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28 Apr 2017
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The SEC and the Financial Choice Act 2.0

“Korea President Park US Congress 20130507 06” by Korea.net, licensed under CC Attribution Share Alike 2.0 Generic.

“To create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes.”

The opening of the 593 page draft of the Financial Choice Act 2.0 by the House Financial Services Committee sets multiple far-reaching goals. Essentially, the Committee attempts to find solutions to limit the SEC’s enforcement power, give Congress greater authority, and strip away the Dodd-Frank Act in order to deregulate the market.

At first glance, the draft appears to give greater authority to the Securities and Exchange Commission (SEC) by increasing the amount of penalties for market violations, and tripling penalties for recidivists. However, the “economics of crime suggests that fines imposed by regulators may need to rise still further if they are to offset the rewards from lawbreaking.” (The Economist (2012) “Fine and Punishment”). For large companies and corporations whose profits are in the billions, a single or multiple $10 million fine will not necessarily deter their behavior. The bill additionally obliges the SEC to take into consideration whether a hefty fine will be detrimental to the shareholders of the company. This provision aims to prevent “innocent” shareholders’ liability, but restricts the SEC’s power to impose fines on wrongdoers.

The draft bill further strips the SEC’s authority by encouraging the SEC to file cases in a Federal District Court as opposed to filing administrative cases in front of their in-house judges. This would effectively permit defendants in administrative cases to ask for a dismissal, and give them greater leverage if the case were to be subsequently heard in federal court. The House Financial Services Committee’s reasoning behind this decision is to reverse a provision from the Dodd-Frank Act that allows the SEC to bring an extensive array of penalties before their in-house judges. However, empirical studies exemplify that the SEC wins 90% of cases before in-house judges, and 88% in federal court. Therefore, changing the mechanism of how cases are heard may not have the impact the legislators intend.

The Financial Choice Act 2.0 further attempts to limit the SEC’s authority and ensure it does not overstep its legal boundaries by requiring the SEC to give “adequate notice” before bringing any enforcement actions for an alleged violation (Sec. 819). Once individuals receive a notice, they will have 180 days to appear before the SEC and make a presentation, after which the Commission will determine whether to bring administrative or judicial action. This bill could cause tension between Congress and the SEC. “If the measure is adopted Congress would be inserting itself fairly deeply into the enforcement division’s practices, reflect a general mistrust of the SEC’s decision-making process” (Henning, P.J. (2017) “A Whack at Dodd-Frank Could Hamstring the SEC.” NY Times). From bitcoin exchanges to Ponzi scheme cases, the SEC has a plethora of hurdles ahead. There is no argument that there needs to be some type of reform to modernize the procedures of the SEC, but the Financial Choice Act 2.0 may be severing too many of the Commission’s limbs.

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