In an effort to prevent financial fraud and strengthen oversight and accountability of Wall Street, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) are introducing bipartisan legislation to strengthen the Securities and Exchange Commission's (SEC) ability to crack down on securities laws violations.
The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2012 will increase the statutory limits on civil monetary penalties, directly link the size of these penalties to the scope of harm and associated investor losses, and substantially raise the financial stakes for repeat offenders of our nation's securities laws.
Under existing law, the SEC can only penalize individual violators a maximum of $150,000 per offense and institutions $725,000. In some cases, the SEC 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. 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. In cases where the penalty is tied to the amount of money gained by the bad action, the SEC would be able to triple the penalty. It would also triple the penalty cap for recidivists who have been convicted of securities fraud or subject to SEC administrative relief within the past five years. The agency would be able to assess these types of penalties in-house, and not just in federal court.
"In order to protect taxpayers and investors, we need tougher anti-fraud laws and forceful oversight of Wall Street. Some of these institutions that are "too big to fail' have also become "too big to care.' If they look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit, the cycle of misconduct will continue. The law needs to change to ensure the punishment fits the crime. This bill gives the SEC more tools to demand meaningful accountability from Wall Street," said Reed, the Chairman of the Banking Subcommittee on Securities, Insurance, and Investment. "I am pleased to be joined by Senator Grassley in this bipartisan effort to enhance the SEC's ability to protect investors and crack down on fraud."
"If a fine is just decimal dust for a Wall Street firm, that's not a deterrent," Grassley said. "It's just the cost of doing business. A penalty should mean something, and it should get the recidivists' attention. I especially like the increased penalties for repeat offenders in this bill. That should help change the dynamic of business as usual. If this legislation is enacted, as I hope it will be, I expect the SEC to use these new penalties. The SEC doesn't always use all of the penalties at its disposal, and it should."
The SEC is responsible for overseeing approximately 35,000 entities, as well as the Financial Industry Regulatory Authority (FINRA), which itself oversees 4,500 brokers; the Public Company Accounting Oversight Board (PCAOB), which oversees auditors of public companies; and the Municipal Securities Rulemaking Board (MSRB), which regulates municipal securities firms and municipal advisors.
Last year, the SEC successfully brought 735 enforcement actions which resulted in the transfer of $2.8 billion in penalties and returned funds to harmed investors.
However, in a recent case between the SEC and two former Bear Stearns hedge fund managers who were indicted on charges of wire and securities fraud for misrepresenting the health of their funds that cost investors $1.6 billion, the SEC was forced to settle for civil penalties of $800,000 and $250,000, respectively. Neither of the former executives admitted nor denied the allegations and were banned from the securities industry for three years and two years, respectively.
A summary of the SEC Penalties Act of 2012 follows:
Update Civil Money Penalties for Securities Law Violations. The bill modernizes and updates the maximum money penalties that may be obtained from individuals and entities charged with securities law violations in administrative and civil actions.
Most Serious Violations. The maximum penalty for an individual charged with the most serious violations (i.e., 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 (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) 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 (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.
Other Violations. The maximum penalties for individuals and entities charged with other violations would be revised as follows:
1. The maximum penalty for an individual charged with less serious violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (i.e., second tier violations) could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation. 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.
2. The maximum penalty for an individual charged with violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (i.e., first tier violations) could not exceed, for each violation, $10,000 or the gross pecuniary gain as a result of the violation. 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.
Penalties for Recidivists. 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 (a) criminally convicted of securities fraud or (b) is subject to a judgment or order concerning securities fraud.
Violations of Injunctions or Bars. 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.