SEC Should Target Individuals, Not Companies: Fmr. SEC Head

It's an ultimately unsatisfying end to a government lawsuit: a settlement where the defendant neither admits nor denies wrongdoing.

On Tuesday, current SEC Chairman Mary Jo White said that this is set to change for some cases. Meanwhile, a former chairman of the SEC, Harvey Pitt, told CNBC that this new development is a good one.

However, Pitt thinks ultimately this stricter stance on admission of guilt should eventually be combined with a strategy that focuses more on individuals, instead of primarily going after companies.

"I think it's a bold, yet cautious, innovative approach to a very difficult problem and the commission is right to experiment," Pitt told CNBC's "Squawk on the Street" Wednesday.

Pitt said that although the SEC runs the risk of taking a significantly larger amount of cases through the litigation process, it will balance this concern by having the control to roll out this requirement selectively.

"It's a bold, yet cautious and innovative approach to a very difficult problem," he said. "It's bold in the sense that they run a significant risk that they will have to litigate significantly more cases than they are presently litigating. It's cautious because they have reserved complete control."

If the SEC is looking for a quick settlement or have concerns about the strength of its case, Pitt said that it will likely go back to the "tried and true formula" to move things along. It's a way for the commission to "dip their toe in the water," he said.

"The staff will do this on a very restrictive basis to start with. They'll see what kind of push back they'll get. If they see too many cases stretching out in terms of settlement, they'll pull back," he said.

The point of this move, Pitt said, is to fix the seeming contradiction that the SEC will file a complaint and accuse defendants of "extremely terrible behavior" but eventually let them off the hook by allowing them to deny guilt.

"People have started to question how credible it is," he said. "They will have to admit some culpability in certain cases and that's a plus."

Ultimately, Pitt said, "it is absolutely essential that the SEC focus not just on institutions and entities but on the people at those entities. Corporations do not act by themselves. It requires people and the SEC needs to go after more of them."

—By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul.