Like the healthcare bill before it, regardless of its dilution to earn Republican votes, the Dodd-Frank financial reform bill is a BFD.
It’s also one that’s continued the trend towards shunting enforcement of the Securities and Exchange Acts away from private litigators, and to the SEC. The bill preserves the rule that private citizens can’t litigate securities fraud premised on “aiding and abetting” liability, but makes it easier for the SEC to do just that; and it restores to the SEC the ability to regulate “foreign-cubed” (foreign-centered) securities fraud, an ability private plaintiffs lost early last month when the Supreme Court decided Morrison v. Nat’l Australia Bank.
There’s cause to doubt whether this is the most efficient solution. Securities enforcement is an area of law particularly susceptible to the Republican argument that, given the right tools, private actors motivated by self-interest might better control industry excess than overburdened government agencies. The SEC, after all, has limited resources; the private market has no such limitation. Thanks the class action device, and rules permitting attorneys to earn large contingency fees, an individual with a plausible claim, even one with very modest means, can attract skilled counsel and take down even top firms. This privateering model is uniquely American, and remarkably effective. If we’re worried about securities fraud, why not “unleash the free market”?
Because, for one, it’s probably too effective. Securities litigation is so lucrative for the plaintiff’s bar that Clinton’s Congress passed laws, over the President’s well-informed veto, to make it harder for plaintiffs to sue in the first instance. Rules designed to weed out meritless claims save firms from costly litigation over petty breaches, and thus preserve the attractiveness of American markets to foreign investors, but permit private redress of real fraud.
Could we successfully “re-privatize” securities enforcement, and guard against frivolous litigation by instituting still stricter threshold requirements? Yes. Would this system better control fraud, without destroying valuable market incentives? Maybe. That’s a question for law professors with both the time and the inclination to make a full study. The argument, though, is at least plausible, more so than many (any?) of the right’s anti-reform arguments. Why haven’t they made it, then?
