Legal Commentary

I want to follow up on my last post on boilerplate by suggesting that boilerplate in law enforcement may function as an alternative to rulemaking and as a way to avoid more formal processes. 

Below are the two SEC settlement provisions that first sparked my interest.  Here's the problem these provisions address:  since 2002, money penalties collected by the SEC can be distributed to injured investors in the form of "Fair Funds," raising the possibility that the money will be treated as damages rather than civil fines.  The category matters because it affects rules about offsetting against private damages, how the money is taxed, whether claimants to the fund have a say in distribution, etc.   In other words, there's real money at stake.

The SEC responded through recurring provisions in settlement agreements, including:

?Regardless of whether any such Fair Fund distribution has been made, amounts ordered to be paid as a civil penalty ... shall be treated as a penalty paid to the government for all purposes, including all tax purposes.?

?To preserve the deterrent effect of the civil penalty, Defendant shall not ... argue [in any related civil action] that he is entitled to ... offset or reduction of such compensatory damages award by the amount of any part of Defendant's payment of a civil penalty in this action.?

On the one hand, these seem perfectly sensible.  They protect the deterrent effect of the penalties by preventing deduction and offset and they anticipate issues that are bound to come up.  Moreover, using these terms is fast and flexible.  After all, boilerplate can be abandoned in future agreements if the situation or policy changes.  On the other hand, these provisions make rulemaking unnecessary or at least less pressing, so using boilerplate may be a way to avoid the contention inherent in more formal processes.  In terms of content, it also seems odd to me that the SEC can determine tax treatment, although tax scholars may know better.