Is tougher SEC enforcement improving governance?

The SEC announced a record $3.4 billion in monetary sanctions for 2013 – a 10 percent increase over the  fines collected in 2012, and a 22 percent increase over 2011 when the agency filed the most enforcement actions in its history.
 
‘A strong enforcement program helps produce financial markets that operate with integrity and transparency, and reassures investors they can invest with confidence,’ said Mary Jo White, chair of the SEC, in a statement. ‘I am incredibly proud of the dedicated and talented women and men of the enforcement division. Our results show we are prepared to tackle the breadth and complexity of today’s securities markets.’
 
So should we be happy that the amount of money regulatory agencies collect each year continues to grow and grow? Is the amount of money the SEC collects the way we want to measure the effectiveness of our efforts to combat corruption?
 
First, we should celebrate the SEC for putting forth a commendable effort to enforce the rules on the books. It has been widely reported that the agency has been undermanned for at least a year, and for the agency to remain able to collect the most monetary sanctions in its history while changing several commissioners and its chairman says a lot about the commitment of all those involved.
 
While we should be happy we have an agency that is active and functioning well, however, we shouldn’t lose sight of the fact that more fines generally mean there was more significant wrongdoing going on that had to be addressed – and, as we discovered in the financial crisis of 2008, when one company engages in an illegal practice, it can quickly spread to others in that industry.
 
It would be nice if we could say more fines will translate into better governance, but instead we have to ask: why are enforcement actions continuing to increase? Why are companies continuing to disregard the regulations on the books and what can really be done to stop them?
 
While we certainly don’t know just yet, this escalation of enforcement actions and increasing amounts of monetary sanctions could be a sign that many are willing to bet the SEC won’t catch them ‒ or that even if it does, it is worth profiting from the wrongdoing and paying the fine rather than not committing the violation in the first place. At the opposite end of the spectrum, another scenario suggests the SEC is being overly aggressive and fining companies that really haven’t committed any wrongdoing. But if the SEC is fining companies at this high a rate, clearly someone is not adhering to the rules at some level.
 
Hopefully, the news of higher fines and the fear of being investigated by an ‘aggressive’ SEC will see the number of enforcement actions begin declining in 2014. Going into next year, the SEC has announced that its enforcement division has ‘opened 908 investigations (up 13 percent) and obtained 574 formal orders of investigation (up 20 percent).’  With so many investigations already under way for 2014, it will be interesting to see whether the amount of financial sanctions increases for a fourth year in a row. It is probably a good sign for governance when the SEC is not engaging in enforcement actions and fines at such a high level. But those levels won’t come down unless companies are being careful to adhere to the rules and making extra efforts not to wind up the focus of an SEC inquiry.