Securities Class Actions Settlements and SEC Fair Funds: What’s the Difference?

Securities class action settlements and Securities and Exchange Commission (SEC) Fair Funds look similar. Both involve compensation to harmed investors, sometimes from the same defendants. Both use third party administrators for claim submissions with similar forms and procedures. However, the actors involved – and their motivations – differ in fundamental ways that produce differences in filing requirements. This article explains those differences and some resulting challenges for participating institutional investors.

Securities class action settlements and SEC Fair Funds differ with respect to who is in charge and their relationship to harmed investors.

In securities class action settlements, the lead plaintiff and counsel prosecute claims on their behalf. When cases settle, lead counsel engage and manage third-party administrators for claim submission under supervision by the courts.

Fair Funds are created in connection with resolutions of either litigation in federal courts by the SEC against defendants, or internal SEC enforcement proceedings against them. If resolutions include disgorgements, Fair Funds are created, and the SEC engages and manages third party administrators for claim submission.

While appearing similar, the actors involved in the recovery efforts for securities class action and SEC Fair Funds have different goals.

In a securities class action, the lead plaintiff and counsel are fiduciaries to the class solely focused on maximizing their compensation. Both they and the courts overseeing distributions strive for maximum notice, inclusion, and participation. Courts preliminarily approve settlements, then notify class members and hold hearings on final approval so class members can weigh in on matters including proposed distribution plans. Claimants can challenge the disposition of their claims and if necessary, escalate issues to class counsel and the court.

By contrast, the SEC is a government enforcement agency and not a fiduciary for harmed investors. Compensation is only one aspect of its resolutions. The SEC can impose other sanctions including fines and penalties, cease and desist orders, and/or serving as executives at publicly traded companies. The defendants’ behavior before or during prosecutions – including remedial efforts to prevent recurrence – can reduce monetary punishments. The SEC allocates recovered funds between fines and penalties, which it keeps, and disgorgements, which return money to investors. In short, the SEC’s mandate includes many things besides compensation including deterrence, protecting market integrity, and furthering other policy goals.

The courts’ and investors’ roles are different

Courts are only involved in Fair Funds resulting from litigation. In those cases, the SEC is the party, not a class of investors, and judges give deference to the SEC on resolutions and Distribution Plans. Investors have no role in the process: they are not given notice or opportunity to comment. For Fair Funds resulting from internal enforcement proceedings, draft Distribution Plans get published on the SEC website with typically a 30-day comment period. This is their only chance to influence things. Without notice, investors rarely comment. They don’t have input on resolutions, and there is no court oversight of these administrations.

Administrative requirements are different and pose operational challenges

Fair Funds have additional administrative requirements that are not seen in securities class action settlements that can increase filing burdens and make investor participation more challenging. These include:

• Greater documentation burdens: In securities class actions, administrators use an audit approach for trade substantiation, targeting document requests at high-risk claims – those from unverified sources and/or involving large payouts. By contrast, some Fair Funds require full documentation from all claimants for all trades. The result: higher administration costs and likelihood of excluding claimants with legitimate claims but less access to supporting documentation due to the passage of time, changes in custodians, or other things limiting the availability of third-party verification.
• Faster and tighter administrations: The SEC runs faster administrations with stricter compliance requirements. By contrast, in securities class action settlements, it’s not uncommon for courts to permit exceptions that expand participation. For example, courts may accept late filed claims if distributions have not yet occurred and/or there is no significant prejudice to other class members.

In sum, securities class actions are prosecuted for the benefit of harmed investors. Lead plaintiffs, class counsel, and courts supervising administrations do so as fiduciaries to class members, with a bias towards inclusion and maximum participation. By contrast, the SEC prosecutes claims to achieve a range of goals, only one of which is victim compensation. The SEC is not a fiduciary for harmed investors, and Fair Funds can focus on goals that reduce inclusion and participation.

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Founded in 2008, Financial Recovery Technologies (FRT) is the leading technology-based services firm that helps the investment community identify eligibility, file claims and collect funds made available in securities and other class action settlements. Offering the most comprehensive range of claim filing and monitoring services available, we provide best-in-class eligibility analysis, disbursement auditing and client reporting, and deliver the highest level of accuracy, accountability and transparency available. For more information, go to www.frtservices.com.

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