Private v Public Enforcement

Region: 

By Associate Professor Michael Legg, UNSW

Enforcement is usually undertaken by the State through various government agencies.  Enforcement by a government agency can involve a range of activities including, in the case of the Australian Securities and Investments Commission, persuasion, warnings, infringement notices, enforceable undertakings, disqualification from managing a corporation or a ban on providing financial services, civil suits for damages, civil penalties, criminal prosecutions resulting in fines or prison terms, and revocation, suspension or variation of conditions of a licence.  The enforcement action taken will vary depending on whether the regulator's goal is to educate, punish wrongdoers, protect investors, preserve assets, deter other potential wrongdoers or compensate people.

More recently, private enforcement of regulation has become possible in Australia.  Private enforcement involves a private citizen commencing litigation based on a cause of action that is enacted not just to remedy a wrong done to the individual citizen, but also has a broader public purpose such as securities or competition laws.  Compensating the citizen who suffers loss or damage because of a breach of securities or competition laws is also seen as deterring that conduct more broadly which fosters efficient and informed markets or deters anti-competitive conduct which may increase prices or harm efficiency.

Private enforcement is almost always through civil litigation and the remedies sought are usually narrower that that sought by public enforcement as the litigation is only viable if some form of monetary compensation is possible.

Private enforcement has been made possible in Australia through the combination of private rights of action so that an injured individual has standing, collective action mechanisms such as class actions which make litigation economically viable and financing of litigation through litigation funding.  

In the shareholder litigation sphere this means that class actions and litigation funding allow shareholders to commence proceedings where they have suffered loss caused by misleading or deceptive conduct, or as a result of a breach of the continuous disclosure regime.  Similarly, in the area of financial products and services, investors can utilise class actions and litigation funding to sue for misleading or deceptive conduct, failure to provide the necessary disclosures mandated by legislation and failure to provide advice based on the personal circumstances of the investor.

Private enforcement is also argued to achieve deterrence.  The class action promoter, referred to as the "private attorney general", seeks out contraventions and ensures they do not go unnoticed leading to greater deterrence.  As contraventions are more likely to result in litigation and its related costs, including payment of compensation, reputational effects and share price declines, corporations will take greater care not to contravene the law.  

Shareholder class actions are advocated on the basis that they promote corporate governance and the efficiency of the market by allowing for the enforcement of statutory requirements such as continuous disclosure and prohibitions on misleading conduct.   Moreover, disclosure laws that are enforced benefit securities markets through encouraging managers to provide more reliable information to market participants.   This in turn promotes investor confidence.  Further, enforcement measures help mitigate the agency costs of aligning the interests of management with those of the outside shareholders. 

ASIC may not pursue compensation, or prosecute every infraction for a number of reasons.  This includes finite funds for enforcement.  The cost of undertaking hard-fought litigation against a well resourced opponent - "a long and drawn-out procedural Stalingrad" - may be high compared to the importance of the case or public benefit to be achieved.  The prospects of success may not be sufficiently high, opening the regulator to (a) criticism if it is unsuccessful, (b) costs orders in favour of an opponent, and (c) a loss of opportunity to pursue other cases.  There may be a preference for criminal sanctions, civil penalties or administrative remedies (e.g. infringement notices or enforceable undertakings) because they better achieve regulatory goals such as deterrence or cooperation.  Co-regulation whereby responsibility for regulation is shared between business and government requires enforcement discretion so that in a particular case there may be a preference for coaxing cooperation and rewarding compliance through not seeking to enforce the law to the maximum extent possible. 

Private enforcement may be a useful adjunct to ASIC enforcement, especially in obtaining compensation, as it reduces the calls on the public purse and can fill gaps created by an under-funded or captive regulator.  However, private enforcement is usually a blunt regulatory instrument.  Class action promoters only profit when there is a monetary recovery.  This means that the shareholder or investor class action’s goal is monetary compensation at the highest amount possible.  Changes to a company's policies or procedures and corporate governance reforms do not increase the recovery. 

The government regulator has a panoply of remedies enabling it to perform its function in a more calibrated manner, depending on the facts and circumstances of the particular case before it.  If over-deterrence appears to be a problem, the regulator can reduce the level of enforcement, conversely, if under-deterrence appears to be a problem, the regulator can intensify enforcement. ASIC's ability to use lower order enforcement tools, such as voluntary compliance or an enforceable undertaking, may be hampered if industry knows that regardless of cooperating with ASIC there is a class action waiting for them. 

The interaction between public and private enforcement is a significant policy issue as it is not as simple as privately-run class actions or regulator-run enforcement proceedings being better than the other.  Each may present advantages but the actions of one can also increase costs for, and compromise the effectiveness of, the other. 

Add new comment