Bipartisan bill would increase SEC penalties

A bipartisan legislative proposal aims to strengthen the Securities and Exchange Commission’s ability to crack down on violations of securities laws.

The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2017 would update and strengthen the SEC’s civil penalties statute by increasing the statutory limits on civil monetary penalties, directly linking the size of these penalties to the scope of harm and associated investor losses, and substantially raising the financial stakes for repeat securities law violators. 

The legislation is sponsored by U.S. Senators Jack Reed (D-R.I.), Chuck Grassley (R-Iowa), Patrick Leahy (D-V.T.), and Heidi Heitkamp (D-N.D.).

Under existing law, the SEC is constrained to penalizing violators in some cases to a maximum of $181,071  per offense and institutions to $905,353. In other cases, it may calculate penalties to equal the gross amount of ill-gotten gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.

Proponents say the bill strives “to make potential and current offenders think twice before engaging in misconduct” by increasing the maximum civil monetary penalties permitted by statute, directly linking the size of the maximum penalties to the amount of losses suffered by victims of a violation, and substantially raising the financial stakes for repeat offenders of our nation's securities laws.

Specifically, the SEC Penalties Act increases the per-violation cap applicable to the most serious securities laws violations to $1 million per violation for individuals, and $10 million per violation for entities.

The legislation would also triple the penalty cap for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years. The agency would be able to assess these types of penalties in-house, and not just in federal court.

“If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent,” Grassley said in a statement. “It’s just the cost of doing business. A penalty should mean something, and it should get the recidivists’ attention. The increased penalties for repeat offenders in this bill … should help change the dynamic of business as usual.  The SEC should have strong penalties in place to protect the securities markets from bad actors.”

The bill must be considered by the Banking, Housing, and Urban Affairs Committee before it may be voted on by the full U.S. Senate.

A more detailed rundown of the legislation follows:

The maximum penalty for an individual charged with the most serious violations (third tier violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses to victims or substantial pecuniary gain to the violator) could not exceed, for each violation, the greater of $1 million, three times the gross pecuniary gain, or the losses incurred by victims as a result of the violation. 

The maximum amount that could be obtained from entities charged with the most serious violations could not exceed, for each violation, the greater of $10 million, three times the gross pecuniary gain, or the losses incurred by victims as a result of the violation.

The maximum penalty for an individual charged with less serious violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (second tier violations) could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation in some cases. 

The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $500,000 or the gross pecuniary gain as a result of the violation in some cases.

The maximum penalty for an individual charged with violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (first tier violations) could not exceed, for each violation, $10,000 or the gross pecuniary gain as a result of the violation in some cases. 

The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation in some cases.

The maximum amount of the penalty for repeated misconduct shall be three times the applicable cap when the person or entity within the five years preceding the act or omission is held criminally or civilly liable for securities fraud.

The bill provides authority to seek civil penalties for violations of previously imposed injunctions or bars obtained or entered under the securities laws. It also provides that each violation of an injunction or order shall be considered a separate offense. However, in the event of an ongoing failure to comply with an injunction or order, each day of the continued failure to comply with the injunction or order shall be considered a separate offense.