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Comment by: Kumar Pallav Corporate law: Policy Analysis

Comment on THE SEC AND THE FINANCIAL INDUSTRY:


EVIDENCE FROM ENFORCEMENT AGAINST BROKER-DEALERS

Author: Stavros Gadinis

Lecturer and Post-Graduate Fellow, Harvard Law School

Market collapse reaction in U.S. financial sector draws criticism on the role of the Securities and Exchange Commission (SEC). The present paper makes a first step towards providing an empirical account of SEC enforcement practices towards suppliers of financial services. This paper investigates differential enforcement patterns towards large and small firms and their employees, and tentatively explores links between enforcement outcomes, SEC bureaucratic capacities, and post-SEC career prospects of agency officials.

In this comment I intend to focus on the paper written by Stavros Gadinis and how the author could explain a systematic bias role of SEC in enforcement patterns. The goal of this comment will be to support and contrast the views of Stavros Gadinis, specifically in the issue that the SEC is more likely to treat big firm defendants favorably. Paper reveal a significant fact that when big firms and their staff are engaged in misconduct, the SEC often brings actions based exclusively on corporate liability, without naming any specific individuals as defendants. Defendants settled with the SEC in 90% of all cases assigned to administrative proceedings. Author explains that the administrative proceedings lead to speedier resolution of the case, while courts take more time to resolution after the violation.

The analysis explore that big firm defendants are more likely to receive no industry ban. At the other end of the spectrum, more than one quarter of small firm defendants are permanently

Comment by: Kumar Pallav Corporate law: Policy Analysis

banned from the industry. For the same violation and comparable levels of harm to investors, a big firm defendant is less likely than a small firm defendant to end up in court rather than in an administrative proceeding, and faces a higher likelihood of being banned from the industry as a result. This analysis favors the view of the author. In this paper, the analysis of fines ordered in administrative proceedings yields a surprising result. The result shows that while substantial differences between big and small firms exist for fines ordered against the corporate entity, individuals associated with big and small firms pay similar fines. The similarity in fine levels seems even more noteworthy than no industry ban on big firm.

In order to analyze the favorable argument in support of the role of SEC, author suggests that no public policy justification exists for the preferential treatment of individual employees in large firms. Additionally author did not support the justification that agency should take into account the reputational harm that big firms suffer as a result of a SEC action. These most commonly proposed explanations do not support role of SEC for the special treatment to big firms. However author supported his argument by indicating that SEC officials treat favorably their preferred future employers. Author suggests that further analyses would be necessary to explore these indications conclusively. The author did not address these issues which may certainly put some light on the reasons behind the favorable role of SEC towards big firms. A violation may occur in spite of a firms policies and compliance program, especially in the public firm. This analysis favors the role of SEC in the given context.

It is a notable that SEC has not provided any comprehensive guidance about its rationale regarding the level of fines and type of industry bans it seeks, or its decision to assign cases to courts or to administrative proceedings. This information would provide benchmarks that could facilitate public monitoring of SEC enforcement. Lack of transparency in the SECs enforcement operations certainly favors the analysis of Gadinis. The analysis explores the cases involving big law firms and shows that their employees are more likely to end up in administrative proceedings. On the other hand, cases involving small firms and their employees are more likely to end up in court. But it is worth to note that SEC tends to assign to courts cases where the harm to investors was larger.

Comment by: Kumar Pallav Corporate law: Policy Analysis

I admire finding in this paper which bring to light the lack of transparency in the SECs enforcement operations, and link it to the observed bias in favor of big firm defendants. This paper addresses the central issue of the agencys future enforcement outlook and suggests SEC to maintain the balance between big and small firm actions.