Note

Backstop Ambiguity: A Proposal for Balancing Specificity and Ambiguity in Financial Regulation

Backstop Ambiguity: A Proposal for Balancing Specificity and Ambiguity in Financial Regulation

Julian J.Z. Polaris

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“The Securities and Exchange Commission (SEC) has been very busy for the last few years. In the wake of the 2007-2008 financial crisis, the agency scaled up enforcement efforts by increasing the number of individual enforcement actions,  requesting that Congress authorize larger civil penalties than are currently permitted,  and securing some of the largest settlements in the agency’s history.  The specific transactions targeted by the SEC are feared to be part of a broader trend in the financial industry toward behavior that prioritizes profit over integrity, potentially imperiling individual market actors and overall economic stability.

Nonetheless, some commentators have criticized the SEC’s increasingly aggressive approach,  particularly in light of the longstanding critique that the agency does not provide clear definitions of potentially actionable behavior. Indeed, the record 2013 settlement with Goldman Sachs arose out of the SEC’s expansive prohibitions on fraud,  and the Department of Justice (DOJ) has capitalized on similarly worded laws to bring finance-related criminal charges.  Conventional wisdom holds that legal certainty and predictability promote efficiency and fairness,  but former SEC General Counsel David Becker admits that ‘there is an aversion among Commission staff to specifying precisely where the line is between legal and illegal conduct.’  Becker’s is one of many voices calling for greater clarity on the boundaries of permitted conduct.

This Note stakes out a middle ground, arguing that careful reliance on definitional ambiguity can play an important role in regulating an industry that seems to have lost its moral compass. Regulators should delineate specific violations where it is possible to do so, but should retain catch-all provisions stated in general terms. This ‘backstop ambiguity’ provides essential flexibility and adaptability in enforcement, thereby discouraging attempts to exploit loopholes in bright-line rules.”

Yale Law School, J.D. expected 2015. 

Cite this article:

Julian J.Z. Polaris

, Note, 

Backstop Ambiguity: A Proposal for Balancing Specificity and Ambiguity in Financial Regulation

, 33 Yale L. & Pol'y Rev. 231 (2014).