Current Law/Business/IT Topic Memo Assignment

MEMORANDUM 4

 

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FROM:

DATE: June 8, 2022

REF: Current Law/Business/IT Topic Memo Assignment

 

Summary

The power of the Securities and Exchange Commission to pursue infringements of securities legislations in court cases arbitrated by the SEC’s administrative laws judicial officers has been continually enlarged by legislature (Choi & Pritchard, 2017). An instance of this was with the Dodd-Frank Wall Street Reforms and Consumers Protection Act. The article “The SEC’s Shift to Administrative Processes: An Empirical Assessment” investigates the implications of the SEC’s decision to rely more heavily on administrative proceedings in its case management. The article explains the continuous loss of constraints that have been placed on the SEC’s jurisdiction to progress before administrative tribunals. It also explains the recent shortcomings of constitutional issues to that jurisdiction. The SEC is able to prosecute the majority of the penalties for breaches of the securities laws whether in federal courts or in administrative proceedings (Choi & Pritchard, 2017). This is because of the current state of the legislation. The article cites a general rise in the number of administrative processes while documenting a general decrease in the amount of judicial actions following the implementation of Dodd-Frank. At the same time, it reveals that after the passage of Dodd-Frank, there has been a rise in the typical amount of civil fines imposed as a result of court lawsuits and administrative processes regarding non-financial public businesses. According to the authors’ point of view, Even though it is impossible to quantify the deterrent impact of extra lawsuits brought by the SEC as a result of the transition to administrative proceedings, it is apparent that the SEC is expanding its enforcement operations against public businesses through administrative proceedings.

Analysis

There are several reasons why the topics addressed in this article are important. To begin, SEC’s Act to allow shift to administrative proceedings contains provisions intended at averting financial catastrophe and the severe consequences that come with it. It also contains detailed information on the consequences of SEC shifting to administrative procedures. According to Choi and Pritchard (2017), the SEC’s capacity to prosecute enforcement charges in its own administrative proceedings has been steadily increased by Congress. With the Dodd-Frank law allowing civil sanction to be sought in administrative processes, the Securities and Exchange Commission has shifted some lawsuits from federal courts to administrative tribunals. Legislative amendments suggested in Congress have also prompted a shift in the SEC’s employment of ALJs, as well as constitutional challenges to their usage. Most of the lawsuits have been filed over inconsequential constitutional matters that the body has the power to resolve quickly. The SEC has already implemented a series of gradual modifications in an effort to avert legislative change.

The purpose of imposing significant fines on publicly traded companies is to send a message of dissuasion to corporate entities in general. However, the expenses of the sanctions are eventually borne by the stockholders of the businesses that are required to pay the fines. Those stockholders, who have typically committed no wrongdoing themselves, have very little ability to influence the compliance activities of the public corporations in which they have invested because of the nature of their investments. Sanctioning firms is done with the intention of sending a message of dissuasion to other public businesses that are in a comparable situation (Choi & Pritchard, 2017). A deterrent message provided by the SEC’s enforcement activities cannot be precisely measured, but it is possible that that message’s power changes depending on guilt, funds invested, and the penalties levied. The deterrent message is diminished if administrative processes include lower indicators of responsibility or lower penalties.

This article provides crucial information on the effects that the trend toward administrative processes has had on one of the most important classes of defendants: public businesses. It demonstrates that the transition away from judicial processes and toward administrative ones has been accompanied by a significant rise in the SEC’s power in administrative actions. The average amount of the civil penalty that is handed down to non-financial public corporations that have been identified as defendants has risen, and this trend can be seen in both judicial and administrative actions (Choi & Pritchard, 2017). In addition to this, it demonstrates a notable rise in the frequency of cooperating with the SEC, especially for the sake of administrative actions. The article’s presents proof to substantiate the claim after the passage of Dodd-Frank act, the complexity of cases, and consequently the expense of litigating matters in administrative processes, escalated. On the contrary, the severity of the breach of the securities legislation that the SEC decides to prosecute as administrative actions after Dodd-Frank is less severe. This trend is consistent with the Securities and Exchange Commission transferring more minor matters from courts to administrative procedures or filing cases as administrative procedures which would not have been filed at all prior to the Act.

Reflection

As I reflected on the material and concerns covered in this paper, I realized that although it is difficult to assess how effective the SEC’s enforcement actions have been at discouraging future misconduct, it is likely that the more cases the SEC will be capable of filing following Dodd-Frank can be explained on the basis of enforcement policies. It is also plausible, albeit less likely, that corporate misconduct has risen after the passage of Dodd-Frank, and that the attempts being made by the SEC are just a response to this trend. However, when viewed from the point of view of publicly traded corporations and the investors of such businesses, the transition from judicial to administrative processes at the SEC is likely to have led to an escalation in the “compliance cost” for violations involving securities.

I also learned from the paper that administrative processes have become more complicated since Dodd-Frank was implemented. The disgorgement sum and the length of time during which the claimed infringement occurred have both increased. Dodd-Frank-related administrative processes, on the other hand, tend to be weaker (less likely to triumph) and less noteworthy (less likely to attract media attentions). As a result of its enforcement activities, the SEC is aiming to optimize the financial penalties it sanctions as well as good media coverage, all the while distributing its scarce funds between administrative procedures and civil court lawsuits in a cost-effective fashion.

Greater focus on corporate sanctions rather than individual culpability has been established by the SEC following the Dodd-Frank legislation. SEC has shown that it is able to impose greater fines on less-culpable conduct after this legislation. Increased fines for publicly traded firms, paired with reduced personal liability, is a strong indication that the Securities and Exchange Commission is focusing on less significant violations (i.e., those with less evidences).

 

Reference

Choi, S., & Pritchard, A. (2017). The SEC’s Shift to Administrative Proceedings: An Empirical Assessment. SSRN Electronic Journal. https://repository.law.umich.edu/articles/1867

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