Sept. 22 (Bloomberg) -- Some things get so hopelessly broken they can’t be fixed. I’ve been wondering if the U.S. Securities and Exchange Commission is one of them.

In the past couple of weeks, the accident-prone agency has stepped into another public-relations pothole, skewered by U.S. District Judge Jed Rakoff for concocting a wimpy settlement with Bank of America Corp. The SEC alleged the bank misled shareholders about terms of its purchase of Merrill Lynch & Co. To set things right, the settlement would have punished shareholders with a $33 million hit for management’s obfuscations.

Such outcomes are possible only in the bizarre place known as SEC-land, where financial firms or employees get accused of breaking the rules but almost never have to admit it. Settlements get signed, skimpy nuisance fines get paid, and the accuser and the accused pat themselves on the back for a job well done. To round out the absurdity, some of those at the agency doing the accusing land jobs at firms they once attacked.

This time, a judge has called the agency on the farce of bringing a case in which no names were named (let’s have some actual people pay these fines, shall we?) and shareholders, not management, were expected to pay fines for the alleged cover-up of $3.6 billion in bonuses to Merrill employees.

Coming as it does on the heels of the horrifying report on the SEC’s mishandling of Bernie Madoff’s Ponzi scheme --, released just in time for no one to read it, after 5 p.m. the Friday of Labor Day weekend -- Rakoff’s challenge only added to the evidence that the SEC is a mess.

White-Out Blizzard

There is more to come from the report by Inspector General David Kotz once the redaction elves at the SEC finish whiting out the good stuff in more than 500 pages of exhibits. I’m putting my money on a 5 p.m. release on the day before Thanksgiving.

Considering the blinding evidence of dysfunction, it occurs to me that enough is enough. Why not just shut the place down? I asked Barbara Roper, director of investor protection at Consumer Federation of America and a member of the SEC’s Investor Advisory Committee, formed in June.

Roper says the Kotz report “calls into question the agency’s ability to fulfill its basic functions,” which sounds to me like a pretty good reason to put it out of its misery. Roper argues, though, that replacing it with something new would only result in more of the same.

“There is a reason it is the way it is,” she says, “and it’s because of the deference that Congress and various administrations have to the financial services industry.” Thus, we’d just get another impotent agency if we started from scratch, she says.

Enforcement Relocation

If all we can do is try to overhaul the agency we’ve got, lawmakers could start by considering making the SEC spin off its enforcement division, says Peter Henning, professor of law at Wayne State University Law School in Detroit.

Some financial regulators -- rulemakers, for instance -- need to interact with the brokerage industry. But Henning says enforcement needs independence and would be better off as part of the U.S. Department of Justice.

That way, after people in the division of market regulation “notify the pit bulls” in enforcement about suspicious activity, the SEC has no further role in the investigation and can’t be pressured by the target firm to go easy.

The SEC would also be better off with a chairman and some commissioners who know about buying stocks, not selling them.

“The SEC should be about investors -- the buy side,” says Mercer Bullard, founder and chief executive officer of Fund Democracy LLC, an advocacy group in Oxford, Mississippi, and another member of the agency’s Investor Advisory Committee.

Getting the Nod

It’s a great idea but a tricky one, considering the clout of Wall Street. “It’s clear that anyone who makes the industry uncomfortable just isn’t going to get the nod,” Roper says.

And the industry clearly has clout. In 2006, the SEC’s Office of Compliance Inspections and Examinations actually set up a hotline for firms that were feeling put out about being investigated. Amazingly, the hotline offers regulated firms “senior-level attorneys” to help resolve complaints.

The investing public, in the meantime, is relegated to filling out an online form when it has a complaint. An improved SEC might consider giving investors access to the top people and letting the brokerage firms sit there and fume if they don’t like the way they’re being treated.

And then there is the question of leadership. SEC Chairman Mary Schapiro was in charge of the self-regulators at the Financial Industry Regulatory Authority when the organization was staunchly defending the greatest gift ever to the brokerage industry: mandatory arbitration of investor disputes.

Schapiro’s Tenure

It’s worth noting that Finra is a defendant in three lawsuits dating from Schapiro’s tenure. One of them, by Standard Investment Chartered Inc., names Schapiro as a defendant and seeks to make unredacted versions of certain documents public. Those might wind up embarrassing the woman in charge of the SEC if they show that she misled brokerage firm members about the “special member payments” they got when Finra was formed in 2007.

You probably haven’t heard the last on this one: On Sept. 11, Standard and Finra heard from the court that the case had been assigned to Jed Rakoff. We may not get good regulation from our pathetic securities agency. But you can’t say they don’t put on a good show.

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Susan Antilla in New York at santilla@bloomberg.net

Last Updated: September 21, 2009 21:00 EDT