Bartlett Naylor writes:  On March 12, Securities and Exchange Commission Chair Mary Jo White publicly returned fire for the first time on the charge from outsiders and two of her fellow commissioners that her agency is soft on Wall Street.

Cut through her rhetoric, however, and what she’s saying: “The SEC trusts Wall Street.”

Here’s the background. The Department of Justice has fined major Wall Street firms for serious violations. The firms have settled by paying billions of shareholder funds in penalties. These infractions trigger other sanctions including the loss of certain privileges at the SEC. But the SEC has generally waived these sanctions. Commissioners Kara Stein and Luis Aguilar have voted against these waivers in several cases, arguing, among other reasons, that waivers dilute the deterrence effect of the automatic sanctions.

On March 12 Chair White drew a line in the sand. These sanctions should not be viewed as deterrence. She explained: “It must be emphasized, however, that it would not be an appropriate exercise of our authority to deny a waiver to further punish an entity for its misconduct or history of misconduct, or in an effort to deter it or others from possible future misconduct, by letting stand an automatic disqualification where the circumstances do not warrant it.”

White undoubtedly penned this speech well before the eve of the speech and advantaged the prodigious legal talent on the SEC staff to buttress her legal case. The written speech includes footnotes and the assertion just quoted contains a footnote to a rule the SEC approved in July 2013. White approved this rule. In fact, however, the rule does not buttress her case. On the contrary, the rule speaks directly about deterrence. The rule makes reference to deterrence five separate times.

Leaders in Congress side with Stein and Aguilar. Rep. Maxine Waters, (D-Calif.) and ranking Democrat on the House Financial Services Committee has promised to introduce legislation to limit the use of waivers and bolster the deterrence effect.  Sen. Sherrod Brown also challenged White’s use of waivers.

From high altitude, Wall Street has escaped true justice. Even as the DOJ claims that major firms committed massive fraud contributing to the financial crisis of 2008 that evicted millions from their homes and jobs and erased $12 trillion from the economy, no Wall Street executive went to prison.

There’s an additional troubling element to White’s position. White says that the only factor that the SEC should consider is whether the firm can honestly provide the services that the sanctions would otherwise interrupt.  That’s a precarious place for the SEC. She’s essentially asking her fellow commissioners to enter the attestation business. That’s a process used in enforcement at companies where CEOs are required to attest that their firms comply with accounting or other rules. The default position should be what the law and rules dictate—loss of privileges. If a firm can build an independently verifiable case that it can honestly serve the market in a division separate from where the violations took place, then the SEC might grant a waiver. Short of that, the SEC should not be saying: “We trust Wall Street.”