Companies that bump against legal restrictions — brokerages, stock exchanges, life insurance companies, and mutual fund managers, for example — routinely argue that no harm would come from cutting them slack.
The SEC often agrees.
It has issued scores of orders in the past few years exempting individual businesses from rules including how they can use clients’ money and how much information they must disclose to the public.
The financial crisis spurred the government to tighten regulation of Wall Street on a variety of fronts, but some of the SEC’s exemptions seem to poke holes in those efforts.
Currently, for instance, the agency is preparing new restrictions for money-market mutual funds, still haunted by the meltdown of 2008, when a major fund was overwhelmed by customers demanding their money back and the government put taxpayer dollars on the line to backstop the industry. SEC Chairman Mary L. Schapiro has said she wants to prevent trouble at a single fund from triggering broader problems.
But in December, the agency issued an exemption allowing individual mutual funds administered by John Hancock to lend money to each other, potentially exposing them to each other’s troubles. Hancock argued that the exemption would come in handy if any of its funds have too little cash to meet customer withdrawals.
The conduct of credit-rating companies has also come under scrutiny since the financial crisis. In 2010, Congress expressed concern about conflicts of interest in the credit-rating business. Saying that faulty ratings had contributed to the crisis, Congress directed the SEC to reduce the financial system’s reliance on credit ratings.
But, last year, the SEC told the Kroll Bond Rating Agency it could disregard a rule meant to make credit-raters less beholden to the companies they rate. Kroll wanted to charge companies fees to rate their securities, and the SEC temporarily waived a limit on the amount of revenue Kroll could derive from any one company.
At the height of the financial crisis, short selling — a form of trading that pays off if stocks fall — was widely blamed for destabilizing major Wall Street firms. In response, the SEC adopted a rule limiting short sales that it described as “potentially manipulative or abusive.”
But early last year, the SEC carved out an exemption for the New York Stock Exchange.Citing highly technical considerations, the SEC concluded that its rule could have obstructed “the normal operation of the market.”
In each of these examples, the companies essentially argued that strict adherence to the rules would be counterproductive.
For the SEC, the authority to make exceptions cuts two ways. While it gives the agency the freedom to give away the store, it also gives it the flexibility to embrace new ways of doing business, said William A. Birdthistle, who teaches securities regulation at IIT
Chicago-Kent College of Law. Overall, he said, the system strikes a useful balance.