Commission Enforcement Research Articles

COMMITMENT DECISIONS IN EU COMPETITION LAW

Introduced into EU competition law by Article 9 of Regulation 1/2003, commitment decisions provide a settlement mechanism for Commission enforcement actions based upon concessions offered by defendant undertakings. The use of negotiated settlements is closely linked with the shift toward a more “regulatory” conception of competition law, however, and thus away from the orthodox antitrust paradigm. This article examines Commission practices to date under the commitment procedure, arguing that the enhanced flexibility and remedial choices available under Article 9 reflect characteristics more usually associated with the regulatory model. In view of the conventional criticisms of antitrust-as-regulation, the article furthermore considers the extent to which these regulatory attributes of the commitment procedure are problematic in practice, given that regulatory competition law does not incorporate the typical safeguards of ordinary regulation. The article concludes that, although the quasi-regulatory nature of commitment decisions is indisputable, its implications are more mixed. The increased effectiveness of Article 9, both as a means of alleviating market problems and of case disposition, must therefore be balanced against certain legitimacy and longer-term efficiency concerns.

The Efficacy of Cybersecurity Regulation

Cybersecurity regulation presents an interesting quandary where, because private entities possess the best information about threats and defenses, legislatures do – and should – deliberately encode regulatory capture into the rulemaking process. This relatively uncommon approach to administrative law, which I describe as Management-Based Regulatory Delegation, involves the combination of two legislative approaches to engaging private entities' expertise. This Article explores the wisdom of those choices by comparing the efficacy of such private sector engaged regulation with that of a more traditional, directive mode of regulating cybersecurity adopted by the state legislatures. My analysis suggests that a blend of these two modes of regulating is superior to either method alone.Federal regulation of cybersecurity through HIPAA, Gramm-Leach-Bliley, and the Federal Trade Commission's enforcement heavily involves private organizations subject to the regulation in the establishment of the actual practices and standards to which those organizations are held. By contrast, the state cybersecurity laws – a form of disclosure-based regulation that de facto achieves directive regulation – detail specific standards developed without industry input.This Article compares the efficacy of those two modes of regulating using a mixed-methods empirical approach. Qualitative data based on interviews with Chief Information Security Officers (CISOs) at leading multinational corporations details the practical effects of how regulation drives cybersecurity practices. Analysis of quantitative data describing security breach incidents reveals that a blend of the two types of regulation is substantially more effective at preventing such incidents than is either method alone. These results provide insight into ways to mitigate the risks of deliberate regulatory capture while still leveraging the unique knowledge private entities have about what are the most salient cybersecurity threats and defenses.

Use and Abuse of Competition Law in Pursuit of the Single Market - Has Competition Law Served as Regulation Subject to a Quasi Industrial Policy Agenda?

The call for an enhanced role for industrial policy considerations has traditionally been relegated to the darkest corner of the competition law universe with limited support. In accordance with this the presumption has been that no such considerations have influenced the Commission's enforcement priorities. However, the reality tends, as often is the case, to be more complicated. In pursuit of the Single Market, competition law has occasionally served a regulatory role that comes with a flavour of industrial policy. Hence, it would be too simplistic to exclude industrial policy considerations as an objective advanced under competition law if a broader definition is applied.

Detecting and Predicting Accounting Irregularities: A Comparison of Commercial and Academic Risk Measures

SYNOPSIS Although a substantial body of academic research is devoted to developing and testing risk proxies that detect accounting irregularities, the academic literature has paid little attention to commercially developed risk measures. This is surprising given the general consensus that academic risk measures have relatively poor construct validity. We compare the commercially developed Accounting and Governance Risk (AGR) and Accounting Risk (AR) measures with academic risk measures to determine which best detects financial misstatements that result in Securities and Exchange Commission enforcement actions, egregious accounting restatements, and shareholder lawsuits related to accounting improprieties. We find that the commercially developed risk measures outperform the academic risk measures in all head-to-head tests for detecting misstatements. The commercial measures also perform as well as or better than the academic measures in new tests that predict future accounting irregularities using numbers reported one year before the misreporting even begins. Our results suggest commercially developed risk proxies can be useful to practitioners and academics when trying to detect or predict accounting irregularities. JEL Classifications: M41; G30; K22. Data Availability: Contact the authors.

Changes in Managers’ Forecasting Behavior and the Market’s Assessment of Forecast Credibility during Periods of Financial Misreporting

The capital market benefits of high quality financial reporting create incentives for managers to signal the quality of their voluntary disclosure practices. Prior research focuses on the relations between observable measures of earnings quality and observable measures of voluntary disclosure quality. We examine the characteristics of management earnings forecasts during periods in which managers possess private (i.e., unobservable to the market) knowledge that they are engaging in financial misreporting (i.e., committing accounting fraud). Using a sample of Securities and Exchange Commission enforcement actions, we hypothesize and find that managers issue more bad news forecasts in periods of fraud relative to pre-fraud periods and control firms, consistent with the increased use of voluntary disclosure to manage expectations downward while violating constraints on earnings management. The fraud period forecasts are, when compared to fraudulent earnings observed by the market, less ex post biased and more accurate than pre-fraud period forecasts and thus give the appearance of higher quality voluntary disclosures. However, the fraud period forecasts are not less ex post biased or more accurate when accounting restatements later reveal true actual earnings. A consequence of the perceived increase in quality is greater bad news fraud-period forecast impact on prices relative to pre-fraud periods. Further, the enhanced price reactions do not deteriorate after the fraud is made public, suggesting that the public revelation does not taint investors’ assessment of the credibility of bad news management forecasts.

Detecting and Predicting Accounting Irregularities: A Comparison of Commercial and Academic Risk Measures

Although a substantial body of academic research is devoted to developing and testing risk proxies that detect accounting irregularities, the academic literature has paid little attention to commercially developed risk measures. This is surprising given the general consensus that academic risk measures have relatively poor construct validity. We compare the commercially developed Accounting and Governance Risk (AGR) and Accounting Risk (AR) measures with academic risk measures to determine which best detects financial misstatements that result in Securities and Exchange Commission enforcement actions, egregious accounting restatements, and shareholder lawsuits related to accounting improprieties. We find that the commercially developed risk measures outperform the academic risk measures in all head-to-head tests for detecting misstatements. The commercial measures also perform as well as or better than the academic measures in new tests that predict future accounting irregularities using numbers reported one year before the misreporting even begins. Our results suggest commercially developed risk proxies may be useful to practitioners and academics trying to detect or predict accounting irregularities.

The Law and Economics of Article 82 EC and the Commission Guidance Paper on Exclusionary Conduct

This article discusses the approach to Article 82 in O'Donoghue and Padilla's book The Law and Economics of Article 82 EC'' (Hart Publishing, Oxford 2006), compares it with the new European Commission Guidance Paper on the Commission's enforcement priorities in applying Article 82 EC to abusive exclusionary conduct by dominant undertakings and addresses some aspects of competition law remedies.

The Unjustified Judicial Creation of Class Certification Merits Trials in Securities

The class action device is vital to deterring securities fraud and remedying its victims, who almost never suffer losses sufficient to justify an individual suit. Nonetheless, the federal courts have begun to convert the class certification process into a premature trial on the merits, thereby precluding victims of securities fraud from pursuing otherwise valid claims of financial wrongdoing. In particular, in a series of important decisions, the federal courts have required plaintiffs to prove the essential elements of their securities fraud claims at the preliminary class certification stage. This Article demonstrates why this trend should end. The judicial creation of class certification merits trials in securities fraud cases is inconsistent with the federal securities laws and Supreme Court precedent. Moreover, judicial resolution of the merits of a securities fraud claim at the class certification threshold infringes on the Seventh Amendment right to trial by jury. Nor can class certification merits trials be excused by any legitimate policy concerns. The harm purportedly averted by these trials is illusory. The supposed threat that class certification and post-certification discovery costs will produce in terrorem settlements is unfounded and illogical. Finally, this Article concludes that the harm caused by class certification merits trials is substantial. This new procedure will over-deter the very type of private securities fraud actions that both supplement Securities and Exchange Commission enforcement actions and compensate victims for losses caused by securities fraud.

The Application of EC Competition Law in the Energy Sector

This article describes the main developments in the application of EC Competition law in the energy sector in the past year. It provides an overview of the major European cases, as well as national enforcement practices and regulatory developments. Finally, some observations are made regarding certain recurring themes in the Commission's enforcement practice.

The changing face of regulators' investigations into financial statement fraud

PurposeThis paper builds on the Committee of Sponsoring Organizations (COSO) Report, which examined US Accounting and Auditing Enforcement Releases (AAERs). The purpose of this paper is to provide valuable insights into the characteristics and realities of financial statement fraud in the post‐Enron regulatory environment.Design/methodology/approachThis paper analyses a sample of AAERs from 2002 to 2005. It also provides case studies of an additional five high‐profile case studies from that period.FindingsThis paper finds evidence of changes in Securities and Exchange Commission (SEC) enforcement activities since the COSO Report. Specifically, it is found that enforcement activities have increased substantially post‐Enron and the companies subject to AAERs are, on average, much larger, more profitable and the frauds are more substantial than those exhibited in the COSO Report. These findings suggest that the SEC has become more aggressive at pursuing larger companies for financial statement fraud in the post‐Enron environment.Research limitations/implicationsThis paper relies on AAERs as the source of analysis of financial statement fraud, its findings must be viewed in light of the limitations of using these documents. Specifically, the prevailing prosecutions agenda of the US SEC may be reflected in these results.Practical implicationsThe study findings are of great practical relevance to accounting regulators and practitioners as they provide valuable insights into the nature and characteristics of financial statement fraud.Originality/valueThe paper provides empirical evidence concerning the changing face of financial statement fraud enforcement and provides a more in‐depth comparison of fraud than possible with most previous studies that have tended to focus on quantitative measures. This is possible because the present investigation utilises qualitative data from AAERs to supplement quantitative findings. Its originality is also due to the use of institutional theory which is not commonly applied in the corporate governance field.

Recent developments in EU competition law (2006–2008): Single-firm dominance and the interpretation of Article 82

Abstract In December 2008, the Commission published a ‘Guidance on the Commission's Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’. The communication appears to conclude a debate on a ‘more economic approach’ towards Article 82 which has occupied the competition law community for the last three years. This article reviews the proposals contained in the ‘Priorities Paper’ in the light of the important judgments on the abuse of single-firm dominance which the CFI and the ECJ have issued between 2006 and 2008, including the Microsoft judgment. It strives to ascertain the current state of the law on Article 82, and the room it leaves for a ‘more economic approach’.

Do Court Decisions Drive the Federal Trade Commission Enforcement Policy on Merger Settlements?

Most mergers filed at the enforcement agencies are conglomerate in nature with only minor horizontal overlaps. An enforcement agency may challenge the merger, if any overlap is believed to be adversely affected by the transaction. While the merging firm is entitled to a hearing in federal court, the delay would impose additional costs, thereby giving the enforcement agency the ability to hold up the bulk of the transaction, pending resolution. Hence, the agency's actions are not fully checked by the threat of litigation. This paper explores whether the FTC's decisions to challenge conglomerate transactions that could feasibly settle differ from the controlling case law. We find that the representative enforcement regimes are remarkably similar, though the FTC is more accepting of efficiencies arguments, while the court considers buyer sophistication as a mitigating factor. In aggregate, the differences generally cancel out leaving comparable levels of enforcement. In depth analysis identifies some minor enforcement differences, almost none of which are statistically significant.

A new dawn for Commission enforcement under Articles 226 and 228 EC: General and persistent (gap) infringements, lump sums and penalty payments

It has long been recognized that in most areas of Community law, such as the internal market, and consumer and environmental protection, the most tenacious problem is not the absence of adequate laws, but insufficient Member State transposition (of directives), as well as insufficient application and enforcement of those rules. Following increased efforts by the Commission to correct this state of affairs by initiating infringement proceedings under Article 226 EC and, more recently, requesting imposition of penalty payments under Article 228(2) EC, the situation has improved in many respects.

Commission Compliance Promotion and Enforcement in the Field of the Environment

AbstractThe article looks at trends and directions since 1996 in Commission policy concerning the promotion and enforcement of European environmental legislation. It places these in their wider context and sets out some relevant statistics for the period 2000-2006. It refers to a 2002 Commission communication as setting out some of the organising principles for Commission enforcement work, offering several examples of how strategic in nature enforcement action has tended to become. It outlines salient features of policy on the use ofArticle 228 to enforce European Court of Justice judgments and touches on the relationship between complaint-handling and the pursuit of core implementation deficits, before presenting some general conclusions.

Financial Misrepresentation and its Impact on Rivals

Firms targeted by Securities and Exchange Commission enforcement actions for fraudulent financial misrepresentation, on average, experience a significant drop in shareholder value. This paper highlights the additional impact of such enforcement actions on the shareholders of rival firms. Consistent with the importance of the industry competition effect we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. We find that the spillover effect increases in importance with the severity of the accusation of financial misrepresentation. We also find that the information spillover effect is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm. Results from this paper shed light on the differential impact of financial misrepresentation on rival firms.

The EC Fining Policy for Violations of Competition Law: An Empirical Review of the Commission Decisional Practice and the Community Courts' Judgments

The EC Fining Policy for Violations of Competition Law: An Empirical Review of the Commission Decisional Practice and the Community Courts' Judgments

Transparency at the Federal Trade Commission: The Horizontal Merger Review Process 1996-2003

This paper empirically analyzes the Federal Trade Commission's merger enforcement decisions, to supplement the 2004 release of the Horizontal Merger Investigation Data. The study provides insights into the review process for both multi- and single-market mergers. We present concentration-based models, customized to the relevant industry, for mergers with large numbers of overlaps. When more detailed data is available (for mergers with 3 or fewer overlaps), the analyses also focus on additional factors. We find evidence to suggest that, in addition to market structure, verified customer complaints and entry considerations also affect the enforcement decision. Finally, the study notes that the Commission's enforcement policy has been stable during the 1996 through 2003 time period.

ACCC Enforcement and Compliance Project: The Impact of ACCC Enforcement Activity in Cartel Cases

The Centre for Competition and Consumer Policy's (CCCP) Australian Competition and Consumer Commission (ACCC) Enforcement and Compliance Project uses qualitative and quantitative research methods to evaluate the impact of ACCC enforcement strategies on compliance with the Trade Practices Act. This Report provides a preliminary analysis of the compliance impact of ACCC enforcement activity in cartel cases. The Report examines four case studies of significant ACCC cartel enforcement action in detail using empirical evidence from interviews with ACCC staff, lawyers and business people involved in each case, and documentary reports of the case and its impact. The four cases are the Freight, Concrete, Transformers and Queensland Fire Protection cases. Each case was chosen because of its significant impact on industry compliance and on the reputation and effectiveness of the Commission, according to preliminary interviews with ACCC staff. The analysis shows that each case did have significant impacts, but also weaknesses. In all four cases the ACCC followed the same pattern of investigation and enforcement, with relatively minor variations. These are the use of informers and leniency/immunity, the section 155 process for gathering evidence, negotiated settlements of enforcement action, the publicity associated with proceedings, and implementation of compliance programs as a remedy for misconduct. Despite failures in the impact of both the ACCC's deterrent and moral messages, the data suggests that ACCC enforcement activity has significantly influenced a change in social norms in Australian business related to cartel behaviours through a mix of enforcement techniques that have begun to extend a web of control over market behaviour. Available at http://www.cccp.anu.edu.au/projects/cartelreport.pdf

Looking Forward: The Federal Trade Commission and the Future Development of U.S. Competition Policy

This article discusses a strategy for FTC competition policy and a positive agenda to implement the strategy. The antitrust laws and the pro-competition ethic they embody serve as an organizing principle in our country's economy. Antitrust plays a major role in shaping our markets, institutions, and the relationships among market participants. Effective antitrust enforcement may preclude direct, command-and-control regulation of sectors of the economy, avoiding the significant inefficiencies such regulation entails. By spurring competition, antitrust contributes to a market system that provides lower prices, encourages greater innovation, and generates faster responses by business to changing consumer needs and desires. The first part of the article identifies two antitrust immunities that help protect and foster regulatory growth: Noerr immunity and the state action doctrine. It details FTC initiatives to limit these immunities to their proper spheres, which will ensure that the ability of antitrust to protect consumers is not unduly restricted. By contrast, expansive applications of antitrust immunities shelter under the cloak of government regulation much anticompetitive conduct that harms consumers. This part of the article also describes the Commission's competition advocacy role. Today, the FTC acts as a vigorous advocate for competition through its publication of studies and reports, as well as participation in state and federal legislative and regulatory fora. The FTC's advocacy program provides economic analysis and other informed guidance to help policymakers better understand the impact of their decisions in creating, maintaining, or forestalling competitive markets. The second section of the article states that the Commission's enforcement program should focus closely on the transactions and kinds of practices that have been shown over time to pose the greatest threat of substantial consumer injury. In particular, there is a general consensus that the practices about which we should most worry occur when competitors stop competing vigorously, making peace to benefit themselves at the expense of consumers. It offers as examples recent investigations into single-firm conduct involving the abuse of government processes. Finally, the article discusses the importance of using the FTC's full range of capabilities, such as conducting research about the economy, engaging in competition advocacy, and using administrative adjudication to resolve competition policy disputes.

The Federal Trade Commission and the Future Development of U.S. Consumer Protection Policy

The paper provides a comprehensive analysis of how the Federal Trade Commission (FTC) fits in the larger scheme of institutions for consumer protection embodied in the American economic system. It also examines how the agency's animating principles shape the Commission's enforcement agenda and other initiatives. The first part of the paper describes the system of institutions for consumer protection embodied in the American economic, legal, and regulatory systems and how they interrelate. It argues that a public institution, such as the FTC, can shore up these economic and legal institutions when they cannot protect consumers adequately. Because the bedrock principle of the FTC's agenda is that robust competition in a strong market is the primary bulwark of consumer protection, the agency strives to reinforce these other institutions without undercutting their vitality. In the past, the FTC has occasionally exceeded its proper place in this institutional context and failed to appreciate the powerful role markets and the common law play in protecting consumers. The past few decades have demonstrated both the opportunities and limits of the FTC as a regulatory agency, and this paper explores those developments. The second section of the paper examines how an understanding of the FTC's proper place in this system of institutions for consumer protection guides the design of the Commission's specific consumer protection initiatives. Starting with the agency's top priority - stopping conduct that causes the greatest threat to consumers - this section details the FTC's actions against fraud and then discusses the regulation of advertising, with an emphasis on matters involving health claims. It next illustrates how the agency uses its unique institutional capabilities to formulate new rules in response to changed situations by examining the FTC's initiatives on privacy and spam, with a particular emphasis on the National Do Not Call Registry. The paper concludes by discussing the critical importance to sensible policymaking of continuing efforts to increase the Commission's research and development function. This function involves a systematic effort to improve the base of knowledge that informs the agency's diverse initiatives in the face of changes in the economic and policymaking environment at home and abroad.