Report of the Task Force on the SEC Administrative Law Judge Process
committee on Federal Regulation of Securities, 47(4): 1731–38 (Aug. 1992)
This Report addresses fundamental issues of fairness that are presented by administrative disciplinary proceedings which are authorized by the SEC, conducted before an administrative law judge (ALJ), and then subject to review by the full Commission. The Report concludes that, to eliminate the risk of perceived and actual unfairness inherent in the SEC's dual prosecutorial and judicial roles, certain procedures relating to such disciplinary proceedings should be reformed. The Report explains that the desired reform could be achieved either by giving a respondent in an SEC administrative proceeding the right to remove the trial to federal court or by vesting the SEC's authority to initiate an ALJ proceeding in an independent General Counsel's office, as in the case of the National Labor Relations Board.
Advising Corporate Directors After the Savings and Loan Disaster
Harris Weinstein, 48(4): 1499–1507 (Aug. 1993)
The savings and loan and bank failures of recent years have generated extensive litigation testing theories of liability applicable to directors of depository institutions. The author, formerly Chief Counsel of the Office of Thrift Supervision, argues that the traditional business judgment rule should prevail over simple negligence theories advanced by the FDIC and the RTC. By resting on post hoc reexaminations of business decisions, the simple negligence theory fails to take adequate account of the risk inherent in business decisions and unduly inhibits the service of qualified persons as corporate directors.
Administrative Actions Against Lawyers Before the SEC
Simon M. Lorne and W. Hardy Callcott, 50(4): 1293–1332 (Aug. 1995)
Since the early 1980s, the SEC has largely avoided bringing administrative proceedings against lawyers. Two recent developments, the passage of the Securities Law Enforcement Remedies Act of 1990 and the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), challenge the SEC's ability to maintain this practice of prosecutorial restraint. This Article discusses the situations in which the SEC should bring administrative proceedings against lawyers, the situations in which lawyers' clients have an interest in a zealous representative that should counsel the SEC to challenge attorney misconduct only before an Article III federal judge, and the practical constraints that sometimes may encourage the SEC to consider administrative proceedings to be a preferable forum.
Further Progress in Defining Constitutional Constraints on Punitive Damages and Other Monetary Punishments
George Clemon Freeman, Jr. and Makram B. Jaber, 61(2):517—568 (February 2006)
This article updates an earlier article by Freeman that was published in the February 2002 issue of The Business Lawyer on the status of the United States Supreme Court's rapidly evolving jurisprudence on constitutional constraints on punitive damage awards. Since then, the Court in State Farm Mutual Automobile Ins. Co. v. Campbell reinterpreted and revised the three factors set forth earlier in BMW of N. Am. Inc. v. Gore for determining whether a punitive damages award was "grossly excessive" and therefore constitutionally prohibited. This article describes State Farm's new guidance, examines how lower federal and state courts have responded to it, and suggests possible areas where further guidance by the Court may be needed. The 2002 article also discussed the potential applicability of due process constraints, particularly the requirement of fair notice and the prohibition of "grossly excessive" punishment, to other monetary punishments authorized or imposed by state or federal government. In that broader context this article discusses several opinions dealing with due process challenges to statutory or administrative prohibitions or other limitations on timely judicial review of EPA administrative orders under the Clean Air Act and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
Framework for Control over Electronic Chattel Paper - Compliance with UCC § 9–105
Working Group on Transferability of Electronic Financial Assets, a Joint Working Group of the committee on Cyberspace Law and the committee on the Uniform Commercial Code of the ABA Section of Business Law and The Open Group Security Forum, 61(2):721—744 (February 2006)
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era
Robert S. Bennett, Alan Kriegel, Carl S. Rauh, and Charles F. Walker, 62(1): 55–88 (Nov. 2006)
Internal investigations long have been an integral part of the successful defense of corporations against charges of misconduct, as well as an important board and management tool for assessing questionable practices. With the heightened standards of conduct and increased exposure created by Sarbanes-Oxley, this essential instrument for safeguarding corporate interests has become even more crucial in identifying and managing risk in the enforcement arena. This article examines from a practitioner's standpoint when and how internal investigations should be conducted in order to protect the corporation in criminal, civil and administrative proceedings. Particular attention is paid to the issues created by a concurrent government investigation and in dealing with employees and former employees in the course of an investigation. The article also addresses the role of the Audit committee under Sarbanes-Oxley, and the important issue of reporting the findings of the investigation to appropriate corporate officials. The subject of self-reporting by the Company to enforcement authorities is considered as well. In this context, the article explores the SEC's position on crediting self-reporting and cooperation as set forth in the Seaboard report; Department of Justice policy as embodied in the Thompson Memorandum; and the impact of the Federal Sentencing Guidelines for Organizations.
The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law
Joseph A. Grundfest, 65(2): 361–394 (February 2010)
The U.S. Securities and Exchange Commission has proposed proxy rules that would mandate shareholder access under conditions that could be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedure Act. In contrast, a fully enabling opt-in proxy access rule is consistent with the administrative record developed to date and can be implemented with little delay.
From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate benefits for constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal corporate governance, but instead reflect a traditional contest for economic rent common to political brawls in Washington, D.C.
From an economic perspective, if the Commission decides to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule. The administrative record, however, currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission could conduct a stratified random sample of the shareholder base, and rely on the survey's results to set appropriate default proxy access rules. The Commission's powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency's authority.
The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers
Stavros Gadinis, 67(3): 679 - 728 (May 2012)
The Securities and Exchange Commission plays a central part in the U.S. regulatory framework for the supervision of the financial industry. How has the SEC carried out this mission? Despite recurrent crises, systematic studies of SEC performance data are surprisingly scarce. As the SEC reforms itself to address the shortcomings revealed in 2007–2008, a systematic examination of the agency’s past record can help identify priorities and evaluate the agency’s renewed efforts. This study takes a first step in studying empirically SEC enforcement against investment banks and brokerage houses, examining the agency’s record in the period right before the 2007–2008 crisis. This data suggests that defendants associated with big firms fared better in SEC enforcement actions as compared to defendants associated with smaller firms in three important dimensions. First, SEC actions against big firms were more likely to involve corporate liability exclusively, with no individuals subject to any regulatory action. Second, big-firm defendants were more likely to end up in administrative rather than court proceedings, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees were likely to receive lower sanctions, notably temporary or permanent bars from the industry. These patterns have important implications for major debates concerning corporate liability, regulatory capture, and the public and private enforcement of securities laws.
SEC Administrative Proceedings: Backlash and Reform
Alexander I. Platt, 71(1): 1-52 (Winter 2015/2016)
The Securities and Exchange Commission’s aggressive prosecution of securities violations inside administrative proceedings (APs) has generated backlash. Key stakeholders are now attacking the agency’s enforcement program as illegitimate and a growing number of respondents charged in APs have launched broad constitutional challenges. Though these suits target deeply entrenched features of administrative adjudication, they have already begun to prove successful, and threaten significant transformations to the SEC and beyond.
Historically, the SEC’s enforcement architecture embodied respect for the principle that, holding all else equal, procedures ought to be commensurate with the stakes of the adjudication. After Dodd-Frank, the agency abandoned this principle. The backlash is, at least in part, attributable to and justified by this reversal.
The SEC should have done after Dodd-Frank what it had done after previous expansions of its administrative penalty powers: reestablish the equilibrium between penalties and procedures by revising its rules of practice that govern APs. The SEC’s recently proposed amendments to these rules are too little, too late. A bolder approach is required.
The Evolution and 2020 Status of Cooperation in SEC Enforcement Investigations
Dixie L. Johnson, Carmen J. Lawrence, and Jamie Stinson 75(4): 2427-2466 (Fall 2020)
When facing potential enforcement action from the Securities and Exchange Commission (“SEC”), companies often seek to mitigate the consequences by cooperating with the SEC in one or more of the following ways: self-policing, self-reporting, remediation, and cooperation. While a 2001 SEC report of investigation known as the Seaboard Report provides a roadmap for what steps to take in order to earn cooperation credit and describes generally the potential benefits to be received, no such report or guidance exists that details exactly what tangible benefits a company will receive in return for the earned credit and how it will be determined. In addition, outside of narrow exceptions where the SEC engages in self-reporting initiatives, companies looking for publicly available guidance on how best to cooperate face a lack of consistency in the SEC’s settlement documentation describing cooperation factors and what benefits may be earned.