Is Investor Protection The Top Priority Of SEC Enforcement?
In these Madoffian Times Havard Law has released a paper on the SEC’s role in protecting investor interests. Enjoy!
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Article Abstract (Via Harvards Law Blog)
Recent financial collapses have focused policymakers’ attention on the financial industry. To date, empirical studies have concentrated on corporate issuer activity, such as securities offerings and class actions. This paper makes a first step in studying SEC enforcement against investment banks and brokerage houses. This study suggests that the SEC favors defendants associated with big (listed) firms compared to defendants associated with smaller firms through two channels. First, the SEC is more likely to choose administrative rather than court proceedings for big-firm defendants, controlling for types of violation and levels of harm to investors. Second, within administrative proceedings, big-firm employees are likely to receive lower sanctions, notably temporary or permanent bars from the industry. To explain this gap, the paper first investigates whether big-firm violations are qualitatively different from small firms’ violations, but finds no support for this. This paper instead finds tentative support for the hypothesis that SEC officials favor prospective employers, as big firms headquartered in desirable locations receive lower sanctions.
Additional Article Excerpts (Via Harvard Law Blog)
“The U.S. financial sector is in tatters. Investment banks and brokerage houses that dominated the market for decades have collapsed under the weight of risky and poorly understood investments. Financial regulators have come under fire for failing to understand and rein in banks’ and brokerages’ excessive bets. Attacks have focused particularly on the Securities and Exchange Commission (SEC), the independent federal agency that regulates financial intermediaries and public offers of securities. The SEC’s failures to mandate adequate safeguards and to identify large-scale financial fraud have led its Chairman to publicly apologize for the agency’s shortcomings and call for internal review.”
Conclusions (Via Harvard Law Blog)
Despite controls concerning violation types and levels of harm, it is possible that big firms’ conduct is systematically less reproachable than small firms’ conduct, because of better compliance systems, higher quality personnel and sophisticated clients. To address these concerns, the paper presents qualitative evidence on a subset of cases where these concerns would be greatest: cases involving a failure to supervise subordinates. It finds that small- and big-firm violations are so similar in terms of fact-patterns, types of supervisory failures, and specific omissions, that they are virtually indistinguishable from a law enforcement perspective.
Finally, the paper tentatively links the above results with concerns about the post-SEC career trajectories of agency officials, who find employment in big firms’ compliance departments or in premier law firms. The paper shows that big firms headquartered in favorable locations receive lower sanctions than big firms around the country, indicating that SEC officials may respond to future employment prospects. The paper also provides some evidence that variation in the quality of legal representation between big and small firms cannot account for the observed differences in sanctions, because these differences persist even for cases where both big and small firms are likely to hire outside counsel.
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Citation (Via Harvard Law Blog)
Pardo, Michael S. and Patterson, Dennis,Philosophical Foundations of Law and Neuroscience(February 6, 2009). Available at SSRN: http://ssrn.com/abstract=1338763
