Toward a Reform-Minded Model for Securities Law Enforcement

Abstract

This paper examines a significant shift in enforcement practice at the United States Securities and Exchange Commission, originating under the Chairmanship of William Donaldson but likely to continue beyond it. This shift is a response to a crisis of corporate governance, exemplified by recent scandals among various public corporations and financial services institutions, and to the demonstrated inadequacy of SEC enforcement tools to respond to that crisis. While the SEC's new approach, which I call the Reform Undertaking, is incomplete, I argue that if properly implemented it may have the potential to spur institutional reform not only in corporate governance, but also within Enforcement practice itself. I use the Reform Undertaking as a springboard for developing a larger theoretical model, focusing on the ways in which forward-looking, reform-minded enforcement improves on more traditional, retrospective, nontransparent approaches as a mechanism for addressing systemic problems in corporate governance. I conclude that the Reform Undertaking is a version of what is becoming known as new governance, or experimentalist, regulation. Further, the new enforcement model I describe - which I call the True Reform Undertaking - is a novel elaboration on existing experimentalist theory. Experimentalism is typically associated with a decentralized, data-driven, highly participatory regulatory model, but my work considers its application to the securities law enforcement context. As such, the True Reform Undertaking responds to one of the hardest problems for New Governance: what to do with worst actors. The model considers how to stimulate reform within corporations that for public welfare or other reasons should not simply be shut down, but whose dysfunction or internal culture makes them resistant to experimentalist incentives.