DEFINITION of '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.

BREAKING DOWN '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, 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 on the Fair Funds Provision

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.

RELATED TERMS
  1. Fair Trade Investing

    Fair Trade Investing is the act of investing in companies or ...
  2. Securities And Exchange Commission ...

    The Securities and Exchange Commission (SEC) is a U.S. government ...
  3. Litigation Risk

    Litigation risk is the probability of a corporation facing legal ...
  4. Securities Fraud

    Securities fraud is a form of white-collar crime that disguises ...
  5. General Provisions

    General provisions are balance sheet items representing funds ...
  6. Fair Trade Price

    Fair trade price is the minimum price paid for certain agricultural ...
Related Articles
  1. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  2. Investing

    What's Fair Value?

    Fair value has three different meanings depending on the context.
  3. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  4. Investing

    An Overview of the SEC's New Mutual Fund Rules

    The SEC has released new liquidity rules for mutual funds aimed at reducing risk.
  5. Investing

    Grasp the Accounting of Private Equity Funds

    Read about private equity accounting and how it is different than that of other investment vehicles. The nature of private equity makes a difference.
  6. Tech

    Stop Scams in Their Tracks

    Find out how to protect yourself and your loved ones from financial fraudsters.
  7. Financial Advisor

    How To Get A Job At The SEC

    Want to make a good living taking on those renegade trading rascals on Wall Street? Here are some tips to help you get in the door at the SEC.
  8. Financial Advisor

    5 Characteristics of Strong Mutual Fund Shares

    Discover some of the basic characteristics shared by good mutual funds that investors can use to help them in selecting funds.
  9. Insights

    Identity Theft: How Much Should You Worry?

    Identity fraud cost $18 billion last year. But are enough Americans victimized – with big enough losses – that it's worth buying protection?
RELATED FAQS
  1. What happens to the fines collected by the Securities and Exchange Commission?

    When the Securities and Exchange Commission (SEC) enforces a civil action against a corporation or an individual found guilty ... Read Answer >>
  2. How fair value is calculated in futures market?

    Learn how the fair value for futures stock index contracts is calculated, and understand how differences between those numbers ... Read Answer >>
Trading Center