The U.S. Securities and Exchange Commission (SEC) could lose several of its current functions and powers, including how it polices the markets, if a new financial legislative proposal is passed by the current administration, according to a New York Times report (http://dtn.fm/2FAyo). The Financial Choice Act 2.0, introduced last week by the House Financial Services Committee’s Chair Representative Job Hensarling, a Texas Republican, is described by proponents and supporters as a bill aimed at creating hope and opportunities for investors, entrepreneurs and consumers by giving more freedom to credit unions and small banks in an attempt to increase the number of available financial options for small players. Opponents, however, slam the proposal as a “handout to Wall Street” by aiming to lift some of the restrictions and regulatory measures enforced by 2010’s Dodd-Frank Act, Forbes said (http://dtn.fm/hIah3).
Hensarling’s bill does seem to focus around the theme of being tough on Wall Street by significantly increasing maximum penalties for violations, including by adding a corporate fine of $10 million per violation and making it possible to triple fines for repeat offenders. It should be noted that higher financial penalties might not have the desired effect, especially for companies that earn billions of dollars and would be able to pay such fines without batting an eye. Additionally, the proposed legislation would require the SEC to determine if a corporate fine will hurt shareholders, which could actually lead to lower penalties for fear that they might harm innocent investors.
The real bone of contention, however, is that the Financial Choice Act attempts to restrict a lot of the SEC’s administrative proceeding rights by transferring responsibility back to federal district courts from the commission’s in-house judges. While not directly ruling out in-house proceedings, the bill would make it more difficult to pursue securities law violations in-house, because it would significantly complicate burden of proof requirements for the SEC. Moreover, the bill would also strip the SEC of the power to bar people found guilty of security law violations from serving as a directors or officers of a public company. Instead, this decision would be transferred to a federal district judge.
The proposed changes are a direct response to the Dodd-Frank Act’s provisions that allowed the SEC to pursue a higher number of cases with its own in-house judges instead of with a federal court. This led to overall faster proceedings, but defense lawyers and opponents of the act complained that the shift gave the SEC an unfair advantage and deprived defendants of their rights. It is yet to be established whether the increase in number of in-house administrative proceedings indeed gave the SEC an unfair advantage. According to a recent article by Georgetown University visiting faculty member Urska Velikonja (http://dtn.fm/9r8RK), the difference between cases won in front of its own judges and those won in federal court is an insignificant two percent. Moreover, there have been known instances of cases thrown out by the SEC’s in-house judges for insufficient evidence.
If the Financial Choice Act is adopted in this form, it would drastically hamper the SEC’s regulatory activities and slow down administrative proceedings against people or corporations that violate securities laws. The proposal seems to reflect lawmakers’ general mistrust of the SEC and a general concern that the agency was too aggressive over the past few years.
While similar legislation was rejected under President Barack Obama, this time it has every chance to succeed, as President Donald Trump has repeatedly promised to repeal the Dodd-Frank Act even before his election. Passed in direct response to the massive financial crisis of 2008, the Dodd-Frank Act was primarily designed to prevent such a crisis from re-occurring by cracking down harder on large banking institutions and decreasing various risks in the financial system. The act proposed tougher regulations and established several new government agencies in charge of overseeing various aspects of the banking system. Critics of the act insisted that it would harm the competitiveness of U.S. companies and ultimately hurt economic growth (http://dtn.fm/NrK7i), and that is exactly what Hensarling’s bill is trying to counter – the legislation’s main declared goal is to promote economic growth by granting more financial freedom to small businesses. It remains to be seen in what form the Financial Choice Act will be passed, but one thing is for sure: it will significantly impact how the SEC works and its ability to efficiently enforce the right penalties against securities law offenders.
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