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Laxity at the Gates: The SEC's Neglect to Enforce Control Person Liability

49 Pages Posted: 9 Aug 2017  

Marc I. Steinberg

Southern Methodist University - Dedman School of Law

Forrest C. Roberts

Southern Methodist University (SMU), Dedman School of Law, Alumnus

Date Written: 2017

Abstract

In recent years the SEC has repeatedly stressed the importance of holding gatekeepers accountable in order to promote effective corporate governance. In spite of these assertions, the Commission has failed to use two powerful tools at its disposal to pursue gatekeepers. Section 20(a) of the Securities Exchange Act provides for liability against “control persons.” This Section imposes liability upon any person who controls another liable person to the same extent as such controlled person, unless she can establish that she acted in good faith and did not directly induce the violation. Sections 15(b)(4)(E) and 15(b)(6))A) of the Exchange Act give the Commission power to institute administrative proceedings against broker-dealers and associated persons for their failure to reasonably supervise another person who commits certain enumerated securities law violations. Although these enforcement mechanisms seem ripe for use, the Commission has refused to allege claims against control persons or based upon a failure to supervise in cases against big banks and large publicly regulated companies, such as those responsible for the financial crises and subsequent instances of large-scale misconduct. Instead, the SEC agrees to large monetary settlements with these companies without holding corporate miscreants liable.

The objective of this article is to propose an enforcement regime which holds executives, directors, and other fiduciaries responsible for misconduct occurring at their enterprises when such misconduct can be attributed to their lack of control or failure to supervise their employees. We will show that by using Sections 20(a) and 15(b)(6)(A), the Commission incentivizes those in charge to actively sniff out misconduct or face the sobering reality of being named in an SEC enforcement action. In order to accomplish this task, this article will: 1) discuss the legal authority giving the SEC power to use these provisions, and explain the provisions’ advantages over the SEC’s frequently used enforcement tools; 2) outline recent misconduct resulting in large monetary settlements with such financial institutions as JP Morgan, Goldman Sachs, Merrill Lynch, and Bank of America; 3) showcase the SEC’s refusal to implement these tools against big players; 4) set forth rationales as to why the Commission has cast these provisions aside, and 5) recommend an enforcement policy in this context that seeks to effectuate law compliance and enhanced corporate governance practices.

Keywords: SEC, U.S. Securities and Exchange Commission, financial markets - regulation, gatekeepers, control person liability, compliance, rule of law, corporate governance practices

Suggested Citation

Steinberg, Marc I. and Roberts, Forrest C., Laxity at the Gates: The SEC's Neglect to Enforce Control Person Liability (2017). Virginia Law & Business Review, Vol. 11, No. 2, (Winter 2017); SMU Dedman School of Law Legal Studies Research Paper No. 353. Available at SSRN: https://ssrn.com/abstract=3015421

Marc I. Steinberg (Contact Author)

Southern Methodist University - Dedman School of Law ( email )

P.O. Box 750116
Dallas, TX 75275
United States

Forrest C. Roberts

Southern Methodist University (SMU), Dedman School of Law, Alumnus ( email )

Dallas, TX
United States

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