Draft Legislation Would Allow Higher Penalties in SEC Enforcement Actions
In December 2011, we reported that U.S. Securities and Exchange Commission Chairman Mary Schapiro wrote to Senator Jack Reed, who chairs the Senate Subcommittee that oversees the SEC, formally requesting legislative changes that would increase existing limits on civil monetary penalties available in SEC actions, and allow the SEC to prosecute enforcement matters in administrative proceedings. The changes, she argued, are essential to deter securities fraud.
According to Law360 and Businessweek, Senators Reed and Chuck Grassley introduced a bipartisan bill on July 23rd, called the “Stronger Enforcement and Civil Penalties Act of 2012,” that would implement Chairman Schapiro’s requests. Per Ms. Schapiro’s recommendation, the draft legislation would raise existing caps on civil penalties the SEC may recover from $150,000 per violation to $1 million per violation for individuals; and from $725,000 per violation to $10 million per violation for “entities.” The legislation, too, “substantially raise[s] the financial stakes for securities law recidivists,” authorizing the SEC to pursue treble damages against individuals or entities who have been convicted of securities fraud or subject to administrative sanctions within the past five years. The bill would also allow the SEC to seek penalties based on the total scope of investor losses.
Importantly, the draft legislation would allow the SEC to seek these elevated civil penalties in administrative proceedings. The Dodd-Frank Wall Street and Consumer Protection Act expanded the scope of securities violations the SEC may prosecute through administrative proceedings, but did not empower the Commission to seek enhanced monetary damages in administrative actions. The Stronger Enforcement and Civil Penalties Act would change that, permitting the SEC to seek the same monetary damages in administrative matters that it may obtain in court proceedings.
The ability to pursue higher sanctions administratively presents a considerable benefit for the SEC. As Peter Henning of the New York Times reported, “There is a perception among securities lawyers that the SEC has something of a ‘home court’ advantage in cases heard by an administrative law judge because the decision will be reviewed first by the full Commission [on appeal], . . . before it ever goes before a federal judge.”
The proposed changes seem to reflect the Commission’s strong desire to obtain civil penalties that will deter future wrongdoing. Indeed, Senator Grassley explained, “If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent. . . . It's just the cost of doing business. A penalty should mean something, and it should get the recidivists’ attention.”
If passed, the legislation will significantly raise the financial risks for individuals and entities accused of federal securities laws violations. We will report back on the status of the bill as more information becomes available.