Gatekeeping in the Dark : SEC Control over Private Securities Litigation Revisited

Companies targeted by SEC enforcement actions often face parallel private class actions under the federal securities laws based on the same underlying conduct. But when the SEC selects enforcement targets, negotiates settlements, and assesses its own performance, it is unclear whether or how the agency considers this potential “piggybacking” effect. Although the agency's enforcement activities can have significant impacts on the flow of private litigation, the agency denies that it accounts for those potential impacts in formulating enforcement policy.The SEC is not idiosyncratic in this respect. Its practice reflects a gap in our understanding of how public agencies channel private litigation. While scholars have analyzed various deliberate and overt forms of agency “litigation gatekeeping,” and have debated the social utility of “piggyback” litigation, the capacity and incentives of agencies to deliberately channel the flow of “piggyback” litigation have not been carefully examined.This paper fills that gap. I argue that agencies like the SEC should consider the potential private litigation consequences of their enforcement activities. And I propose adjustments to the enforcement regime to integrate consideration of the “piggyback” effect in a transparent and systematic manner. For thirty years, securities regulation scholars have proposed expanding the SEC's authority to control the flow of private securities class actions. But these proposals face significant conceptual and practical challenges and have not gained traction. This paper offers a new path forward: the SEC should make better use of its existing, inchoate authority to channel private litigation by systematically incorporating the “piggyback” effect into its enforcement decisionmaking