Enforcement Discretion at the Sec

David Zaring (Wharton)

Abstract: The Dodd Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all. This paper evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication – the term for the sort of adjudication over which ALJs preside – works today. It examines five years of Initial Decisions by the ALJs. Those decisions do not suggest that some ALJs are particularly likely to rule for the agency compared to their peers, and do suggest that the best way to reduce the agency’s chance of success is to obtain representation. The paper shows that defendants can rarely escape liability before ALJs, but can reduce their damages, relative to the amount sought by the agency’s Enforcement Division. It also documents the routine nature of much of what ALJs do; defaulting defendants who fail to respond to complaints, imposing sanctions on brokers and investment advisers who have already been adjudged to commit securities fraud in federal court, and so on. Finally, the paper makes a preliminary comparison of the sorts of enforcement actions taken against financial institutions by the SEC with those taken by other regulators of those institutions, such as the Federal Reserve Board.

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