SEC, fiduciary duty, Sarbanes-Oxley, unfitness standard, corporate governance, officer and director bar


The U.S. Securities and Exchange Commission (SEC) is the civil regulatory agency responsible for helping to defend and protect the American investor. One significant threat to investor security occurs when an individual, acting as an officer or director, violates a fiduciary duty to his or her employer and its shareholders, risking investor money. These actions could involve insider trading, fraudulent statements in public filings, or other self-serving conduct.
Recognizing the importance of deterring such misconduct, Congress gave the SEC the authority to bar certain individuals from serving as officers and directors of public companies. An individual should be barred if he has demonstrated unfitness to serve in that capacity. Unfortunately, the current standard has resulted in inconsistent applications across different types of misconduct and has been unresponsive to both legislative enactments and widespread management misconduct leading up to the 2008 financial crisis, which has eroded its effectiveness as a key deterrence mechanism in the SEC’s arsenal.
This Note begins by exploring the roles held by directors and officers and why effective corporate governance is critical to the functioning of the capital markets. Next, this Note discusses how the existing unfitness standard has failed to address Congress’s intent to deter misconduct and has not appropriately responded to the Sarbanes-Oxley Act of 2002, which amended the statutory requirement for granting a bar. Ultimately, this Note proposes a new standard for officer and director unfitness that gives less opportunity for inconsistent results, focuses on the risk of future misconduct, and properly responds to recent legislative enactments and market events such as the 2008 financial crisis.

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