Systemic Forum Selection Ambiguity in Financial Enforcement


Time to read

3 Minutes

Forum selection ambiguity in financial regulation has drawn a lot of attention recently. As is well known,  financial regulation makes extensive use of criminal law as a means of enforcement. The use of criminal law, however, is problematic in the financial field because in many cases criminal sanctions are perceived as both unjust and inefficient. One solution has been the creation of an administrative enforcement forum—alongside or instead of the criminal enforcement forum (and alongside or instead of a civil enforcement forum). This solution was adopted by the SEC in the regulation of securities. And indeed, more and more cases, which the government used to file in criminal courts, are now being pursued in administrative proceedings. But recent criticism suggests that the creation of administrative enforcement proceedings, designed to ease the normative friction between criminal law and financial regulation, only exacerbates this friction. This critique implies that the boundary between the different fora is ambiguous, or, in other words, the justification for forum selection by the regulator is not clear. 

 Forum selection ambiguity in the enforcement of securities laws was recently criticized by the judiciary. One critique is that forum selection ambiguity may lead to under-criminalization. Judge Jed S Rakoff, a United States District Judge for the Southern District of New York, has played a leading role in this line of critique. In the aftermath of the Citigroup and Bank of America cases, Judge Rakoff published an article titled The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, which attacked the failure to criminally prosecute Wall Street executives for their roles in creating the 2008 financial crisis, and the decision to settle for administrative punitive measures instead. A second critique tackles the alleged expropriation of defendants’ rights by “forum shopping,” as the administrative forum has less procedural rights. A third critique refers to the supposed harm to the principle of legality. This is possible due to the fact that the SEC may use forum selection ambiguity to claim the role of the legislator in creating new criminal obligations.

Contemporary literature identifies the ambiguity in forum selection and describes it as a discretionary problem. It recognizes that this discretionary power has utility, but emphasizes the concerns for justice, legality, good-faith, accountability, fairness, and the power balance between the branches of government. It therefore calls for clear forum selection guidelines. As a step towards addressing the forum selection ambiguity problem, the SEC recently issued guidance on its approach to forum selection, listing a number of policy considerations that should be taken into account.

My article suggests that this was a step in the wrong direction. Contrary to the current literature, I argue that the ambiguity does not stem from the lack of clear policy considerations, but rather from the legal theory behind them, which creates systemic ambiguity in punitive forum selection. The functional approach behind policy considerations is committed to exposing and calculating all the “considerations of social advantage” that forum selection can offer. Because of this commitment to multiple considerations, this policy-oriented approach is bound to take into account a variety of political theories and to draw an infinite number of considerations from them. These different theories collide time and again, lead to different results, and fail to give the “considerations of social advantage” any coherent meaning. Furthermore, it is impossible to effectively analyze these numerous policy considerations due to factor overload, the absence of hierarchy, the difficulty in quantifying considerations, and the requirement to collect an enormous amount of information. Therefore, instead of leading to a superior decision-making process, the policy-oriented approach only exacerbates the vagueness of the boundary between the different enforcement fora. The outcome is punitive ambiguity.

The ambiguity I am referring to is not only the uncertainty regarding the nature of a future legal dispute, which means that the regulated entity cannot know in advance whether its conduct will be deemed criminal or administrative. I am also referring to the ambiguity of the justification for the forum the government selects. In other words, I argue that due to systemic ambiguity, the regulator herself cannot justify her forum choice coherently. The consequences of this punitive ambiguity are severe. In the best case, the regulator’s decision between fora is a reflection of her personal standards, but not necessarily the legislature’s desired policy. In the worst case, the infinite number of considerations used to determine forum can be used to disguise the regulators self-interested decisions.

I conclude that systemic ambiguity is created by the functional legal theory now under-pinning the question of forum selection in securities law enforcement. For this reason, a diffferent legal theory is needed to re-conceptualize the limit between fora.

Dr. Eithan Y. Kidron is lecturer in Criminal Law and Financial Regulation in the Faculty of Law at Tel Aviv University.


With the support of