Fair Funds for Investors

The Fair Funds for Investors provision was introduced in 2002, under Section 308(a) of the Sarbanes-Oxley Act (SOX). Fair funds for investors was put into place to benefit those investors who have lost money because of the illegal or unethical activities of individuals or companies that violate securities regulations.

Prior to the Fair Funds Provision, money recovered by the Securities and Exchange Commission (SEC) in the form of civil penalties levied against regulatory violators was disbursed to the U.S. Treasury, and the SEC did not have the right to distribute these funds back to investors who were victimized. Essentially, this provision enabled the SEC to add civil money penalties to disgorgement funds for the relief of the victims of stock swindles.

Research performed by Emory University’s Urska Velikonja and published in 2014 in the Stanford Law Review has found that the SEC’s efforts to compensate defrauded investors via the Fair Funds Provision have been more successful than opponents of the provision have expected. Since 2002, fair funds have allowed the SEC to distribute $14.33 billion to investors who were victimized by fraud. The average fair fund disbursement is about the same size as the average class action settlement disbursement related to securities class action suits.

Velikonja’s research further found that fair funds compensates investors for different kinds of misconduct than private securities litigation. Most private litigation compensates investors for accounting fraud, while fair funds compensate investors who have been the victim of anticompetitive behavior or consumer fraud. Fair funds have compensated investors who have been victimized by collusion between funds and brokers, interest-rate fixing, undisclosed fees, false advertising, late trading, pump-and-dump schemes, mutual fund market timing, and other forms of securities fraud and manipulation.

In most of these cases, victims can’t pursue private litigation, either because it is inaccessible, or impractical. Most investors who receive fair funds distributions get no compensation from private litigation for this reason; fair funds provide their only means of access to compensation, and they will usually be compensated on a level equal to at least 80 percent of what they lost. Velikonja’s research also found that defendants are more likely to contribute to fair funds distributions than they are to pay damages related to private litigation.