Fair Funds and the Compensation Conundrum

Abstract:     
The Fair Fund provision of Sarbanes-Oxley allows the Securities and Exchange Commission ("SEC") to direct money penalty amounts to injured investors. Because of the provision, large penalties mean potentially large SEC-obtained investor compensation, heralding a new compensatory role for the agency. The SEC has announced that it will direct money to injured investors whenever possible, but has not articulated clear priorities. This Article fills the gap by introducing terms of debate and proposing a framework for the SEC's exercise of its discretion under Fair Funds.

The Article introduces the concept of "public class counsel," a public actor that has the dual function of deterrence and victim compensation. The concept describes - and suggest limits to - the SEC's role in a system in which public and private remedies for securities law violations increasingly converge. The Article then draws on the analogy between the "public class counsel" and the "private attorney general" to propose an answer to the following question: When should the SEC exercise its discretion to create a Fair Fund? It suggests that the SEC focus on distributing penalties gathered from aiders and abettors of securities fraud because such an approach would minimize two significant concerns with investor compensation: first, that compensation of injured investors often amounts to a transfer of money among equally innocent investors and, second, that giving the SEC and private actors a role in compensation risks duplication of costs.

Keywords: Fair Funds, Sarbanes-Oxley, investor compensation, Securities and Exchange Commission, remedies, civil penalties, disgorgement, restitution, administrative agency

Accepted Paper Series