Wall Street Expresses Concern Over Soaring SEC Fines

Wall Street Expresses Concern Over Soaring SEC Fines


Wall Street is grappling with an unwelcome side effect of inflation, one that doesn't involve rising prices at the pump but rather, heftier checks to be cut for regulatory violations. Recent reports suggest that big banks and brokerage firms are being compelled to pay substantially larger settlements for regulatory investigations, including those that may not have resulted in losses for investors. This surge in regulatory fines, even for what were once considered technical violations, is prompting concern and frustration among financial institutions.

A recent Wall Street Journal report highlighted the Securities and Exchange Commission's (SEC) trend of demanding tens of millions of dollars to settle cases that, not long ago, would have cost far less. One such case that drew attention was the SEC's lawsuit against Virtu Financial, one of Wall Street's major electronic traders. The SEC accused Virtu of potential improper viewing of clients' confidential trading data. Notably, the SEC did not claim that Virtu had misused the data. Instead, it raised concerns about whether unauthorized traders had accessed nonpublic records.

Typically, the SEC prefers to settle enforcement cases with financial firms, allowing them to pay fines rather than engage in prolonged litigation. However, under the leadership of Chair Gary Gensler, SEC officials have sought more substantial fines, even in cases where previous offenders had paid less.

In the Virtu case, the SEC sought a fine of over $25 million, according to insiders, marking a substantial increase from fines imposed in similar past cases. This would have represented approximately 5% of Virtu's net income for the previous year. Virtu's CEO, Douglas Cifu, expressed his dissatisfaction with the SEC's settlement offers, describing them as non-commercial. In response, he chose to contest the regulator in court.

Cifu, who has clashed with Gensler on other regulatory matters, characterized the SEC's lawsuit as politically motivated. Virtu and a few other companies dominate the business of executing small investors' market orders and claim to provide traders with better prices than stock exchanges.

The SEC's lawsuit against Virtu alleges that the company misled institutional clients by failing to disclose information-security vulnerabilities. The regulator categorized this as negligent fraud, a claim that can lead to steeper penalties.

Advocates of stricter financial regulation support Gensler's strategy but are also calling on the SEC to pursue legal action against more individuals involved in such cases. While significant fines may serve a purpose, these advocates argue that hefty penalties alone won't deter financial institutions from breaking the law.

Recent investigations into prohibited messaging tool use by banks' brokers and traders have led to substantial fines in the Biden era. JPMorgan Chase, Goldman Sachs, Morgan Stanley, and UBS Group, among others, have each paid $200 million to regulatory agencies. This contrasts with fines of just $1.65 million that some of these institutions faced approximately 20 years ago for failing to maintain the required email records.

However, critics argue that Gensler's SEC is imposing fines that go beyond historical norms. This stance has sparked pushback from defense lawyers and conservative legal groups seeking ways to challenge the SEC's civil-enforcement authority. A legal petition filed with the Supreme Court by the New Civil Liberties Alliance, a conservative legal group, contends that the SEC has exceeded its statutory limits for penalties in certain cases.

The debate surrounding these fines underscores the challenges of striking a balance between regulatory enforcement and the interests of financial institutions. Financial firms are now grappling with a new fiscal reality as regulatory fines soar, sparking a broader discussion about the cost and consequences of these settlements.