What Are Fair Funds for Investors?

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

Key Takeaways

  • The Fair Funds for Investors provision was introduced in 2002 under Section 308(a) of the Sarbanes-Oxley Act (SOX).
  • The provision returns wrongful profits, penalties, and fines to defrauded investors.
  • 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; the SEC did not have the right to distribute these funds back to investors who were victimized.

Understanding Fair Funds for Investors

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; the SEC did not have the right to distribute these funds back to investors who were victimized. The Fair Funds for Investors provision enabled the SEC to add civil money penalties to disgorgement funds for the relief of the victims of stock swindles.

The provision established a fund that holds money recovered from an SEC case. The fund then chooses how to distribute the money to defrauded investors. After the funds are disbursed, the particular fund is terminated.

The Fair Funds for Investors provision has 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; the Fair Funds provision provides their only means of access to compensation, and research has shown they will usually be compensated on a level equal to at least 80% of what they lost.

Special Considerations

Research on the Effectiveness of the Fair Funds for Investors Provision

In 2014, Urska Velikonja of Emory University published research on the Fair Funds for Investors provision in the Stanford Law Review. The report found that the SEC’s efforts to compensate defrauded investors via the provision has been more successful than opponents of the provision expected. Between 2002 and 2014, the provision has 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 the provision 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.

Velikonja’s research also found that defendants are more likely to contribute to Fair Funds for Investors distributions than they are to pay damages related to private litigation.