Politics in Securities Enforcement
27 Pages Posted: 1 Feb 2016 Last revised: 3 Feb 2016
Date Written: December 1, 2015
American securities enforcement agencies often face charges that they use their enforcement power to further political goals. Most recently, Standard & Poor’s credit rating agency claimed that the U.S. Department of Justice unfairly singled it out for prosecution for fraudulent credit ratings after it downgraded U.S. sovereign debt. The U.S. Securities and Exchange Commission (SEC), too, has been accused of using its enforcement politically: of bringing enforcement to punish its detractors, and of holding back investigations of politically-connected figures.
While individual charges might be justified, there is surprisingly little evidence that enforcement agencies, in particular the SEC, select their targets politically. Yet, while politics is largely irrelevant at the individual case selection level, political influences do shape enforcement choices at the aggregate level. The main drivers are not political directives or direct pressure from important people in high places. Rather, politics seeps into enforcement choices through close congressional oversight by the U.S. House and Senate committees for banking and financial services and for appropriations.
The ultimate result of congressional oversight during the last decade is an increase in enforcement targeting strict-liability violations and follow-on cases, obscured almost entirely by meaningless reporting of enforcement results — a result that both Congress and SEC leadership seem to be comfortable with, although there is no evidence that it reduces fraud, and can produce embarrassing enforcement failures.
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