On November 28, 2011, SEC Chairman Mary Schapiro sent a letter to Senator Jack Reed, Chairman of the Senate Subcommittee on Securities, Insurance and Investment, requesting “statutory changes [that] would further enhance the effectiveness of the Commission’s enforcement program by expanding the Commission’s authority to seek monetary penalties for the most serious securities law violations.” Despite “impressive” enforcement results in 2011, Schapiro says, legislative changes are needed to further deter securities laws violations. To that end, she proposes increasing limits on civil monetary penalties and “substantially rais[ing] the financial stakes for securities law recidivists.”
In order to deter – and in appropriate circumstances penalize – violators of the federal securities laws, Schapiro seeks to exponentially increase existing caps on civil penalties the SEC may recover in an enforcement action: from $150,000 per violation to $1 million per violation for individuals; and from $725,000 per violation to $10 million per violations for “entities.” And in certain cases, Schapiro would like authorization to seek a penalty equal to the amount of investor losses caused by a securities law violation.
Central to Schapiro’s request – and perhaps of more practical importance – is a proposal that would allow the SEC to prosecute more enforcement matters in administrative proceedings. As Peter Henning of the NY Times reports:
There are a number of advantages for the S.E.C. to pursuing a case administratively, including limited discovery rights for the respondent in the action and a quicker hearing. There is a perception among securities lawyers that the S.E.C. 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, which authorized filing the action, before it ever goes before a federal judge.
If approved, Henning says, the changes would allow the SEC to pursue enforcement matters outside of the federal courts, thereby “skirting the kind of scrutiny Judge Rakoff applied” in rejecting the SEC’s proposed settlement with Citigroup. (Journalists for Bloomberg and Reuters, too, draw connections between Schapiro’s letter requests to Senator Reed and the rejected Citi settlement.)
The requested changes, Schapiro argues, “would substantially enhance the effectiveness of the Commission’s enforcement program by addressing existing limitations that have resulted in criticism regarding the adequacy of Commission actions.” If nothing else, the increased penalties contemplated would drastically change the stakes for regulated individuals and entities.
Schapiro plans to prepare and submit to the Senate Subcommittee proposed language affecting the propose changes. The fate of the draft legislation is yet to be determined, but companies should follow this space closely.