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A Tale of Two Courts: Determinants and Consequences of the SEC’s Choice of Enforcement Venue After the Dodd-Frank Act
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|Title:||A Tale of Two Courts: Determinants and Consequences of the SEC’s Choice of Enforcement Venue After the Dodd-Frank Act|
|Abstract:||The Dodd-Frank Act allows the SEC to choose either an internal administrative proceeding or federal district court as an enforcement venue for resolving alleged violations of federal securities laws, granting both venues equal civil enforcement power. I examine the determinants and consequences of the SEC’s choice of enforcement venue after the Dodd-Frank Act. Additionally, I develop a new proxy for political connectedness to measure the frequency and length of meetings between the defendants’ congressional representatives and the SEC chair, using data from the SEC chair’s daily calendars obtained via the Freedom of Information Act. Results show that (1) more material cases are about 30% more likely to be assigned to federal courts than to administrative proceedings, (2) politically connected defendants are about 9% more likely to be routed to administrative proceedings, and (3) defendants are more likely to be routed to administrative proceedings when the SEC’s budgetary constraint is more binding. Moreover, compared to defendants in federal courts, defendants in administrative proceedings are associated with lower monetary penalties. One additional meeting between the defendant’s congressional representatives and the SEC chair corresponds to a 50% decrease in additional monetary penalties imposed on defendants in administrative proceedings. Importantly, administrative proceedings are resolved 17 times faster than federal court cases. This study has at least two implications. First, the SEC’s private incentives affect its enforcement venue selection and possibly enforcement outcomes. When the political and economic costs (benefits) are greater, the SEC is more likely to route cases to administrative proceedings (federal courts). Second, SEC administrative proceedings impose lower litigation costs on both the SEC and the defendants, in comparison to federal courts.|
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