For many months now, CFA Institute has commented on the state of enforcement for financial service violations. We’ve blown hot and cold on whether our system is effective. Yet, as one of the major factors leading to the current lack of public trust and confidence in financial markets and its players, it needs attention.
We seem to constantly struggle to catch and penalize wrongdoers in a manner that either deters others or sends any serious message to serial offenders. In a word, our enforcement system is schizophrenic. One minute we go gangbusters on insider-trading crooks, the next we are scratching our heads over the lack justice for hard-core financial-crisis wrongdoers.
FERC-JPMorgan Settlement: Déjà Vu All over Again
To be sure, enforcement is happening as financial institutions deal with an ongoing deluge of regulatory and legal cases — ranging from fraud claims over mortgage security sales and LIBOR rigging to money laundering and insider trading, just to name a few. But just last week yet another market mishap of some consequence hits the news: JPMorgan’s $410 million settlement with the U.S. Federal Energy Regulatory Commission (aka FERC) over charges of gaming the electricity markets.
Is it just me, or does it seem there’s not a single corner of the market for securities or other financial instruments that firms cannot find a way to manipulate for their own profit? This one seems especially dreadful, given it jacked prices paid by the public for electricity. In any event, this should renew concerns about trust and ethics in finance and reinvigorate discussion about the ineffectiveness of symbolic, regulatory hand-slaps.
Real Enforcement Progress?
It is especially unfortunate because enforcement in recent days has shown signs of “seeing the light” and becoming a frontline defense against malfeasance and deterring future wrongdoing. This is in stark contrast to a light-touch enforcement path, extracting minor tolls when someone or some firm gets off track. We see signs investors might finally be getting the level of enforcement they both deserve, and deep down require, if trust in markets is to be restored.
Here are some reasons for optimism. First, bipartisan legislation is pending to increase significantly the penalties for fraud and manipulation. We have new whistleblower protections and incentives to reveal wrongdoers and a healthy caseload of new enforcement cases at both the SEC and CFTC, including high-profile insider and market fraud actions.
Perhaps most significant are two items that go a long way to putting more teeth in the bite of enforcement. Congressional budgeting for the SEC indicates beefed-up technology assets for the purposes of closer monitoring and detection of fraud. Meanwhile, newly installed SEC Chair Mary Jo White has publicly disavowed “Neither Admit Nor Deny” (NAND) settlements. The days of mega-financial firms getting off light with token fines and no admission of wrongdoing for serial violations looked to be waning.
Yet, along comes a new and significant market manipulation case against JPMorgan involving the critically important energy markets — with an old-school settlement. No admission of wrongdoing and a large but financially immaterial $410 million in fines and restitution. That is big bucks for FERC, but scarcely a blip for JPMorgan.
Finance Industry, Heal Thyself
The upshot of all this is simple: Will Wall Street ever self-correct, or must we force it through more rules and ever-more-severe enforcement? In an environment where public trust is blown and the industry seems willing and able to resort to its old tricks, it seems we face that unfortunate reality.
With SAC Capital serving as a recent example, we either get our house in order or we deserve more serious (potentially firm-ending) consequences. All of us in this industry should be hell-bent on the former. What are your thoughts?
Photo credit: Reuters