In August, the Justice Department announced a $16.65 billion settlement with Bank of America over the fraudulent sale of mortgage-backed securities (in reality, the cost to the bank is significantly lower). But two months later, one small part of the settlement has not been finalized in federal court: a $135.84 million cash distribution to the Securities and Exchange Commission. The reason for the holdup could raise the stakes for financial institutions that commit fraud, and over time stabilize the system as a whole, simply because two SEC commissioners have dared to try to maintain the consequences for misconduct.

Under current SEC rules, financial firms that settle fraud investigations automatically incur a number of additional penalties. Many of these mandatory actions date back to the creation of the SEC during the Great Depression. The SEC can ban institutions from managing mutual funds, prevent them from working with private companies to find investors, and force SEC approval for any stocks or bonds that the firm issues on its own behalf. These penalties and disqualifications cut into profits, and in many ways can be as damaging as the settlements themselves. [Read more] – Michael’s Blog