The Equity Façade of SEC Disgorgement

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Russell G. Ryan*

In its civil law enforcement cases under the federal securities laws, the Securities and Exchange Commission (SEC) routinely seeks disgorgement of ill-gotten gains, and courts routinely grant it.[1] The SEC commonly describes disgorgement as an equitable remedy,[2] and courts similarly begin their disgorgement analyses by assuming as axiomatic the equitable nature of disgorgement.[3]

But what if that premise is wrong? What if disgorgement is an equitable remedy only some of the time? What if in many cases it is actually a remedy at law, or even a punitive remedy? And what if in some cases the very label of disgorgement is a misnomer?

This Article attempts to answer these critical but largely overlooked questions. It begins with a brief summary of the history and context of disgorgement among the various SEC enforcement remedies.[4] It then explains why disgorgement in SEC cases is often not a remedy in equity at all, but rather a classic remedy at law in the form of a personal liability to pay a sum of money—independent of whether the defendant still possesses the tainted profits, or ever possessed them at all.[5] Finally, the Article explores the potential legal and statutory ramifications of removing the façade of equity from the disgorgement remedy.[6]

Disgorgement in Context

In carrying out its law enforcement role, the SEC is statutorily empowered to pursue a wide range of remedies against securities law violators. These remedies include injunctions,[7] administrative cease-and-desist orders,[8] monetary penalties,[9] and various forms of bars and suspensions.[10] The SEC can unilaterally order some of these remedies through administrative proceedings, while others are available only if the SEC files a lawsuit and obtains an order or judgment from a federal district court.[11]

Congress has never explicitly included disgorgement among the remedies the SEC can seek in federal court.[12] Despite this silence, the SEC has been seeking disgorgement for decades, and courts have been granting it for nearly as long.[13] Courts initially held that disgorgement—or “restitution,” as some courts and commentators labeled it early on—was a remedy ancillary to the court’s statutory power to order equitable injunctive relief.[14] Over time, courts came to accept as a truism the notion that disgorgement is inherently an ancillary equitable remedy.[15]

Significantly, most of the seminal SEC disgorgement cases were decided before Congress first empowered the agency in 1990 to seek monetary penalties against securities law violators.[16] Until then, the temptation for the SEC to request and the courts to grant disgorgement based on questionable theories was understandable, lest securities law violators appear to avoid punishment by suffering a mere injunction against future wrongdoing without any accompanying monetary sanctions. Today, however, there are no compelling reasons to stretch disgorgement beyond its limits.[17] In recent decades, Congress has granted the SEC and the courts a vast array of options to impose harsh monetary and other sanctions against wrongdoers in virtually all kinds of securities cases, regardless of whether disgorgement is available as an additional remedy.[18] Indeed, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the SEC can now administratively impose severe financial penalties, subject to only limited and deferential after-the-fact review by a federal court of appeals.[19]

More importantly for purposes of this Article, SEC disgorgement law developed mostly before the Supreme Court’s 2002 decision in Great-West Life & Annuity Insurance Co. v. Knudson.[20] As discussed at length below, Great-West articulated the Court’s most recent and authoritative teaching on whether and under what circumstances a restitutionary remedy constitutes equitable relief, as opposed to legal relief, in the context of a federal statute that explicitly allows the former but not the latter.[21] Great-West is especially significant because, within months after it was decided, Congress added a similar provision for equitable relief to the federal securities laws as part of the Sarbanes-Oxley Act of 2002.[22] Although that provision did not explicitly mention disgorgement, the widespread assumption that disgorgement was invariably a form of equitable relief has since emboldened the SEC and courts to cite it as statutory authority for ordering disgorgement.[23] Still, whether the power to order disgorgement derives from a district court’s inherent equitable powers or from the explicit statutory authority of Sarbanes-Oxley—or both—it can lawfully be ordered only if it in fact constitutes equitable relief rather than legal relief.

Courts have also given the SEC substantial procedural and evidentiary advantages in disgorgement cases based on the premise that it is an equitable remedy. For example, the SEC is required to proffer only a “reasonable approximation” of the alleged ill-gotten gains, at which point the evidentiary burden shifts to the defendant to disprove the SEC’s calculation.[24] Based on the presumption that disgorgement is an inherently equitable remedy, courts also generally hold that defendants facing SEC disgorgement claims enjoy neither the protection of any statute of limitations[25] nor the right to a jury trial.[26] Courts have also accepted the SEC’s position that a disgorgement order is enforceable through contempt sanctions[27] and is not a debt that triggers the protections normally afforded to judgment debtors under the Federal Debt Collection Procedures Act.[28] All of these advantages, however, would presumably be swept aside in any given case if the disgorgement sought by the SEC were determined not to be an equitable remedy.

The Equity Façade and the Disgorgement Misnomer

As noted at the outset of this Article, the SEC and the courts have commonly described disgorgement as an equitable remedy, designed to deprive wrongdoers of unjust enrichment and to deter others from violating the securities laws.[29] It is also generally acknowledged that disgorgement cannot be used punitively, and thus must be limited to an amount causally connected to the alleged wrongdoing.[30] Beyond that, however, any resemblance to a truly equitable remedy largely disappears in most cases. For example, the SEC and the courts generally say that disgorgement can be ordered even against defendants who no longer possess or have access to the tainted profits, or never possessed them at all.[31] They further say that a defendant can be held jointly and severally liable for other people’s gains as long as the participants were closely related or had collaborated in their scheme.[32] These attributes call into question whether the label of equity accurately describes disgorgement.

In determining whether SEC disgorgement claims seek truly equitable relief, the starting point should be the Supreme Court’s analysis in Great-West,[33] which interpreted the phrase “equitable relief” in Section 502(a)(3) of the Employee Retirement Income Security Act of 1974.[34] The plaintiffs were an insurer and a company-sponsored employee health plan seeking reimbursement of funds previously paid to a beneficiary after an auto accident.[35] They claimed that certain agreements entitled them to reimbursement from the proceeds of a settlement the beneficiary later recovered from a third-party tortfeasor.[36] In a 5-4 decision, the Supreme Court rejected several alternative attempts to classify the requested monetary relief as equitable rather than legal.[37] Most relevant for present purposes, the Court rejected the argument that the plaintiffs were seeking equitable restitution.[38]

The Court acknowledged that some forms of restitution are equitable in nature but emphasized that others are available only at law.[39] The Court quoted earlier precedent holding that “equitable relief,” as used in the statute at issue, “must refer to ‘those categories of relief that were typically available in equity.’”[40] The Court then distinguished between “restitution at law” and “restitution in equity,” holding that only the latter fell within the court’s equitable powers.[41]

The Court’s description of “restitution at law” fittingly captures the essence of the disgorgement remedy typically sought by the SEC:

In cases in which the plaintiff “could not assert title or right to possession of particular property, but in which nevertheless he might be able to show just grounds for recovering money to pay for some benefit the defendant had received from him,” the plaintiff had a right to restitution at law through an action derived from the common law-writ of assumpsit. In such cases, the plaintiff’s claim was considered legal because he sought “to obtain a judgment imposing a merely personal liability upon the defendant to pay a sum of money.”[42]

The Court then distinguished the separate concept of restitution in equity:

In contrast, a plaintiff could seek restitution in equity, ordinarily in the form of a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession. A court of equity could then order a defendant to transfer title (in the case of the constructive trust) or to give a security interest (in the case of the equitable lien) to a plaintiff who was, in the eyes of equity, the true owner. But where “the property [sought to be recovered] or its proceeds have been dissipated so that no product remains, [the plaintiff’s] claim is only that of a general creditor,” and the plaintiff “cannot enforce a constructive trust of or an equitable lien upon other property of the [defendant].” Thus, for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.[43]

Because the plaintiffs in Great-West sought to impose the kind of personal monetary liability described by the Court as legal restitution, the Court held that the remedy was beyond the district court’s equitable powers.[44]

Many SEC disgorgement orders do not fit within Great-West’s description of equitable relief because the defendant does not possess the allegedly illicit gains that flowed from the securities law violation, and thus the disgorgement seems most akin to a personal liability to pay a substitutionary sum of money approximating the illicit gains. Common examples include insider-trading cases in which tippers are ordered to disgorge not only their own profits but also those of their tippees.[45] Other cases involve defendants who have spent, squandered, or transferred their ill-gotten gains before being caught by the SEC, yet are still ordered to disgorge what they no longer possess.[46] In these cases, courts often rely in part on the concept of joint and several liability,[47] a dubious approach for reasons that exceed the scope of this Article.[48] In any event, the so-called disgorgement does not purport to order specific performance, a constructive trust, or an equitable lien over specific funds or property derived from the alleged wrongdoing, all of which would, of course, be impossible. Instead, courts simply require the defendant to pay a substitutionary sum of money calculated as an approximation of ill-gotten gains the defendant does not possess. Not surprisingly, the SEC’s collection rate in these cases is dismal.[49]

In ordering disgorgement, courts typically consider it irrelevant that the defendant no longer possesses the ill-gotten gains,[50] which seems incompatible with Great-West. One influential example is the D.C. Circuit’s opinion in SEC v. Banner Fund International.[51] Rejecting the defendant’s claim that he no longer had access to his illicit gains, and thus could not disgorge them, the court asserted that the defendant’s approach would create a “monstrous doctrine” and lead to “absurd results,” because it might incentivize securities law violators to spend or transfer their tainted profits before getting caught.[52] In hindsight, however, this aspect of Banner Fund cannot be squared with the Supreme Court’s Great-West opinion two years later.

Like most disgorgement decisions, Banner Fund assumed that disgorgement is an inherently equitable remedy. But the court’s literal language and rationale, when read in contrast with the Supreme Court’s subsequent opinion in Great-West, leaves little doubt that Banner Fund was actually describing a legal remedy rather than an equitable one:

The SEC in turn contends that . . . the disgorgement order imposes an obligation upon [the defendant] personally, which he may satisfy using his own assets. Because disgorgement is an equitable obligation to return a sum equal to the amount wrongfully obtained, rather than a requirement to replevy a specific asset, we reject [the defendant’s] challenge and affirm the district court.

. . . As the SEC points out, the requirement of a causal relationship between a wrongful act and the property to be disgorged does not imply that a court may order a malefactor to disgorge only the actual property obtained by means of his wrongful act. Rather, the causal connection required is between the amount by which the defendant was unjustly enriched and the amount he can be required to disgorge. To hold, as [defendant] maintains, that a court may order a defendant to disgorge only the actual assets unjustly received would lead to absurd results. . . .

. . . [A]n order to disgorge establishes a personal liability, which the defendant must satisfy regardless whether he retains the selfsame proceeds of his wrongdoing.[53]

Banner Fund flatly rejected the notion that disgorgement requires current possession of, or access to, the “actual property” representing the ill-gotten gains; the court instead explicitly equated disgorgement with the mere payment of a sum of money “equal to the amount wrongfully obtained.”[54] Two years later in Great-West, however, the Supreme Court made clear that the kind of remedy described in Banner Fund (and similar cases) is actually a legal one rather than an equitable one.[55] Specifically, Banner Fund’s literal description of disgorgement as imposing a “personal liability” to pay “a sum equal to the amount wrongfully obtained,” rather than an obligation to return “the actual assets wrongfully received,” eerily presaged the nearly verbatim language Great-West later used to describe restitution at law.[56] Moreover, contrary to what Banner Fund incorrectly assumed, whether a defendant “retains the selfsame proceeds from his wrongdoing” is not only relevant to the distinction between equitable and legal remedies that seek the repayment of money, it is largely dispositive under Great-West.[57]

Indeed, in cases like Banner Fund, the very label of disgorgement is a misnomer. The federal securities laws do not define the terms “disgorge” or “disgorgement,” but in common parlance they mean to eject or discharge the contents of something.[58] These terms presuppose that the contents remain extant in order to be disgorged. In the securities law context, true disgorgement should similarly mean that the defendant in fact possesses or at least has access to the asset being disgorged. Otherwise, calling the remedy “disgorgement” is akin to a doctor advising an emaciated patient to disgorge last year’s Thanksgiving dinner. When the order makes no pretense of requiring the actual disgorgement of anything the defendant possesses or has access to, it is neither disgorgement nor an exercise of equitable power. It is a mere personal liability to pay a money judgment—the quintessence of a remedy at law.

Additionally, disgorgement fails Great-West’s test for equitable relief in several other ways. First, disgorgement is a relatively modern concept, particularly in the context of law enforcement. It does not appear to have even been known to historical courts of chancery, much less typically granted by them, the key determinant of equitable relief under Great-West.[59] Indeed, disgorgement was not known, contemplated, or typically awarded even when Congress enacted the federal securities laws. One commentator found “only 11 cases in federal and state case law that were published between 1800 and 1960 that use the term ‘disgorgement’ in any context.”[60] The Government Accounting Office has likewise reported that “[t]he use of the disgorgement sanction in securities law violation cases is a relatively recent phenomenon,” and that “[d]isgorgement was first ordered in a securities law violation case in 1970.”[61] The closest historical antecedent to modern disgorgement is probably restitution, which as previously noted was the label some early disgorgement cases used,[62] and which was the very remedy the Supreme Court analyzed in Great-West.

Moreover, the federal securities laws explicitly include disgorgement among the many remedies the SEC is empowered to order administratively without ever seeking the imprimatur of a federal court sitting in either law or equity.[63] By explicitly authorizing disgorgement as an administrative remedy, capable of being ordered by an independent executive branch agency carrying out its law enforcement functions, Congress must have recognized that disgorgement is not invariably a remedy in equity. It seems highly doubtful that Congress would—or constitutionally could, consistent with separation of powers—bestow one of the core judicial powers of an Article III court of equity upon a law enforcement agency of the executive branch.[64]

To be sure, some disgorgement might fairly be characterized as equitable under Great-West. For example, the SEC sometimes moves with alacrity to preserve suspected ill-gotten funds through a temporary restraining order, a preliminary asset freeze, the appointment of a receiver, a voluntary agreement, or otherwise. Sometimes the ill-gotten gains remain extant and identifiable even in the absence of affirmative steps by the SEC to preserve them. If and when the SEC obtains a disgorgement order in these types of cases, there is a specific pool of money that can be turned over to the SEC. Not coincidentally (and not insignificantly), in these cases the SEC has a relatively high success rate in collecting the resulting disgorgement judgments.[65] But these cases, based on the author’s two decades of anecdotal experience on both sides of SEC enforcement cases, represent a small fraction of SEC disgorgement cases.[66]

Potential Ramifications

If the above analysis is correct—if disgorgement is often not an equitable remedy in SEC enforcement cases but rather a legal remedy akin to a simple money judgment—there would be several practical ramifications for SEC enforcement.

First, whenever disgorgement is legal rather than equitable, the SEC has no lawful power to seek it in federal court proceedings, and the courts have no lawful power to award it. Being purely a creature of statute, the SEC can lawfully seek in court only those remedies Congress has authorized it to seek, and disgorgement at law is not among those remedies.[67] Likewise, being courts of limited jurisdiction, federal courts can lawfully impose only those remedies at law that Congress has authorized in the relevant statutes.[68] As discussed above, ever since disgorgement was first accepted as a lawful remedy in SEC enforcement, the only plausible sources of authority cited to support it are either the courts’ inherent power to grant equitable remedies ancillary to their explicit statutory power to grant injunctive relief[69] or the recent statutory provision for “equitable relief” added by Sarbanes-Oxley.[70] If and when disgorgement is not in fact an equitable remedy, neither source of lawful authority is available.

Second, notwithstanding the colorful warnings of Banner Fund and other cases, the resulting partial demise of disgorgement would not raise an alarm in the realm of SEC enforcement. As previously discussed, the SEC has a vast arsenal of other equitable and punitive remedies to address securities law violations even in cases where disgorgement is unavailable or inappropriate.[71] Violators are also subject to potential criminal prosecution[72] as well as money damage awards in private lawsuits.[73] In short, securities law violators do not get off scot-free simply because the SEC cannot seek disgorgement in a particular case.

Moreover, even under a strict adherence to the principles of Great-West, the SEC would have several options to deprive securities law violators of the profits caused by their violations. As previously noted, the agency often moves swiftly to preserve tainted profits—through court orders, voluntary agreements, or otherwise—before those profits can be transferred or dissipated, and in other cases the funds remain available even without any affirmative steps being taken to preserve them.[74] In such cases, the court could presumably order truly equitable disgorgement consistent with Great-West.[75] As also previously noted, whenever the SEC finds a securities law violation it can order disgorgement from the violator administratively, without having to go to court at all (although subject to deferential judicial review).[76] The SEC can also ask federal courts, when imposing statutory penalties against a defendant, to calculate that penalty as an amount equal to “the gross amount of pecuniary gain to [the] defendant as a result of the violation.”[77] Of course, if these remedies are insufficient, the SEC can always seek help from Congress, which has accommodated similar requests in recent decades.[78]

To be sure, if courts began acknowledging that some SEC disgorgement demands seek legal rather than equitable relief—yet concluded they could still award it (or the SEC prevailed upon Congress to authorize disgorgement at law by statute)—the distinction between legal and equitable disgorgement would affect a host of collateral issues and rights affecting SEC disgorgement defendants. For example, based largely on the premise that SEC disgorgement claims seek inherently equitable relief, courts have generally denied defendants the repose of any statute of limitations[79] and the right to a jury trial.[80] For similar reasons, courts have allowed the SEC to enforce disgorgement judgments through contempt sanctions (including incarceration) rather than limiting the agency to the writ of execution normally used to enforce money judgments.[81] One federal circuit has even held that an SEC disgorgement order is not a “debt” owed to the government that triggers the protections ordinarily afforded under the Federal Debt Collection Act.[82] Removing the façade of equity would severely undermine the prevailing approach to all of these issues.[83]


The prevailing notion that SEC disgorgement is an inherently equitable remedy ought to be thoughtfully revisited. Courts award the SEC billions of dollars in disgorgement each year, yet in many cases the premise of equity seems squarely at odds with the Supreme Court’s analysis of restitution in Great-West. Given the amounts at stake in these cases, as well as the significant procedural disadvantages a defendant confronts when a court acts in equity rather than at law, the long-standing premise of equity warrants a higher degree of skepticism and scrutiny than it has received thus far.


Preferred citation: Russell G. Ryan, The Equity Façade of SEC Disgorgement, 4 Harv. Bus. L. Rev. Online 1 (2013),

* Russell G. Ryan, a former Assistant Director of the SEC’s Division of Enforcement, is a partner in the Washington, D.C., office of King & Spalding LLP. Mr. Ryan represented the petitioner in Cahill v. SEC, 133 S. Ct. 28 (2012) (denying certiorari), and in related proceedings in the lower courts, certain opinions from which are cited in this Article.

[1] The Securities and Exchange Commission (SEC) has secured more than $1.8 billion in aggregate disgorgement orders in each of its four most recent fiscal years—far more than the agency has been awarded in statutory penalties over the same period. See Secs. & Exch. Comm’n, Select SEC and Market Data, Fiscal 2012, 2 tbl. 1, available at ($2.1 billion in disgorgement and $1 billion in penalties); Secs. & Exch. Comm’n, Select SEC and Market Data, Fiscal 2011, 2 tbl. 1, available at ($1.9 billion in disgorgement and $928 million in penalties); Secs. & Exch. Comm’n, Select SEC and Market Data, Fiscal 2010, 2 tbl. 1, available at ($1.8 billion in disgorgement and $1 billion in penalties); Secs. & Exch. Comm’n, Select SEC and Market Data, Fiscal 2009, 2 tbl. 1, available at ($2.1 billion in disgorgement and $345 million in penalties).

[2] As an example, in a recent case the SEC asserted this premise in the second sentence of the argument section of its brief. Brief of the Secs. & Exch. Comm’n, Appellee at 15, SEC v. Whittemore, 659 F.3d 1 (D.C. Cir. 2011) (No. 10-5321) (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989)). Similarly, in a report on disgorgement submitted by the agency to Congress, the second sentence of the SEC’s background discussion of disgorgement stated: “Disgorgement is a well-established, equitable remedy applied by federal district courts and is designed to deprive defendants of ‘ill-gotten gains.’” Secs. & Exch. Comm’n, Report Pursuant to Section 308(c) of the Sarbanes Oxley Act of 2002, 2­–3 (2003) [hereinafter SEC Disgorgement Report], available at

[3] See infra notes 15 & 29 and accompanying text. A recent Lexis search of cases in which the SEC was a named party and the opinion contained the exact phrase “disgorgement is an equitable remedy” returned 81 hits. Moreover, this author’s routine weekly electronic search and review of new court opinions issued in SEC enforcement cases has revealed dozens of opinions each year in which courts begin their disgorgement analysis with the assumed premise that disgorgement is equitable. For several recent examples, see SEC v. O’Meally, 2013 U.S. Dist. LEXIS 33487, at *7 (S.D.N.Y. March 11, 2013) (“Disgorgement is a form of equitable relief.”); SEC v. Murray, 2013 U.S. Dist. LEXIS 32460, at *4 (E.D.N.Y. March 6, 2013) (“Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits.”); SEC v. Art Intellect, Inc., 2013 U.S. Dist. LEXIS 32132, at *69 (D. Utah March 6, 2013) (“Actions for disgorgement of improper profits are equitable in nature, because the purpose of disgorgement is to prevent unjust enrichment.”).

[4] See infra notes 7–28 and accompanying text.

[5] See infra notes 29­–66 and accompanying text.

[6] See infra notes 67–83 and accompanying text.

[7] See, e.g., Securities Act of 1933 § 20(b), 15 U.S.C. § 77t(b) (2012); Securities Exchange Act of 1934 § 21(d)(1), 15 U.S.C. § 78u(d)(1).

[8] See, e.g., 15 U.S.C. §§ 77h-1(a), 78u-3(a).

[9] See, e.g., 15 U.S.C. §§ 77t(d), 78u(d)(3), 78u-1 to -2.

[10] See, e.g., 15 U.S.C. § 77h-1(f), 77t(e) (bars and suspensions from service as public company officer or director); 15 U.S.C. § 78u(d)(2), 78u-3(f) (same): 15 U.S.C. § 78o(b)(4), (b)(6) (bars and suspensions from service as or association with broker-dealers); Investment Advisers Act of 1940 § 203(e), (f), 15 U.S.C. § 80b-3(e) to (f) (2012) (bars and suspensions from service as or association with investment advisers).

[11] Compare 15 U.S.C. §§ 77h-1, 78u-2 to -3 (administrative remedies) with 15 U.S.C. §§ 77t, 78u, 78u-1(federal court remedies).

[12] This is not merely a legislative oversight, as Congress has explicitly empowered the SEC to order disgorgement administratively without having to go to court at all. See, e.g., 15 U.S.C. §§ 77h-1(e),78u-2(e), -3(e). As noted by one commentator, the legislative history of these provisions “makes clear that Congress assumed that disgorgement was already available as a remedy in judicial proceedings.” Barbara Black, Should the SEC Be a Collection Agency for Defrauded Investors?, 63 Bus. Law. 317, 321 (2008) (citing S. Rep. No. 101-337, at 8 (1990)). In practice, for reasons that exceed the scope of this article, the SEC rarely uses administrative proceedings to pursue contested disgorgement claims, preferring instead to file and litigate such claims in federal court. Nevertheless, the fact that Congress has explicitly granted the SEC, an independent executive branch agency, the power to order disgorgement administratively as part of its law enforcement functions, weighs heavily against any presumption that disgorgement is a remedy in equity. See infra notes 63–64 and accompanying text.

[13] The SEC first sought and obtained disgorgement in SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77, 92–94 (S.D.N.Y. 1970); aff’d in part and rev’d in part, 446 F.2d 1301, 1307–08 (2d Cir. 1971), and has done so innumerable times since. See generally John D. Ellsworth, Disgorgement in Securities Fraud Actions Brought by the SEC, 1977 Duke L.J. 641, 641–42 n.3 (1977); SEC Disgorgement Report, supra note 2, at 3 n.3 (citing cases).

[14] See, e.g., SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989) (holding that because the Exchange Act does not restrict the equitable remedies of district courts, disgorgement is available “simply because the relevant provisions . . . vest jurisdiction in the federal courts”); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1103–04 (2d Cir. 1972); Texas Gulf Sulphur, 446 F.2d at 1307–08.

[15] See, e.g., SEC v. Wang, 944 F.2d 80, 85 (2d Cir. 1991) (“The disgorgement remedy [the district court judge] approved in this case is, by its very nature, an equitable remedy . . . .” (emphasis added)); First City Fin, 890 F.2d at 1230 (“Disgorgement is an equitable remedy . . . .”); SEC v. Certain Unknown Purchasers of Common Stock of and Call Options for Common Stock of Santa Fe Int’l Corp., 817 F.2d 1018, 1020 (2d Cir. 1987) (“The disgorgement remedy approved by the district court in this case is, by its nature, an equitable remedy.” (emphasis added)).

[16] See infra note 18.

[17] See generally John K. Robinson, A Reconsideration of the Disgorgement Remedy in Tipper-Tippee Insider Trading Cases, 62 Geo. Wash. L. Rev. 432 (1994).

[18] See, e.g., Securities Enforcement Remedies and Penny Stock Reform Act, Pub. L. No 101-429, secs. 101, 202, §§ 20(d), 21B, 104 Stat. 931, 932­–33, 937–38 (1990) (codified in relevant part at 15 U.S.C. §§ 77t, 78u-2) (authorizing the SEC to seek, and courts to impose, among other things, monetary penalties, officer-director bars, and penny-stock bars against any violator and authorizing the SEC to impose monetary penalties and other sanctions administratively against persons and entities in SEC-regulated industries); Sarbanes-Oxley Act, Pub. L. 107-204, §§ 305, 603, 807, 1105 and 1106, 116 Stat. 745, 778–79, 794–95, 804, 809–10 (2002) (codified in relevant part at 15 U.S.C. § 78u(d)(2), 78u(d)(6), 78u-3(f), 78ff(a), & 18 U.S.C. § 1348) (lowering the SEC’s burden of proof to obtain officer-director bars; authorizing the SEC to impose such bars administratively and without court approval; authorizing the SEC to obtain penny-stock bars in federal court cases; adding new criminal penalties for securities fraud involving public companies; and increasing maximum penalty amounts for violations generally).

[19] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, sec. 929P, § 308, 124 Stat. 1376 (2010). SEC administrative sanctions are set aside by courts only if “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” See 5 U.S.C. § 706(2)(A); KPMG, LLP v. SEC, 289 F.3d 109, 121 (D.C. Cir. 2002); Graham v. SEC, 222 F.3d 994, 999–1000 (D.C. Cir. 2000); accord VanCook v. SEC, 653 F.3d 130, 137 (2d Cir. 2011) (holding that the SEC’s choice of administrative sanction disturbed only if “unwarranted in law or without justification in fact”).

[20] 534 U.S. 204 (2002).

[21] See infra notes 34–44 and accompanying text.

[22] Sarbanes-Oxley Act § 305(b), codified at 15 U.S.C. § 78u(d)(5).  The amendment inserted a new subsection (5) into Section 21(d) of the Securities Exchange Act of 1934, providing that “[i]n any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.” Id.

[23] E.g., SEC v. Whittemore, 659 F.3d 1, 4 (D.C. Cir. 2011).

[24] E.g., id. at 7; SEC v. Happ, 392 F.3d 12, 31 (1st Cir. 2004); SEC v. First City Fin. Corp., 890 F.2d 1215, 1231–32 (D.C. Cir. 1989) (citing cases from other circuits).

[25] See, e.g., Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010); SEC v. Rind, 991 F.2d 1486, 1492–93 (9th Cir. 1993); SEC v. Gabelli, 2010 U.S. Dist. LEXIS 27613, at *12–13 (S.D.N.Y. 2010).

[26] See, e.g., Rind, 991 F.2d at 1493; SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 94-96 (2d Cir. 1978).

[27] See, e.g., SEC v. Huffman, 996 F.2d 800, 803 (5th Cir. 1993) (holding that a disgorgement order is enforceable by contempt because it is “more like a continuing injunction in the public interest than a debt” (citing Pierce v. Vision Investments, Inc., 779 F.2d 302, 307–08 (5th Cir. 1986))); SEC v. Goldfarb, 2012 U.S. Dist. LEXIS 85628, at *10–17 (N.D. Cal. 2012) (contempt available). But see SEC v. New Futures Trading Int’l Corp., 2012 U.S. Dist. LEXIS 55557, at *5–6 (D.N.H. 2012) (striking provision in SEC’s standard settlement template purporting to allow the agency to enforce the disgorgement provision through contempt sanctions).

[28] See, e.g., Huffman, 996 F.2d at 802–03.

[29] E.g., SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998); SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997) (quoting First City Fin., 890 F.2d at 1230).

[30] E.g., First City Fin., 890 F.2d at 1231 (citing cases from other circuits).

[31] See, e.g., SEC v. Whittemore, 659 F.3d 1, 9–10 (D.C. Cir. 2011) (quoting SEC v. Banner Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000) and Platforms Wireless, 617 F.3d at 1098); SEC v. Benson, 657 F. Supp. 1122, 1134 (S.D.N.Y 1987).

[32] E.g., Whittemore, 659 F.3d at 10–12; SEC v. Calvo, 378 F.3d 1211, 1215–16 (11th Cir. 2004); Hughes Capital, 124 F.3d at 455.

[33] 534 U.S. 204.

[34] 29 U.S.C. § 1132(a)(3).

[35] See Great-West, 534 U.S. at 207–08.

[36] Id.

[37] Id. at 210–20.

[38] Id. at 212–18.

[39] Id. at 212­–14.

[40] Id. at 210 (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 256 (1993)).

[41] Id. at 212–14.

[42] Id. at 213 (citations omitted) (quoting 1 Dan B. Dobbs, Law of Remedies: Damages-Equity-Restitution § 4.2(1), at 571 (2d ed. 1992); Restatement of Restitution § 160 cmt. a (1936)).

[43] Id. at 213–14 (alterations in original) (second & third emphases added) (citations omitted) (quoting Restatement of Restitution § 215 cmt. a (1936)). In footnoted dictum, the Court noted “a limited exception for an accounting for profits,” a remedy not at issue in that case. Great-West, 534 U.S. at 214 n.2. “If, for example, a plaintiff is entitled to a constructive trust on particular property held by the defendant, he may also recover profits produced by the defendant’s use of that property, even if he cannot identify a particular res containing the profits sought to be recovered.” Id. In the context of SEC enforcement, this remedy is most closely akin to the prejudgment interest that is routinely awarded on top of a lawfully ordered disgorgement award.

[44] Id. at 214.

[45] See, e.g., SEC v. Clark, 915 F.2d 439, 453–54 (9th Cir. 1990); SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77, 89 (S.D.N.Y. 1970). For a strong articulation and analysis of the illogic of ordering disgorgement from non-trading tippers, see John K. Robinson, supra note 17, at 432.

[46] See, e.g., SEC v. Whittemore, 659 F.3d 1, 9–12 (D.C. Cir. 2011).

[47] E.g., Whittemore, 659 F.3d at 10–12; SEC v. Calvo, 378 F.3d 1211, 1215–16 (11th Cir. 2011); SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997).

[48] In short, applying a tort-damage theory like joint and several liability to a purportedly equitable law enforcement remedy is the jurisprudential equivalent of forcing a square peg into a round hole. Unlike a private plaintiff, the SEC is not an injured victim suing to recover for compensable loss, injury, or damages that it has suffered. Cf. Gabelli v. SEC, 133 S. Ct. 1216, 1218 (2013) (noting that as a law enforcement agency, the SEC is “a different kind of plaintiff” seeking “a different kind of relief”). Although the SEC often sues to remedy misconduct that resulted in investor losses, the purpose of disgorgement is not to compensate those losses but rather to deprive the wrongdoer of his ill-gotten gains. See, e.g., Zacharias v. SEC, 569 F.3d 458, 471 (D.C. Cir. 2009) (quoting earlier cases). Thus, the disgorgement amount can be higher or lower than the damages sustained by those injured by the wrongdoing, and indeed the very question of whether anyone suffered a loss is “irrelevant” to the appropriateness and calculation of any disgorgement award. Id. Moreover, allowing the SEC the expediency of joint and several liability introduces risks of unfairness, favoritism, and the arbitrary exercise of prosecutorial discretion, because many securities fraud cases present more than one potential defendant, and the ability to hold any one of them jointly and severally liable for everyone else’s gains presents the SEC with disquieting incentives when picking and choosing who among them it will charge.

[49] See SEC Disgorgement Report, supra note 2, at 20–21; U.S. Gov’t Accountability Office, GAO-02-771, SEC Enforcement: More Actions Needed to Improve Oversight of Disgorgement Collections 12–14 (2002), available at

[50] See SEC v. Banner Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000) (noting that a contrary rule would lead to “absurd results”); SEC v. Whittemore, 691 F. Supp. 2d 198, 207 (D.D.C. 2010) (holding that whether a defendant retained the funds is “not germane” and how she spent them is “irrelevant”); SEC v. Benson, 657 F. Supp. 1122, 1134 (S.D.N.Y. 1987) (noting that the manner in which defendants “chose to spend” their gains is “irrelevant” to disgorgement).

[51] 211 F.3d 602.

[52] Id. at 617.

[53] Id. (emphasis added).

[54] Id.

[55] Great-West, 534 U.S. at 213.

[56] Banner Fund, 211 F.3d at 617.

[57] Supporters of prevailing SEC disgorgement law might cite by analogy to the Second Circuit’s opinion in FTC v. Bronson Partners, LLC, 654 F.3d 359 (2d Cir. 2011). However, Bronson was interpreting the Federal Trade Commission Act and is otherwise distinguishable. The relevant statute in Bronson, unlike the Exchange Act and the statute at issue in Great-West, was silent regarding the kinds of relief a court could award beyond injunctions. Id. at 365 (quoting statute). Bronson relied heavily on Porter v. Warner Holding Co., 328 U.S. 395 (1946), to suggest that this statutory silence gave courts almost limitless power to award monetary relief ancillary to a statutory injunction. 654 F.3d at 365–66.  The relevant section of the Exchange Act, however, is noticeably different from the statutes in Porter and Bronson, and for practical purposes is identical to the statute in Great-West. Whereas Porter involved a statute that granted courts power to issue any “other order” in addition to injunctions, and Bronson involved a statute that was silent on the matter, both the Exchange Act and the statute in Great-West empower courts to issue injunctions plus other “equitable relief.” As Great-West made clear, the qualifier “equitable” would be meaningless if not read to limit the available remedies to those in equity. 534 U.S. at 209–10. Moreover, the fact that Congress added this phrase to the Exchange Act in 2002, just months after Great-West interpreted the identical phrase in another federal statute, strongly suggests that the phrase should have the same import as it did in Great-West. Additionally, the appellant in Bronson did not argue the specific point raised in this article, as both the parties and the court appear to have simply assumed that disgorgement (unlike restitution) is equitable; the dispute ultimately centered on how disgorgement should be calculated and whether “equitable tracing” rules should apply. 654 F.3d at 372–75. Finally, Bronson’s literal description of disgorgement—like that in Banner Fund—actually echoes the themes articulated in Great-West to describe what an equitable remedy is not. Id. at 373–74 (noting that the disgorgement plaintiff “does not claim any entitlement to particular property” or “priority over the other creditors of the defendant,” but “asks only to have a judgment for the amount of [the] ill-gotten gains, which . . . will simply permit [the plaintiff] to share with other creditors on an equal basis”).

[58] See, e.g., Merriam-Webster’s Collegiate Dictionary 332 (10th ed. 1993).

[59] See Great-West, 534 U.S. at 211.

[60] See George P. Roach, A Default Rule of Omnipotence: Implied Jurisdiction and Exaggerated Remedies in Equity for Federal Agencies, 12 Fordham J. Corp. & Fin. L. 1, 47 n.175 (2007).

[61] U.S. Gov’t Accountability Office, GAO/GGD-94-188, Securities Enforcement: Improvements Needed in SEC Controls Over Disgorgement Cases 2, n.3 (August 1994) (citing SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77 (S.D.N.Y. 1970)), available at

[62] See generally SEC v. First Pac. Bancorp, 142 F.2d 1186, 1192–93 (9th Cir. 1998) (declining to “engage in a rather scholastic argument about whether restitution and disgorgement are really just about the same thing” and citing cases going both ways on the point). But see SEC Disgorgement Report, supra note 2, at 2–3 (acknowledging that courts at times use the terms disgorgement and restitution interchangeably, but arguing that they are distinct concepts).

[63] See, e.g., 15 U.S.C. § 78u-2(e), -3(e). Like other administratively ordered sanctions, an administrative disgorgement order is subject only to limited and deferential review by a court of appeals, and thus will be set aside only if “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” See supra note 19 and cases cited therein. For reasons beyond the scope of this article, the SEC rarely brings contested disgorgement claims in administrative proceedings, preferring instead to pursue them in federal court.

[64] Even Article I courts—which are at least courts of some kind rather than law enforcement agencies of the executive branch—have been held to lack general equitable powers. See, e.g., Bowen v. Massachusetts, 487 U.S. 879, 905 (1988) (federal Court of Claims lacks equitable powers of a district court); Comm’r v. McCoy, 484 U.S. 3, 7 (1987) (Tax Court lacks general equitable powers); cf. Comm’r v. Gooch Milling & Elevator Co., 320 U.S. 418, 420–21 (1943) (Board of Tax Appeals, an executive branch administrative predecessor of the Tax Court, lacks equity jurisdiction).

[65] See SEC Disgorgement Report, supra note 2, at 1, 9, 22.

[66] The author recently argued the relevance of Great-West to SEC disgorgement on behalf of a client in a petition for an en banc rehearing in the D.C. Circuit and a subsequent petition for certiorari in the Supreme Court, but both petitions were denied without comment. See SEC v. Whittemore, No. 05-cv-00869 (D.C. Cir. Dec. 22, 2011) (unpublished order denying rehearing en banc); cert. denied, 133 S. Ct. 28 (2012). Only two district court opinions appear to have squarely considered the relevance of Great-West to SEC disgorgement, and both ruled in the SEC’s favor. SEC v. DiBella, 409 F. Supp. 2d 122, 132–33 (D. Conn. 2006); SEC v. Buntrock, 2004 U.S. Dist. LEXIS 9495, at *6–9 (N.D. Ill. May 25, 2004). However, both cases examined the issue in the context of a motion to strike, and neither appeared to have involved a scenario where the illicit gains had been transferred to other parties as part of the relevant scheme and thus were no longer available to disgorge. Moreover, as one commentator has noted, Buntrock essentially “assume[d] away the issue” and thus “failed to undertake the analysis established in Great-West” and even “flout[ed] the Supreme Court’s message in Great-West.” See Roach, supra note 60, at 48.

[67] See, e.g., Am. Bus Ass’n v. Slater, 231 F.3d 1, 8 (D.C. Cir. 2000) (Sentelle, J., concurring) (“Congress’s failure to grant an agency a given power is not an ambiguity as to whether that power has, in fact, been granted. On the contrary, and as this Court persistently has recognized, a statutory silence on the granting of a power is a denial of that power to the agency.”).

[68] See, e.g., Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (holding that federal courts, being courts of “limited jurisdiction,” “possess only that power authorized by Constitution and statute, [] which is not to be expanded by judicial decree” (internal citation omitted)).

[69] See supra notes 13–15 and accompanying text.

[70] See supra notes 22–23 and accompanying text.

[71] See supra notes 18 & 19 and accompanying text.

[72] See 15 U.S.C. §§ 77x, 78ff.

[73] See Janus Capital Grp., Inc. v. First Derivative Traders, 31 S. Ct. 2296, 2301 (2011) (acknowledging private right of action under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder).

[74] See supra note 65 and accompanying text.

[75] Cf. Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356, 362–63 (2006) (distinguishing Great-West where plaintiff sought recovery of “specifically identifiable” funds that were “within the possession and control” of the defendant because the parties had previously stipulated the funds would be set aside and preserved pending final determination of the merits of the lawsuit).

[76] See supra notes 12 (citing relevant statutes) and 19 (describing standard of review for SEC administrative sanctions and citing cases).

[77] See, e.g., 15 U.S.C. § 78u(d)(3)(B).

[78] See supra notes 18 & 19 and accompanying text.

[79] See supra note 25.

[80] See supra note 26.

[81] See supra note 27. Compare Fed. R. Civ. P. 69(a)(1) (enforcement of money judgment is through writ of execution) with Fed. R. Civ. P. 70(e) (contempt available for failure to obey judgment for a specific act).

[82] See, e.g., Huffman, 996 F.2d 800, 802–03 (5th Cir. 1993).

[83] The SEC’s ability to obtain an equitable preliminary asset freeze at the start of an enforcement case would also be doubtful whenever the SEC could not identify the specific assets representing the fruits of the securities law violation because the Supreme Court has held that such preliminary equitable remedies are not available to secure assets prior to trial where a plaintiff seeks only legal relief in the form of a money judgment. See Grupo Mexicano v. Alliance Bond Fund, 527 U.S. 308, 321 (1999); SEC v. ETS Payphones, Inc., 408 F.3d 727, 734 (11th Cir. 2005) (distinguishing Grupo Mexicano on the ground that disgorgement is an equitable remedy).


SPACs and the JOBS Act

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Usha Rodrigues

Public Inroads in Private Equity

The law has long confined the average investor to trading in public securities[1] while allowing wealthy—or “accredited”[2]—individual investors access to a panoply of private securities, including investment vehicles such as hedge funds and private equity funds. Nevertheless, pressure to let the general public into private equity has been growing. Two forces have contributed to this mounting pressure. First, public investors are eager to try their hand at investing in private enterprise. Second, private firms need capital. In the face of these forces, the sharp line that has long separated public and private firms has become increasingly blurred.[3]

Consider the story of the emerging growth company (EGC), or “Initial Public Offering (IPO) on-ramp,” provision of the Jumpstart Our Business Startups Act (JOBS Act). In its first few months on the books, this provision had effects far different from what its drafters envisioned. The JOBS Act’s IPO on-ramp was intended to ease regular companies’ path to going public; instead, it has inadvertently made it easier for the average investor to get a taste of private equity via special purpose acquisition corporations (SPACs). This piece will briefly describe SPACs, the IPO on-ramp, and how shell companies have taken advantage of a legislative provision intended to bring cash-hungry young companies directly to market. This piece will close with a few thoughts on lessons the story of SPACs’ interaction with the JOBS Act may offer regarding the increasingly indistinct line that divides public and private investment.

 Introducing SPACs

A SPAC is a type of “blank-check” company that goes public to raise a pool of cash and then begins a hunt for a target.[4] The bulk of the IPO proceeds are locked up in a trust account, invested in government-backed securities, and kept safe from the interference of the managers.[5] Once a target is identified, the SPAC managers disclose material financial information about it to shareholders, who then have a say on whether the acquisition occurs by way of voting or opt-out rights.[6] If no suitable target is found, or if a shareholder is unhappy with the deal, she can receive most of her money back—an average of ninety-eight cents on the dollar—from the trust account.[7] But if a SPAC shareholder does like the deal, then she will end up having owned a piece of an acquisition vehicle—in essence, a one-off private equity fund.[8]

The beauty of the SPAC model is that it bifurcates the process of going public, making it faster and cheaper. When the SPAC itself goes public, it is basically an empty shell, so any disclosures required under the Securities Act of 1933 (1933 Act) are minimal and cheap.[9] The SPAC’s Securities Exchange Act of 1934 (Exchange Act) filings are likewise minimal; in essence, they involve nothing more than reporting the rate of return generated in the trust account.[10] If and when the SPAC acquires a target—usually a private company—that target immediately becomes public without the hassle, disclosures, and delay that accompany a typical IPO.[11]

JOBS Act and SPACs

SPACs offered a rare chance for the average investor to participate in the rarified world of investing in private targets, while simultaneously offering those targets an easy route to an IPO. The JOBS Act took a decidedly different approach to blurring the line between public and private investment. Rather than letting the general public into private equity investments, the drafters tried the converse: encouraging more private firms to go public. Yet despite the JOBS Act’s focus on making it easier to bring traditional operating companies to the public market, its provisions have proven unexpectedly appealing for SPACs. Thus, legislation intended to help conventional companies go public is also facilitating a form of private equity investment.

SPACs’ business structure was in place long before the passage of the JOBS Act; indeed, they predated the Act by more than a decade.[12] The whole point of the JOBS Act’s EGC provision was to coax small-cap companies into going public by reducing the burdens of public disclosure and ongoing federal regulation, thereby providing the benefit of access to the public capital markets previously unavailable to them. I thought surely the passage of the JOBS Act was bad news for SPACs. Why agree to be acquired by a SPAC when you can easily go public on your own? The JOBS Act, however, had an unanticipated effect on the SPAC market because the JOBS Act’s IPO on-ramp provision makes it easier and cheaper for any small corporation to go public.[13]

As it turned out, the JOBS Act was not all bad news for SPACs because many SPACs themselves decided to go public using the IPO on-ramp. Indeed, in the eight weeks after the JOBS Act’s passage, over a dozen of the companies taking advantage of the new on-ramp option were SPACs.[14] Four months after the JOBS Act’s passage, one out of every nine EGCs was a SPAC.[15] The trend has not abated; in the first half of August 2012, one out of five firms that made use of the IPO on-ramp provision were SPACs.[16] To say the least, SPACs are making good use of the EGC option.

At first blush, SPACs’ use of the JOBS Act’s on-ramp seems counter-intuitive. It already was, and still is, easy for SPACs to go public under the conventional 1933 Act registration process. After all, SPACs’ disclosures at the start-up phase are largely boilerplate, along the lines of “this is who we are, this is how much money we plan to raise, this is how much we are setting aside in trust.”[17] If it is so easy for SPACs to register under the 1933 Act, why should they bother with the on-ramp provision offered by the JOBS Act?

The answer to this question stems from economic realities. As it turns out, successful SPACs—that is, SPACs that complete acquisitions—can save a lot of money in securities regulation compliance costs by making use of the IPO on-ramp. The payoff comes from greatly reduced ongoing reporting requirements imposed by the Exchange Act.In particular, EGC status under the JOBS Act lasts up to five years, as long as revenues, market capitalization, and debt issuances stay low,[18] and with that status come “scaled-back disclosures, certain exemptions to executive-compensation disclosures and attestation requirements for the auditors.”[19] These features make EGC SPACs comparatively more attractive to potential targets. A private company looking to go public on the cheap (i.e., at even less expense than the JOBS Act’s on-ramp promises) might well favor an EGC SPAC acquirer that promises lower disclosure burdens over a traditional public company acquirer—or, for that matter, a non-EGC SPAC—both of which would require the Exchange Act’s more in-depth disclosure. Time will tell whether EGC SPACs prove to be more successful acquirers than traditional acquirers and non-EGC SPACs.

In sum, despite reformers’ best intentions, many of the first companies to file as EGCs were not small operating companies rushing to access the capital markets as soon as regulatory barriers fell away. Instead, they were firms looking to acquire private firms down the road and take them public. Even so, the net effect may be what the JOBS Act’s drafters intended: if these new EGC SPACs have their way, they will acquire private firms, and thus bring more small firms to the public markets. Yet the SPAC EGCs will accomplish this goal in a roundabout way. More small firms will go public, as the JOBS Act envisioned, but by way of shell companies that allow the general public to participate in the uniquely public form of private equity that SPACs offer. While successful EGC SPACs will thus bring more firms public, they will at the same time allow their own investors to participate in a species of private equity investment, a kind of investment traditionally reserved for accredited investors. All of this supports a telling conclusion: both regulators and the market itself are exerting pressure on the line separating public and private investment, and these two separate forces can combine to produce unanticipated results.

Blurring the Line Between Public and Private

In conclusion, SPACs and the JOBS Act, both considered singly and taken together, signal the mounting pressure building over the divide between public and private investment. SPACs are mechanisms that let the public make private equity-like investments. The IPO on-ramp is an attempt to entice private companies to the public markets. Yet even more tellingly, these separate phenomena have recently interacted in an unexpected way, revealing how difficult it can be for reformers to revise the public-private boundary with any degree of certainty.

SPACs and the JOBS Act’s IPO on-ramp are but two examples of recent trends that suggest that the line separating the public and private investment spheres may be blurring. Another example, the CROWDFUND Act, applies pressure on the other side of the public-private line: rather than making it easier for more private companies to access the public markets, it allows unaccredited investors a chance to invest limited sums in private companies for the first time.[20]

Securities regulation ultimately involves a delicate balancing act, with investors’ need for protection and firms’ thirst for capital pulling in opposite directions. The traditional balance reserved robust investor protection for the public markets, and allowed wealthy investors exclusive access to more risky, and potentially more profitable, private firm investment.[21] But SPACs are a sign that the general public also desires to furnish capital to private firms in exchange for the chance to earn a higher rate of return.  At the same time, the JOBS Act signals a desire on the part of regulators and firms alike to allow companies to enjoy the benefits of being public while reducing some of the burdens that have traditionally accompanied public status.  Such examples thus, in different ways, indicate that the public-private boundary may be shifting dramatically.


Preferred citation: Usha Rodrigues, SPACs and the JOBS Act, 3 Harv. Bus. L. Rev. Online 17 (2012),

† Associate Professor of Law, University of Georgia School of Law.  I thank Mike Stegemoller and the staff of the Harvard Business Law Review.  Any errors are my own.

[1] See, 15 U.S.C.A. § 77d (West 2009 & Supp. 2012) amended by Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012).

[2] Rule 501 of Regulation D describes several categories of accredited investors, including certain banks, charitable organizations, and certain high net worth individuals, who may invest in securities that are not registered. 17 C.F.R.  § 230.501(a) (2012). Most notably, individuals with a net annual income of over $200,000 or a total net worth of over one million dollars may invest in securities that are not registered provided that those securities meet the general disclosure requirements of Rule 502. 17 C.F.R. § 230.502 (2012).

[3] For a few recent scholarly discussions of the public-private divide, see Donald C. Langevoort & Robert B. Thompson, “Publicness” in Contemporary Securities Regulation After the JOBS Act (Georgetown Law and Econ. Research Paper, No. 12-002, 2012) available at; Adam C. Pritchard, Revisiting “Truth in Securities” Revisited: Abolishing IPOs and Harnessing Private Markets in the Public Good (Univ. of Mich. Law & Econ. Research Paper No. 12-010, 2012) available at; Usha Rodrigues, Securities Law’s Dirty Little Secret, 81 Fordham L. Rev. (forthcoming 2013) (on file with the author).

[4] Usha Rodrigues & Mike Stegemoller, Exit, Voice, and Reputation: The Evolution of SPACs, 37 Del. J. Corp. L. (forthcoming 2012).

[5] Id.

[6] Id.

[7] Id.

[8] See Steven M. Davidoff, Black Market Capital, 2008 Colum. Bus. L. Rev. 172, 225 (2008) (“SPACs are a species of private equity: these are capital pools organized to acquire individual businesses. But because of the general requirement that the initial acquisition comprise eighty percent of its assets, SPACs typically only acquire a single privately-held business. Despite these important distinctions, SPACs otherwise attempt to mimic private equity returns by employing comparable structures and practices. For example, SPACs utilize similar leverage to increase the size and potential returns of their acquisitions. The managers of SPACs are also typically provided twenty percent of the initial share offering at nominal amounts; ownership they are required to maintain until and after consummation of an acquisition.”).

[9] Daniel S. Riemer, Special Purpose Acquisition Companies: Spac and Span, or Blank Check Redux?, 85 Wash. U.L. Rev. 931, 950–51 (2007) (describing typical SPAC registration disclosure).

[10] Rodrigues & Stegemoller, supra note 4.

[11] Some call SPACs back-door IPOs, but SPACs differ from the seedier reverse mergers that led to so many Chinese companies with questionable accounting practices going public. Id.

[12] Riemer, supra note 9, at 944–45.

[13] For example, emerging growth companies need to disclose only two years of audited financial information prior to going public. 15 U.S.C.A. 77g(a)(2)(A) (West 2009 & Supp. 2012) amended by Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012). They are not subject to Sarbanes-Oxley’s dreaded internal controls provision. 15 U.S.C.A. § 7262(b) (West 2009& Supp. 2012) amended by Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012).

[14] Emily Chasan, Meet the JOBS Act’s Jobs-Free Companies, Wall St. J., June 4, 2012, at B1.

[15] Chris Hitt, “I Am Shocked, Shocked”: Blank Check Companies and the “Scandal” of the JOBS Act, Blogmosaic (Aug. 16, 2012),

[16] Id.

[17] See, e.g., Acquicor Tech. Inc., Registration Statement (Form S-1) (Sept. 2, 2005).

[18] 15 U.S.C.A. 77b(a) (West 2009 & Supp. 2012) amended by Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012).

[19] Chasan, supra note 14.

[20] Title III of the JOBS Act, the CROWDFUND Act, allows issuers to sell up to one million dollars of securities in a twelve-month period without Securities Act of 1933 registration. Any investor can invest in these companies—they are not reserved for accredited investors only. If an investor’s annual net worth or income is less than $100,000, she can invest no more than 5% of her net worth or annual income or $2,000, whichever is greater. Jumpstart Our Business Startups Act, Pub. L No. 112-106, sec. 302, § 4(a)(6)(B)(i), 126 Stat. 306, 315 (2012). If an investor’s annual net worth or annual income is equal to or more than $100,000, then she can invest no more than the greater of 10% of her net worth or annual income and $100,000. Id.

[21] Individuals qualify as accredited investors by having a net annual income of over $200,000 or a total net worth of over one million dollars. 17 C.F.R. § 230.215 (2012).  SEC regulations and industry practice dictates that only this special class of individual investors can invest in hedge funds, private equity funds, and venture capital funds. Thus, historically at least, ordinary investors have been shut out of the private market, except via pension funds that in effect pool the resources of many investors into an accredited-investor fund. No private market mutual funds currently exist.

Complexity of Regulation

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Chester S. Spatt

It is a great pleasure to provide keynote remarks at this weekend’s conference on “Complexity and Change in Financial Regulation” at the Harvard Law School. In my comments tonight I will try to build from my experiences as a former Chief Economist of the U.S. Securities and Exchange Commission (SEC) from 2004 through 2007 and as a close observer of the evolution of financial regulation in the aftermath of the financial crisis to focus upon the “Complexity of Regulation.” While our financial system is itself very complex, our financial regulators would benefit in many cases by designing simple and robust approaches that build off of basic principles and that emphasize the role and importance of economic incentives and markets.

While I recognize that to some degree complexity in financial structure breeds complexity in regulation, often the causality is reversed. Complexity in regulation leads to complexity in financial structures and systems, particularly in light of the efforts of market participants to mitigate the costs and complications induced by regulation, including attempts to engage in regulatory arbitrage. Consequently, much of the costs of regulation in my view are associated with its intricacies. It also is useful to recognize that complexity in regulation leads to huge entry barriers associated with the cost of regulatory compliance. Instead of addressing “too big to fail,” this can lead to maintaining “too big to fail” institutions. This is a connection that appears to be underappreciated by our financial regulators.

Given these broad perspectives, you might not be surprised to hear that I feel that the extent of complexity in financial regulation has been, to a degree, excessive. For example, regulators often would do far better in accomplishing their regulatory goals by adapting relatively simple standards and principles that force market participants to internalize the consequences of their actions.

Economic principles emphasize the importance and power of relatively robust regulation, but in many contexts there has been little effort to try to utilize robust alternatives. An example that I will emphasize is the case of bank capital. While bank capital standards have risen in the aftermath of the financial crisis, they have not risen to levels that would internalize the full costs of risk-taking by heavily-leveraged institutions.[1] Note that the terminology “bank capital” refers to the bank’s equity, as distinct from its debt financing, which just reflects how the bank funds or finances itself. But the essence of the “too big to fail” problem is the government backstopping the risk-taking by banks by preventing failure and default on debt in the face of systemic risk. Consequently, the pricing of debt on an ex ante basis does not sufficiently penalize the firm for the costs of its risk-taking. In contrast, governments have been willing to allow the value of a bank’s equity to collapse. High capital standards would essentially provide a solution to the “too big to fail” problem as it would internalize the costs of failure within the bank’s funding cost, rather than seeking support from taxpayers. A high capital or equity requirement forces the firm to deleverage. But as financial theory teaches a) equity and debt are substitutes in funding the firm and b) the overall cost of funding the enterprise is not substantially influenced by how the firm chooses to fund itself—at least absent governmental subsidies.[2] This is a basic precept in financial theory, the Nobel Prize-winning Modigliani-Miller theory, understood by most recent MBA graduates. While some observers suggest that equity capital is dramatically more expensive than debt,[3] this is inconsistent with the basic principles of efficient pricing on which our markets are built and does not reflect the true underlying riskiness and marginal costs of equity and debt.

Requiring a bank to have sufficiently high capital, such that the capital would bear any risks that the bank creates, would be a much more robust approach to the “too big to fail” problem in my judgment than the routes designed by our legislators and regulators.[4] For example, as a byproduct of the financial crisis regulators have not attempted to scale back mega institutions and indeed, have permitted many to grow through acquisition of weak institutions (to address the immediate problems of the day). While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires that systemically important institutions have “living wills”[5] and the FDIC be empowered with “resolution authority” to resolve mega institutions,[6] does the marketplace and the pricing of debt contracts reflect a belief that the largest financial institutions would be resolved cleanly in the event of a perceived systemic crisis? The answer to that is no. The basic point that I would emphasize is that the complexity of these institutions, as illustrated by the difficulties with “global resolution,” undercuts the credibility of Washington’s solutions to “too big to fail.” I should note that a fundamental source of complexity is the global nature of our institutions and the national structures to regulation, which leads to considerable regulatory competition and only limited coordination.

A closely related example is the Volcker Rule, which essentially bans proprietary trading by the major financial institutions.[7] Some aspects of what is envisioned seem rather simple and clear-cut, but other features illustrate the inherent complexity of this regulation. On the one hand, it is relatively straightforward for the major financial services firms to give up their proprietary trading and hedge fund units, and indeed many of the Wall Street firms divested these activities in the immediate aftermath of the passage of the Dodd-Frank Act.[8] On the other hand, the dealer and market-making function to facilitate the trading activities of firm customers is a central activity of financial intermediaries. Distinguishing trades that are undertaken to facilitate customer business from those that are motivated by the firm’s interest in creating trading profits can be challenging. At the heart of the regulatory proposals underlying the Volcker Rule is an attempt to develop “metrics” to try to distinguish such trades. But this is a tough distinction indeed—and at the heart of the complexity of Volcker. Indeed, recent headlines are highlighting the difficulty in implementing Volcker by the statutory deadline this summer.[9] Recently, Congressman Barney Frank has even called for the implementation of a simplified version.[10]

Yet what are we really trying to accomplish with Volcker? Most everyone agrees that we are not trying to block legitimate market-making, but instead we are trying to prevent the presence of “too big to fail” guarantees applying to proprietary trading and ensure that large banks and financial institutions bear the consequences of their risk-taking. Of course, the potential focus on complex “metrics” leads to considerable complexity in the proposed implementation and potential serious distortions in the market-making process. Ironically, government officials have exempted U.S. Treasuries from Volcker,[11] appearing to acknowledge that Volcker would raise the liquidity costs of trading Treasuries—certainly suggesting that the costs for market making are real. Now European sovereigns are seeking similar relief for their bonds trading in the U.S.[12] and not adopting analogues for firms supervised by their jurisdictions.[13] Yet there is a potential broad solution for the types of risk-taking that Volcker is designed to confront and other types of excessive risk-taking, namely high capital standards.

Much of the focus on hard-to-implement and very complex standards, such as the Volcker Rule, would be far less significant if major financial institutions simply were forced to bear the consequences of their actions by high equity (and capital) standards. To the extent that it is apparent that government would not bail out equity, but will bail out creditors, high equity is crucial to ensuring the internalization of funding consequences and costs.

This highlights a central aspect to financial regulation in the aftermath of the financial crisis, namely that in many cases alternative approaches could be used to address key features of the same underlying problem. In the language of economics, alternative regulations would provide imperfect substitutes for one another. In the case of such substitutes there may be miscounting of the benefits relative to the costs in cost-benefit analysis. In these types of situations we might expect that the benefits, such as those associated with the reduction or elimination of “too big to fail,” may be substantially duplicated and thus overstated, while the costs of simultaneously adopting different approaches may be closer to additive. In effect, there would be diminishing returns to multiple approaches to a regulatory problem.

An interesting example of the theme that regulations can be substitutes for one another arises in the treatment of credit rating agencies under the Dodd-Frank Act. On the one hand, the Dodd-Frank Act directs regulators to remove references to credit ratings in various financial regulations.[14] This limits the ability of rating agencies to sell regulatory treatment and limits the extent of systemic risk when a rating agency misjudges the underlying risk. Removing reliance on ratings for regulatory purposes suggests that regulators should be comfortable with rating agencies establishing their own norms, leading to competition in the definition of ratings. However, the Dodd-Frank Act also pursues a second theme with respect to rating agencies, stressing the importance of close supervision of the rating agencies by the regulator and relatively uniform standards and definitions.[15] This is just the opposite of encouraging competition. Indeed, the case for uniform rating standards and definitions under tight supervision of the regulator would be much more compelling if the regulator were to use the ratings for determining regulatory treatment. As you can see, these two broad perspectives—reducing reliance on ratings for regulatory purposes and tighter supervision and more uniformity in standards—serve as substitutes for one another.

Credit ratings point to a number of interesting examples of how governments think about the information generated by market participants.[16] On the one hand, there is the desire to outsource aspects of the regulatory process, but on the other hand huge suspicion by government officials of the information that would arise from such processes with respect to sovereign credits. By way of illustration, this has emerged vividly on many fronts with concerns about the quality of sovereign credits. For example, in the aftermath of the downgrade of the United States by Standard and Poor’s, the Treasury said that S&P had engaged in “terrible judgment.”[17] In Italy, the police even raided a credit rating agency in the face of an adverse judgment.[18] The European sovereign debt crisis led to a ban on naked credit default swaps and short selling of financials in some European countries as well as attempts to undercut the definition of a “credit event” in Greece.[19] There can be tremendous information in credit default swap pricing—at least if there is not an attempt to manipulate the underlying credit event. On other fronts, “the European Union’s (EU) application of Basel bank capital rules placed ‘zero risk weight’ on EU sovereign debt, as if these instruments were not subject to credit risk, creating huge artificial incentives for banks to hold these sovereign credits.”[20] Instead of being motivated by investor protection, such treatment appears to be an attempt to increase the demand for sovereign debt and the ease with which incumbent officials can continue to issue it.[21] Even the purchases of sovereign debt by the European Central Bank would inflate its demand, thereby artificially raising the price and complicating the problem of sorting out the natural private sector interest in the bonds.[22]

This broad class of government policies, “by weakening the integrity of market pricing”, can reduce the sovereign’s own access to funding over time.[23] It certainly would have been difficult to see how these could be acts of investor protection, which is a core justification for much of financial regulation. It is important for government officials around the globe to have a healthy respect for market institutions rather than suspicion about these arrangements, especially when applied to their government’s own credits. This would not require the type of complexity that appears to be the hallmark of much regulatory policy.

Central clearing of relatively standardized derivatives is another important focus under the Dodd-Frank Act.[24] This is leading to a fundamental redesign of the trading of derivative securities and swaps and the required use of central counter-parties (CCPs) for relatively standardized instruments. The re-engineering of these markets is proving to be tremendously complicated. While I am somewhat sympathetic to the use of the CCPs as a way to reduce contagion associated with counter-party risk and to make the risk structure more transparent, it is not clear that the use of clearinghouses will actually reduce systemic risk.[25] Risks are not eliminated when matched through a clearinghouse. Indeed, the incentives to trade with weak counter-parties would be heightened (because of more favorable pricing), and more generally, the clearinghouse would tend to attract transactions that it was mis-marking.[26] If market participants perceived the risk of trading through the clearinghouse were low (e.g., due to a potential federal guarantee) market participants would increase their risk exposures.[27] For these reasons, as well as the concentration of risk in the CCP, it is plausible that central clearing would raise systemic risk greatly when another crisis occurred and perhaps even raise the likelihood of a crisis.[28] While many observers have pointed to the lack of clearinghouse failures during the financial crisis a few years ago, in fact in recent decades there have been a number of clearinghouse failures, and the nature of the risks that would be assumed by a swap clearinghouse would be huge compared to that in traditional clearinghouses.[29] “Indeed, Federal Reserve Chairman Ben Bernanke attributed the [absence of such failures] during the financial crisis to ‘good luck’” and summarized the relevant takeaway as follows: “As Mark Twain’s character Pudd’nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket.”[30] To avoid the potential collapse of a major clearinghouse would require very strong risk management and backstops from Washington, D.C. The complexities associated with the operation and design of a swaps clearinghouse will be vast.

In trying to identify simple and robust perspectives to guide the financial regulatory process, it is helpful to focus briefly on cost-benefit analysis. This has been an especially visible issue in Washington, D.C., in the aftermath of last year’s decision by the District of Columbia Federal Circuit Court of Appeals, striking down the SEC’s proxy access rule due to an inadequate and inconsistent cost-benefit analysis.[31] The court’s ruling, following earlier decisions by the D.C. Circuit overturning the SEC’s independent mutual fund chair and director rule in 2005 and 2006,[32] highlights what should be central criteria for financial regulation under administrative law and economic principles. It is challenging to do cost-benefit analysis right, but until last year’s decision there was relatively little inclination by financial regulators to take the challenge seriously. In my view, the development of evidence in support of rule-making and to determine the direction of potential rule-makings is quite important. Among other tools, this emphasizes the importance of natural experiments—perhaps even randomized ones—as well as serious before-and-after analyses to assess the impact of regulations. Indeed, one way to give before-and-after analyses teeth would be to “sunset” (end) the rule adoption after a number of years, so that its merits would need to be reargued, in part using the data generated from the initial rule adoption.[33] More generally, excess complexity in the formulation of a regulation can be a serious impediment to the generation of meaningful evidence.

Adherence to economic principles is an important way to strive for simplicity in the regulatory process. While much of the focus of the Circuit Court’s proxy access decision addressed inconsistencies in the SEC’s cost-benefit analysis, at least some aspects of that rule also suggested conflict with economic principles.[34] I thought that a particularly striking aspect of the overturned proxy access rule was that the coalition of shareholders who would be permitted to nominate candidates to be placed on the corporation’s official proxy ballot needed to own at least 3% of the company’s shares for at least three prior years.[35] The latter restriction seems at variance with the traditional concept of the full transferability of ownership rights through a sale. Ownership of an asset is a claim to its future rather than something vested by virtue of history.[36]

A final theme that I would like to highlight in my discussion of simplicity vs. complexity in regulation is the importance of transparency and disclosure. This arises at many levels. First, I think that it is very important that the decision-making process of the regulators be exposed to sunlight with serious opportunity for diverse perspectives at the regulator to be articulated. Such conversations would reduce the effective complexity of regulation by contributing to the understanding of the public. Yet remarkably, a recent Wall Street Journal article highlights the almost total absence of public meetings by the Board of Governors of the Federal Reserve in the last two years and even errors by not properly recording dissents.[37] Transparency is important not only for statements about monetary actions, but also with respect to the rule-making (and along other lines for the detail underlying liquidity facilities).[38]

Disclosure also is an important substantive value in the regulatory process for regulators to take seriously. Yet in some situations regulators appear to have discouraged disclosures. An interesting example along these lines is the limited disclosures by Bank of America during its acquisition of Merrill Lynch, with the apparent strong encouragement of the Federal Reserve and Treasury.[39] Indeed, more extensive and informative disclosures to shareholders would likely have led to the rejection of the acquisition, heightening concerns about the possible collapse of Merrill Lynch. The example of stress tests also is an interesting one in which the concerns of systemic risk regulators and banking supervisors would not have emphasized disclosure and indeed, the absence of any disclosure until the latter stages of the 2009 stress tests was striking.[40] Yet disclosure is a fundamental principle in America’s capital markets, and indeed to the extent that banks plan to address stress test results with a capital raising, it is crucial that investors be apprised of the planned uses of the funds (including providing a capital cushion) rather than being misled. Full disclosure also is very simple (especially compared to incomplete disclosure)—the structure of information that is available to market participants would be transparent and recognized by all.

Financial regulation benefits from an emphasis on simple rather than complicated rules that avoid creating needless distortions, undertake serious cost-benefit analyses, use transparent rule-making processes, and emphasize disclosure and incentives.

I appreciate your listening and reflecting upon my remarks and would welcome any questions that you might have. Thanks very much.


Preferred citation: Chester S. Spatt, Complexity of Regulation, 3 Harv. Bus. L. Rev. Online 1 (2012),

† Chester S. Spatt is the Pamela R. and Kenneth B. Dunn Professor of Finance at the Tepper School of Business at Carnegie Mellon University, where he has been a faculty member since 1979. Professor Spatt also served as the Chief Economist of the U.S. Securities and Exchange Commission in Washington, D.C. from July 2004 until July 2007.  He gratefully acknowledges financial support from the Sloan Foundation.

[1] See Anat R. Admati et al., Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Capital is Not Expensive 11–19 (Rock Ctr. for Corp. Governance at Stanford Univ., Working Paper No. 86, 2011) available at

[2] Id. at 17–18.

[3] See id. at 1.

[4] Anat R. Admati and Martin Hellwig, Good Banking Regulation Needs Clear Focus, Sensible Tools, and Political Will, Int’l Centre for Fin. Reg. 5 (Dec. 2011)—Financial-Times-Research-Prize-2011/A-Admati-and-M-Hellwig—Good-Banking-Regulation-N.aspx, in advocating high capital standards, also emphasize that “regulation should focus on measures that are cost effective and that do not require that supervisors know more than is feasible.”  Allan H. Meltzer, Banks Need More Capital, Not More Rules, Wall St. J., May 16, 2012,, also calls for high capital standards and points to the difficulty designing and implementing regulation (using the example of the ambiguity as to whether the recent losing trades of JP Morgan Chase would have been covered by the Volcker Rule, if it had been in effect) and advocates outright repeal of Dodd-Frank.

[5] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 165(d)(1) 124 Stat. 1376, 1426 (2010) [hereinafter Dodd-Frank Act].

[6] Id. § 204.

[7] See id. sec. 619 § 13.

[8] See, e.g., Nelson D. Schwartz, Bank of America Cuts Back Its Prop Trading Desk, N.Y. Times, Sept. 29, 2010,

[9] See, e.g., Craig Torres & Cheyenne Hopkins, Bernanke Says Dodd-Frank’s Volcker Rule Won’t Be Ready by July 21 Deadline, Bloomberg, Feb. 29 2012,

[10] Ben Protess, Barney Frank Wants Simpler Volcker Rule by Labor Day, N.Y. Times, Mar. 22, 2012,

[11] Dodd-Frank Act sec. 619 § 13.

[12] Cheyenne Hopkins, U.S. Regulators Exploring Volcker Exemption for Foreign Sovereign Debt, Bloomberg, Feb. 1, 2012,

[13] Sarah N. Lynch & Dave Clarke, Volcker Rule May Disadvantage U.S. Banks: OCC’s Walsh, Reuters, Jan. 17, 2012, available at

[14] Dodd-Frank Act § 939.

[15] See Dodd-Frank Act sec. 932 § 15E.

[16] See Statement No. 320, Chester S. Spatt & Peter J. Wallison, Shadow Fin. Regulatory Comm., A Regulatory Blueprint for Mismanaging the Sovereign Debt Crisis 1 (Dec. 5, 2011),

[17] Id.

[18] Id.

[19] Id. at 1–2.

[20] Id. at 2.

[21] Id.

[22] Id.

[23] Id.

[24] See Dodd-Frank Act § 723.

[25] Chester S. Spatt, Statement for Senate Subcommittee on Securities, Insurance, and Investment Hearing on Derivatives Clearinghouses: Opportunities and Challenges 2 (May 25, 2011) [hereinafter Spatt, Opportunities and Challenges]; see also Chester S. Spatt, Designing Reliable Clearing and Settlement Systems for Enhancing the Transparency and Stability of Derivatives Markets, Presentation at the Wharton School Financial Institutions Center Conference on Strengthening the Liquidity of the Financial System (June 28, 2011) (on file with author).

[26] See Spatt, Opportunities and Challenges, supra note 25, at 2–3.

[27] See id. at 2; see also Mark J. Roe, Derivatives Clearinghouses Are No Magic Bullet, Wall St. J., May 6, 2010,

[28] Spatt, Opportunities and Challenges, supra note 25.

[29] Id. at 3–4.

[30] Id. at 4 (quoting Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Remarks at the 2011 Financial Markets Conference: Clearinghouses, Financial Stability, and Financial Reform 8–9 (Apr. 4, 2011)); see also Editorial, Pudd’nhead Wilson in Washington, Wall St. J., Apr. 23, 2011,

[31] Bus. Roundtable v. Sec. & Exch. Comm’n, 647 F.3d 1144, 1148–51 (D.C. Cir. 2011).

[32] See Chamber of Commerce of U.S. v. Sec. & Exch. Comm’n (Chamber I), 412 F.3d 133 (D.C. Cir 2005) (overturning the SEC’s independent and mutual fund chair and director rule because the SEC failed to consider the cost of compliance and alternative rules); see also Chamber of Commerce of U.S. v. Sec. & Exch. Comm’n, 443 F.3d 890 (D.C. Cir. 2006) (holding that the SEC did not follow adequate procedures in its response to Chamber I).

[33] Chester S. Spatt, Measurement and Policy Formulation, Speech at the Meeting of the Society for Financial Econometrics at the University of Chicago, 5–6 (June 2011).

[34] See Bus. Roundtable, 647 F.3d at 1148–50.

[35] Id. at 1147.

[36] Cf. Statement No. 297, Marshall Blume et al., Shadow Fin. Regulatory Comm., Proxy Access and the Market for Corporate Control 2 (Sept. 13, 2010),

[37] Victoria McGrane & Jon Hilsenrath, Fed Writes Sweeping Rules from Behind Closed Doors, Wall St. J., Feb. 21, 2012,

[38] With respect to the transparency of liquidity facilities, see, for example, Bob Ivry & Craig Torres, Fed’s Court-Ordered Transparency Shows Americans Have Right to Know, Bloomberg, Mar. 22, 2011,

[39] See Chester S. Spatt, Regulatory Conflict: Market Integrity vs. Financial Stability, 71 U. Pitt. L. Rev. 625, 630–32 (2010) [hereinafter Spatt, Regulatory Conflict]; see also Chester S. Spatt, Economic Principles, Government Policy and the Market Crisis, Keynote Address at the Western Finance Association 17 (June 19, 2009).

[40] Spatt, Regulatory Conflict, supra note 39, at 629.