McClatchy continues its fine recent watchdog work with a package looking at the SEC’s slap-on-the-wrist regime. It’s a smart new angle on the too-big-to-fail problem—as it says in the lede of the main story, “In the eyes of federal regulators, many Wall Street firms are too big to punish.”

McClatchy is going for the big game here, as it should, zeroing in on the light penalties Citigroup, Bank of America, and the like have gotten for repeated infractions.

During the past three years, some of the nation’s largest financial firms have been accused by the government of cheating or misleading clients and ripping off tens of thousands of consumers of their investments.

Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the Securities and Exchange Commission that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund businesses.

Why was that? It’s something I hadn’t thought about, but it makes sense that these firms are too big to punish. Government officials are deathly afraid of going after companies too aggressively after Arthur Andersen crumbled in the wake of criminal charges against it. When a unit is tucked away in a giant bank, is it less likely to get harshly penalized for breaking the rules? See for instance all those nasty subprime shops contained in Citigroup. Indeed, they were what Citigroup was founded on, something the mainstream press never really explained well.

I like how McClatchy goes straight to the heart of what the wrongdoing meant:

The infractions that led to the waiver applications raided Americans’ pocketbooks and savings accounts.

It’s is specifically talking about an exemption that is universally granted to offenders by the SEC, letting them off the hook for the toughest penalty of the Investment Company Act of 1940, which would force violators to close their mutual-fund divisions. I think the piece could have used some fleshing out on exactly how this would play out if enforced, but the law seems like a good vehicle for this story.

In a sidebar on how the SEC dealt with Bank of America’s wrongdoings, McClatchy writes this:

Among the firms implicated was Bank of America, based in Charlotte, N.C. In fact, the company was cited for improper behavior even after the SEC had cut it a break for earlier transgressions.

In 2006, Bank of America and other companies were cited for improperly marketing auction rate securities. The SEC, however, declared it planned to go easier on Bank of America “because of the quality of its self-monitoring capabilities in the auction rate securities area.”

Because of that “quality,” Bank of America was fined $750,000, half the amount of other banks.

A year later, however, that self-monitoring didn’t prevent the bank from getting in trouble again.

Alas, McClatchy misplays what BofA (and Citi) actually did. It wasn’t fined for “improperly marketing” those securities. It was fined because it “improperly allowed customers to place certain orders in auctions, submitted or changed orders after auction deadlines and gave some customers information that gave them unfair advantages about what rate to bid,” according to a 2006 Dow Jones story (This link is the best I can find). Reuters put it this way: “The SEC said the firms provided certain clients with guidance information that gave them an advantage over rival bidders in deciding what rate to bid to ensure higher returns.” Read the SEC press release yourself. McClatchy would have strengthened its story if it had got that right.

But to prove McClatchy’s larger point, the SEC describes the violations as “serious and widespread,” yet lets them off the hook for virtually nothing.

Finally, in a second sidebar, McClatchy pokes holes in financial institution’s pro forma claims for why they should be exempt from Section 9 of the law in question.

As a unit of one of today’s Wall Street behemoths, Goldman Sachs Group, wrote in a 2005 application: “It could not have been foreseen that investment advisers and other service providers to investment companies would in the future be part of large financial service organizations like Goldman Sachs.”

No?

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.