Bill Would Bolster SEC Penalties

A bill being introduced this week by Senators Jack Reed (D-Rhode Island) and Charles Grassley (R-Iowa) would bolster penalties handed out by Securities and Exchange Commission (SEC).

“During a series of hearings, it became increasingly clear to me that in order to protect taxpayers and investors, we need tougher anti-fraud laws and better oversight of Wall Street,” Senator Reed said. “Some of these institutions that are ‘too big to fail’ have also become ‘too big to care.’ We need to end the cycle of misconduct where such institutions can look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit.”

The Enforcement of Civil Penalties Act of 2012 will “strengthen the ability of the SEC to crack down on violations of securities laws by updating its civil penalties statute,” Reed said.

“This legislation will ensure that the punishment better fits the crime 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 offenders of our nation’s securities laws.”

The bill would increase the per violation cap for the most egregious securities laws violations to $1 million per offense for individuals and $10 million per offense for entities.

Under existing law, the SEC can only penalize individual securities law violators a maximum of $150,000 per offense and institutions $725,000 per offense.

The bill will also toughen penalties by allowing penalties equal to three times the economic gain of the violator.

It also provides a new calculation method that includes the amount of associated investor losses as part of the penalty determination.

“This should allow the SEC to address situations where the actual economic gain to the violator is relatively small compared to the extent of the wrongdoing or the harm caused to investors,” Reed said.

“In the recent case involving Citigroup, existing law did not even entitle the SEC to recover the amount actually lost by investors,” Reed said. “Estimated investors losses were about $700 million, but the SEC proposed to settle the case with Citigroup for only $285 million. This amount was what was estimated to be close to the total monetary recovery that the SEC itself could have obtained if it had gone to trial. Under our bill, this amount could have been much larger, and would have taken into account the economic gain to Citigroup, in addition to investor losses.”

The bill includes two statutory changes that would substantially improve the ability of the SEC’s enforcement program to ratchet up penalties as recidivism occurs.

One would allow the SEC to triple the applicable penalty cap for recidivists who, within the preceding five years, have been criminally convicted of securities fraud or been the subject of a judgment or order imposing monetary, equitable, or administrative relief in any action alleging SEC fraud.

The other would allow the SEC to seek a civil penalty if an individual or entity has violated an existing federal court injunction or bar imposed by the SEC. Many believe this approach would be more efficient, effective, and flexible than the current civil contempt remedy.

Finally, under the SEC Penalties Act, the penalty relief available in administrative proceedings will be the same as it is in district court.
In essence, the SEC will be able to assess these types of penalties in-house, and not just obtain them in federal court.

“Given the JP Morgan trading scandal, issues arising from the Facebook IPO, and the manipulation of LIBOR, it is clear much still needs to be done to improve transparency and restore confidence in our financial system,” Reed said. “The nearly one-half of all U.S. households that own securities deserve a strong cop on the beat that has the tools it needs to go after fraudsters and the difficult cases arising from our increasingly complex financial markets. Our economy’s success depends in no small part on restoring confidence in our capital markets.

The SEC Penalties Act will help by giving the SEC more tools to demand meaningful accountability from Wall Street. It will enhance the SEC’s ability to protect investors and crack down on fraud and I urge my colleagues to cosponsor and join us in supporting this important legislation.”

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