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April 18, 2014

The Politics Of Securities Enforcement

Historically, the Governor appointed California’s Commissioners of Corporations.  Cal. Corp. Code § 25600.  Today, the Governor still appoints the head of the new Department of Business Oversight.  Having served as a Commissioner, I believe that it is preferable to have securities enforcement decisions made by an appointed rather than an elected official.  An appointed Commissioner doesn’t need to raise money for his or her election or reelection.  Yet, there is accountability to the public.  Commissioners are subject to confirmation by the Senate and serve at the pleasure of the Governor (unlike SEC Commissioners who are appointed to five year terms, Exchange Act § 4(a)).

Thus, it was nice to see that my intuition is supported by actual data.  In Policing Public Companies: an Empirical Examination of the Enforcement Landscape and the Role Played by State Securities Regulators, 65 Fla. L. Rev. 395 (2013), Professors  Amanda M. Rose and Larry J. LeBlanc reviewed 5,441 Form 10-Ks filed by 1,977 different companies with shares of common stock listed on the New York Stock Exchange.  They reached some interesting conclusions about securities related state enforcement actions:

  • 36% of states have an elected securities regulator and these states were responsible for 80% of the matters disclosed;

  • 68% of the actions were directed at out-of-state companies (i.e., those neither headquartered nor incorporated in the enforcing state);

  • Only 18 of the 50 states were identified as bringing actions against companies in the authors’ data set; and

  • States with an elected Democrat serving as the securities regulator brought matters at nearly seven times the rate of other states.

This study focused exclusively on NYSE listed companies.  It would be interesting to know whether the same results obtain for companies with shares listed on NASDAQ and whose shares are traded in the over-the-counter markets.  Many of these companies can be expected to be much smaller and perhaps more likely to be natural targets of local rather than national enforcement.

Since my time as Commissioner, California has hybridized civil enforcement of the Corporate Securities Law of 1968 and the California Commodity Law of 1990.  In 2003, the legislature enacted SB 434 (Escutia) to grant the California Attorney General with parallel enforcement authority of both of these laws.  See Cal. Gov’t Code § 12657 et seq. 

© 2010-2014 Allen Matkins Leck Gamble Mallory & Natsis LLP

About the Author

Keith Paul Bishop, Business Attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients on compliance,...

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