Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program
Paul S. Atkins
Securities and Exchange Commission (SEC)
Bradley J. Bondi
Cadwalader, Wickersham & Taft LLP; Georgetown University Law Center; George Mason University - School of Law
Fordham Journal of Corporate and Financial Law, Vol. 13, pp. 367-417, 2008
The United States Securities and Exchange Commission (the 'SEC' or 'Commission') is nearing its seventy-fifth anniversary, a milestone that will be marked by reflection on the past and contemplation of the future. During this time of introspection, the Commission should take the opportunity to examine the manner in which it has reacted to the growth and changes in its regulatory authority and in the capital markets. One constant throughout its history has been the SEC's need to balance competing interests. The SEC's stated mission reflects this tension. Today, that mission is composed of three objectives: 'to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation'.
Historically, the SEC's mission has focused on investor protection. As the SEC and its regulatory powers have grown in response to the ever more complex and international financial services markets, the seemingly straightforward mission of investor protection has become more intricate and multidimensional, prompting questions such as, 'Who are the investors that should be protected' and 'How should they be protected?' After all, investors range in sophistication, size, activity, goals, needs, and other attributes. They include traditional individual and institutional investors in the securities markets, traders, and foreign entities seeking to invest in the United States. Choices that the SEC makes in its rulemaking and other activities can favor or disfavor one group of investors over another. A rule beneficial for one investor may be detrimental to another, depending on an investor's investment strategy or changing circumstances. Indeed, because investors ultimately pay for inefficiencies arising from regulatory mandates through direct or indirect costs, diminished returns, and reduced choice, the rules must be made with careful analysis and deliberation. Congress acknowledged this potential harm in 1996 when it revised the SEC's statutory mandate to expressly require the SEC 'to consider or determine whether an action is necessary or appropriate in the public interest' and to 'consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.'
This multidimensional aspect of investor protection applies not only to rulemaking, but also to enforcement matters. Each enforcement matter involves in some degree a balancing of competing interests, some at a pragmatic, case-specific level and others at a higher policy level. For example, in distributing money recovered in an enforcement action against a bankrupt company, the SEC conceivably could decline a distribution to all investors and instead choose a distribution that favors one class of investor over another, such as common stockholders over senior debtholders, which by virtue of their preferred position may have had greater recovery per dollar invested than did common stockholders, but still fell short of their desired recovery. In its overall enforcement program, the SEC's decisions about resource allocation, charges to be brought, and relief to be sought may enhance the protection of one group of investors at the potential cost of another. Advancing a novel legal theory may protect the group of investors in a particular case, but have unintended detrimental consequences to investors as a whole.
The enforcement decisions of the SEC must be guided by the multidimensional nature of the SEC's mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. The difficult choices of balancing conflicting interests must be guided by the transcendent principles of predictability, fairness, and transparency, culminating in the rule of law. These principles are the defining characteristics of the U.S. markets.
In order to assess the SEC's application of these principles to its enforcement decisions, this Article investigates the shifting focus of the SEC's enforcement program from its inception to the present day. The Article explores the development and usage of the SEC's statutory enforcement powers in the context of due process and fairness. Finally, the Article calls for the Commission to appoint an independent advisory committee to conduct a detailed review and evaluation of the policies and procedures of the enforcement program in light of the changes in the SEC's statutory authority over the course of the last three decades.
Number of Pages in PDF File: 51
Keywords: securities law, SEC, Securities and Exchange Commission, SEC Enforcement, Division of Enforcement, Enforcement Division, Enforcement Program, Securities Enforcement
JEL Classification: K22, K41Accepted Paper Series
Date posted: August 23, 2009
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