Rationalizing Enforcement in the US Financial System

212 Pages Posted: 9 Sep 2020

See all articles by Hal S. Scott

Hal S. Scott

Harvard Law School

John Gulliver

Program on International Financial Systems

Date Written: June 14, 2018

Abstract

In the last decade, public enforcement of the laws governing the U.S. financial system has received widespread attention, but neither policymakers, academics nor private institutions have produced a comprehensive overview and assessment of the public enforcement system for the U.S. financial system. This Report, Rationalizing Enforcement of the U.S. Financial System (the “Report”), attempts to do just that. While we make recommendations aimed at improving aspects of the enforcement system, the primary purpose of this Report is to lay out a succinct description for the public, policymakers, and others about how the enforcement system works.

The Report is divided into four chapters: Chapter 1: Enhancing the Structure of the U.S. Enforcement System – Improving Coordination and Procedural Fairness; Chapter 2: Rationalizing the Setting of Sanctions; Chapter 3: Ensuring Appropriate Use of Monetary Sanctions; and Chapter 4: Promoting Individual Accountability.

Chapter 1 describes the highly-fragmented structure of the U.S. public enforcement system and the potential for overlapping enforcement actions by multiple agencies resulting from the same underlying misconduct. We also describe the lack of laws and policies mandating coordination, with the DOJ’s new anti-“piling on” policy being a recent exception, and separately, the discretion some agencies have to engage in forum shopping by unilaterally selecting the forum in which they bring enforcement actions. The chapter sets forth recommendations to formalize and standardize coordination policies and limit the ability of agencies to engage in forum shopping.

Chapter 2 sets forth the laws, rules and policies that guide and constrain the setting of monetary sanctions in enforcement actions. We explain that agencies generally have vast discretion in setting sanctions because statutes and policies provide limited practical constraints. We recommend that agencies develop core principles or guideposts to avoid arbitrary, inconsistent and disproportionate penalties. We then describe the byzantine approach many agencies take to publicly disclosing information about enforcement action outcomes and present our own data analysis on monetary sanctions over a 17-year period. The chapter concludes with recommendations for enhancing transparency of enforcement action outcomes.

Chapter 3 describes how monetary sanctions collected in enforcement actions are spent. In particular, the chapter describes the lack of public disclosure and sets forth recommendations to increase transparency and appropriately restrict the use of collected monetary sanctions.

Chapter 4 explores the issue of individual accountability. We find that while the government has significant legal and investigative tools to identify and hold culpable individuals and firms accountable, it can face more significant challenges with respect to individuals. We set forth recommendations that we believe will better enable enforcement authorities and firms to work together to identify culpable individuals and build successful cases against them.

Keywords: Enforcement, Financial systems, Capital Markets regulation

Suggested Citation

Scott, Hal S. and Gulliver, John, Rationalizing Enforcement in the US Financial System (June 14, 2018). Available at SSRN: https://ssrn.com/abstract=3661584 or http://dx.doi.org/10.2139/ssrn.3661584

Hal S. Scott (Contact Author)

Harvard Law School ( email )

1557 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-4590 (Phone)
617-495-9593 (Fax)

John Gulliver

Program on International Financial Systems ( email )

134 Mt Auburn St.
Cambridge, MA 02138
United States
02138 (Fax)

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