Bill Introduced to Significantly Increase SEC Penalties

Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced bipartisan legislation in the Senate to give the Securities and Exchange Commission (SEC) another tool to crack down on violations of securities laws by increasing penalties fines by almost 10 times. In the Press Release, Senator Reed, a senior member of the Senate Banking Committee was quoted stating “This bipartisan bill gives the SEC the firepower it needs to crack down on Wall Street fraud and punish repeat offenders … This bill gives the SEC more tools to demand meaningful accountability from Wall Street.”

The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2015 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. It would also triple the penalty cap for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years and the agency would be able to assess these types of penalties in-house, and not just in federal court.

Under existing law, individual violators are generally capped at maximum of $160,000 per offense and institutions are capped at $775,000. In other cases, the SEC may calculate penalties to equal the gross amount of any ill-gotten gain, but only if the matter is litigated in federal court, not when the SEC handles a case administratively.

It appears that the bill, if passed, will give the SEC a substantially stronger position when dealing with violators of securities laws. To that end, Senator Grassley was also quoted stating that “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”.

With respect to other violations, the bill proposes maximum penalties for individuals and entities charged with other violations would be revised as follows:

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 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 (i.e., 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.

With respect to the penalties for recidivists, the bill proposes that the maximum amount of the penalty for repeated misconduct would 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.

Finally, the bill would provide the SEC with the authority to seek civil penalties for violations of previously imposed injunctions or bars obtained or entered under the securities laws and it provides that each violation of an injunction or order would 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 would be considered a separate offense.