Our unsettling Wall Street settlements

October 26, 2011, 1:30 PM UTC

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE — Protesters are taking to the streets across the country, asking (as many of the 99% — and the 1%, for that matter — do), “why haven’t financial institutions or their leaders faced stiffer fines and criminal penalties?”

Citigroup (C) last week, J.P. Morgan (JPM) this summer, and Goldman Sachs (GS) last year have all settled with the SEC based on charges that the information they provided to clients was not open and fair.

Haven’t we seen this movie before? If you said yes, then you probably remember the 2003 Wall Street settlement.

Under the terms of the 2003 settlement, 10 major investment firms promised to provide open and fair disclosure to clients. Indeed, they were prohibited from ever again violating existing rules (permanently enjoined, in legal speak).

One of those rules says: “All … communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service…[and not] omit any material fact.”

But here the big banks are again, settling up once more for claims that they again did not provide fair disclosure to clients.

While the rules the banks agreed not to break under the 2003 settlement are broad, the structural reforms they were required to undertake were narrow. Under the terms of the Wall Street settlement, monitors were appointed. But the regulators and enforcers (which include the National Association of Securities Dealers, the SEC, the North American Securities Administration Association, the states, and the New York Stock Exchange) decided that the monitors should oversee much narrower programs than what would have been necessary to fix the communications processes at these firms.

Taking a narrow view may have the advantage of making the parameters of reform clear and may make it easier for firms to comply. Unfortunately, taking a narrow view also means that the major issues at a given company may not get fixed.

The SEC took the narrow view in their recent settlements as well: “The settlement … requires remedial action by Citigroup in its review and approval of offerings of certain mortgage-related securities.”  Similar language was used in the Goldman and J.P. Morgan settlements.

How can such narrow settlements address the larger issues at these firms?

As a matter of practice, the SEC doesn’t follow up on settlements to ensure there are no violations, according to a spokesperson. But “the SEC doesn’t under-charge people,” the spokesperson says, and the legality of any settlement violation would be a matter for the Justice Department to pursue. A spokesperson for the Justice Department declined to provide comment on their views on — or reviews of — settlement violations.

True, these firms would be obligated to abide by existing rules with or without making such a commitment in their settlements. But repeat offenders within other parts of our justice system often face increasingly stiffer penalties for their lapses.

Yet Citigroup paid $300 million in the 2003 settlement and just $285 million in this one. While J.P. Morgan and Goldman paid more in the recent settlements than they did in 2003, they paid only a sixth of what Citigroup did in the 2003 settlement.

Further, as Jesse Eisinger and Jake Bernstein at Propublica have reported, Citigroup “says it has settled all of its potential liability to” the SEC with this one case. It will be interesting to see what conclusions Judge Jed S. Rakoff draws when he reviews the Citigroup settlement. SEC commissioner Luis Aguilar expressed concern earlier this year about the “revisionist history” in company statements following settlements which involve no admission or denial of wrongdoing. Will there be any pressure at the SEC for change?

The lack of Justice Department guidance also warrants attention. If the public and financial institutions are not told what penalties might be sought, how can enforcement act as a deterrent? Perhaps Judge Rakoff will shed some light on these issues as well.

Further, if the fines are paid for from money that would otherwise go to shareholders (or to worker salaries or reduced fees to customers), where is the real deterrent going forward?

The SEC’s director of enforcement Robert Khuzami put considerable weight on the power of deterrence in an interview last year with the New York Times’ Andrew Ross Sorkin. “It’s much more important to deter the misconduct before it occurs than deal with it afterward,” he said.” But, clearly, current approaches to deterrence are not working.

To avoid déjà vu all over again, regulators and enforcers should look to these cases as lessons for the future. Without changes, we are likely to see these unsettling circumstances again — and our faith in regulators and enforcers will decline.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.