Congress expanded the SEC’s ability to pursue enforcement actions in administrative proceedings in the Dodd Frank Act, bringing the agency’s use of proceedings before its own administrative law judges (ALJs) into the spotlight. A number of respondents have challenged the constitutionality of these proceedings, relying principally on arguments arising out of the Appointments Clause of the Constitution. Those disputes are currently being played out both before the SEC and in the courts, but they are unlikely to be a long-term obstacle to the SEC’s use of administrative proceedings.

In our article, The SEC’s Shift to Administrative Proceedings: An Empirical Assessment, we examine the consequences of the SEC’s recent shift to administrative proceedings. Regulated entities, such as broker-dealers, investment advisers, and other financial entities, have been subject to penalties in administrative proceedings for some time, so we focus on public companies outside of financial services. Specifically, we examined enforcement actions filed by the SEC against public companies (other than SIC 6000s) that are tracked by the Center for Research in Security Prices (CRSP). We utilized New York University’s Securities Enforcement Empirical Database (or SEED) as a source for the enforcement actions. We focused on all cases initiated against these companies between January 1, 2005 and September 30, 2015. We started with a total of 324 SEC actions in our dataset. We divide our dataset into two categories, civil cases filed in federal court or administrative proceedings before an ALJ. We show a general decline in the number of court actions against public companies from 2010, the year of Dodd Frank’s enactment, through the end of the SEC’s 2015 fiscal year on September 30, 2015.

We show that the shift toward administrative proceedings has been accompanied by a substantial increase in the average civil penalty imposed on non-financial public companies named as defendants, both in court and in administrative proceedings. We also provide evidence that the complexity, and thus the cost, of cases the SEC brings in administrative proceedings increased after the enactment of Dodd Frank. Specifically, we show an increase in two proxies for the complexity of the nature of the alleged underlying securities law violation, the disgorgement amount, a measure of the underlying profits from the alleged securities law violation, and the number of years during which the violation allegedly took place. Violations that involve greater profits are likely to be longer running and involve more transactions and participants.

The egregiousness or priority of the securities law violation is weaker, however, for cases the SEC chooses to bring as administrative proceedings post-Dodd Frank. We focus on whether the SEC action involves an accounting claim, excluding accounting claims relating to the SEC’s systematic efforts to address option backdating and FCPA violations. Although option backdating and FCPA enforcement both involve accounting claims, they may reflect priorities of the SEC other than investor protection. Thus, those actions may have less direct impact on investors. We focus instead on bread-and-butter accounting violations, which arguably pose the most risk to investors, allowing us to assess in what forum the SEC bring cases with the greatest impact on investors. We find that the incidence of such bread-and-butter accounting violations is unchanged for cases brought in court after Dodd Frank, but has significantly declined for administrative proceedings.

We note an even more striking pattern in requirements for independent consultants in SEC settlements, including for example independent compliance consultants. Independent consultants were required in 6% of court cases prior to Dodd Frank, but that percentage rose to 14% post Dodd Frank. By contrast, consultants were required in 14% of administrative proceedings prior to Dodd Frank, but only 4% after the passage of the law. We also look at how often the SEC pursues actions against individuals based on the same misconduct alleged against the public company. Here the pattern suggests less serious offenses across the board. Individuals were charged in 74% of the court cases against the public companies in our sample prior to Dodd Frank, but only 56% of the cases subsequent to the law’s passage. For administrative proceedings, the figure declined from 64% prior to Dodd Frank to 47% afterward. These patterns are consistent with the SEC shifting more marginal cases from court to administrative proceedings or bringing actions as administrative proceedings that would not have been brought at all pre-Dodd Frank.

Overall, we conclude that the SEC’s ability to extract settlements has increased with the flexibility to choose its forum provided by Dodd Frank. The SEC appears to be bringing more cases against public companies through administrative proceedings compared with civil actions in the post-Dodd Frank period, but it is not clear that the additional cases have the same deterrent value as the mix of cases that the SEC brought prior to Dodd Frank. We do not see stronger evidence of culpability. Nor do we see other indicia that the SEC is imposing such penalties because the agency views the cases as higher priority. The SEC’s shift to administrative proceedings appears to have resulted in an increase in the “enforcement tax” for securities violations.

The preceding post comes to us from Stephen Choi, the Murray and Kathleen Bring Professor of Law and Director of the Pollack Center at NYU Law School and Adam C. Pritchard, the Frances and George Skestos Professor of Law at Michigan Law School. The post is based on their paper, which is entitled “The SEC‘s Shift to Administrative Proceedings: An Empirical Assessment” and available here.