Nikhil Kumar: So will the SEC start getting tough
with wrongdoers? Don’t bank on it


Is the Securities and Exchange Commission (SEC), the US government agency charged with policing the markets, finally getting tough?

The new head of the agency, Mary Jo White, is making policy changes under which the SEC will seek more admissions of wrongdoing from defendants when settling cases.

Historically, the watchdog has typically allowed defendants to settle cases without admitting or denying any wrongdoing. But Ms White wants the agency to be stricter when striking deals in cases where the conduct at issue is particularly egregious, or in cases of widespread harm  to investors.

This doesn’t mean that we won’t be sent SEC press releases where X institution or Y individual gets a slap on the wrists and neither admits nor denies anything. That formula will still be applied to most cases. It’s only where the wrongdoing is of a particularly glaring nature that the SEC will seek an admission of guilt during settlement negotiations, or tell the defendants to prepare for court.

The change of heart follows criticism that the agency was being, well, too soft. US District Judge Jed Rakoff is among those who has been less than moved by the “neither admit nor deny” gambit. In 2011, he declined to approve an SEC settlement with Citigroup over allegations that the bank misled investors in a complex mortgage bond deal in the final days of the pre-crisis housing boom. Under the settlement, the bank agreed to pay nearly $300m (£197m) while neither admitting or denying the charges.

In a sharply worded ruling, Judge Rakoff said the SEC’s policy of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations was “hallowed by history, but not  by reason”.

He went on to say that “a consent judgment that does not involve any admissions and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real  truth lies”.

Putting the particulars of the Citigroup case to one side, Ms White’s policy change appears, then, to be a step in the right direction. Maybe the SEC is about to get tough.

Except it likely won’t, otherwise it wouldn’t have already let it be known that “most” cases will continue to be settled the old way.

The reason is simple enough to discern. The SEC simply doesn’t have the resources to pick legal fights with big corporations. If you were in any doubt about this, consider these remarks, from the Republican SEC commissioner Daniel Gallagher. Speaking to Reuters about the changes that Ms White is making, he welcomed the move: “In cases where there is a really bad actor and... for whatever reasons, we are concerned they will get back into the public sphere, then having them admit fault I think that is a good thing for the investing public.” But then he struck a revealing note of caution: “I worry, to the extent we are going after entities that have a lot of civil exposure, that we will end up in court and tying up our resources,” he said.

In other words, don’t get your hopes up.

Fat cat bosses are getting even more of the cream

Do chief executives of large corporations earn sums that are more a reflection of their power over corporate boards than of their skills?

The question matters because one of the arguments levelled against those who complain about rising executive pay is that the trends at the top of the corporate ladder are driven by the demand for highly skilled individuals, both inside and outside the boardroom. And so, the argument goes, it’s fairer to look at CEO pay relative to other highly skilled individuals. Drawing comparisons with the typical worker is  thus misleading.

OK then, says the Washington-based Economic Policy Institute (EPI). In a new report tracking the pay of chief executives, it found that the average big company boss was compensated to the tune of $14.1m in 2012.

The measure covers the top  350 firms in the US and includes the value of stock options exercised in a given year. Last year’s result was up nearly 13 per cent since 2011, and more than 37 per cent since 2009.

But that’s the just headline. The report also tracked the pace of growth in CEO pay relative to other high earners. Although the EPI couldn’t draw comparisons for 2012 as data on the compensation of other high earners in 2012 are not yet available,  it found CEO pay relative to the pay of the top 0.1 wage earners grew from 2.55 times in 1989 to 4.7 in 2010.

The difference is not as wide as in data comparing CEO pay to the pay of the typical worker (which, by the way, stood at between 272.9 to 1, or 202.3 to 1 in 2012, depending on how you measure options).

As Jordan Weissmann at points out, the divergence between CEO pay and the pay of other highly skilled workers isn’t enough to conclusively support the claim that bosses are being paid too much. But the figures should none the less prompt some introspection in boardrooms and among those board directors entrusted with determining compensation for chief executives.

Not least because the pace of growth in CEO pay over the last two years – during which unemployment in the wider economy remained elevated – would suggest that company bosses have continued to pull ahead of other groups of highly skilled individuals.

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