When Does the SEC Exercise Enforcement Leniency?

• In Event: Securities Regulation - II

Abstract

This paper documents a regime shift in the SEC enforcement on financial misconduct. We find that while the SEC imposes a higher sanction before 2010 on misconduct firms who cooperate with SEC investigation, it now rewards cooperative violators with more lenient treatment in reduced charges and penalties. We show this regime shift is primarily due to the SEC exercising more leniency towards good faith cooperation (e.g., timely disclosure, replacing executives), as opposed to perfunctory cooperation (e.g., independent investigations). Additionally, we find that misconduct firms have become reluctant to cooperate under the new regime. Our findings highlight the importance of regulators establishing a clear incentive structure and limiting prosecutorial discretion when operationalizing an effective leniency program.

Authors

• Michelle Liu, Hunter College CUNY

• Andrew J Leone, University of Miami

• Edward Li, Baruch College