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From Securities Regulation Daily, July 9, 2015

Bill would massively increase SEC’s administrative penalty authority

By Matthew Garza, J.D.

The SEC will have an even bigger stick to wield in administrative proceedings if a bill introduced today by Senators Chuck Grassley (R-Iowa) and Jack Reed (D-RI) is signed into law. The agency, already under fire from the defense bar for taking full advantage of its increased administrative powers under the Dodd-Frank Act, would be able to levy civil penalties in cease and desist proceedings against both individuals and entities at roughly ten times the rate of current limits under the Stronger Enforcement of Civil Penalties Act of 2015. The bill would also triple the cap on penalties levied against repeat offenders, defined as those held criminally or civilly liable for securities fraud within the preceding five years.

“If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent,” said Sen. Grassley.  “It’s just the cost of doing business.” He said he especially liked the targeting of repeat offenders featured in the bill because it would help “change the dynamic of business as usual.” He added that he expects the SEC to use these new penalties if they become law. “The SEC doesn’t always use all of the penalties at its disposal, and it should.”

Third tier penalties. The maximum penalty for especially egregious offenses, or “third tier” administrative penalties as defined by the Securities Act, would increase to the greater of: (i) $1 million per offense for natural persons or $10 million per offense for entities; (ii) three times the gross amount of pecuniary gain to the offender; or (iii) the losses incurred by the victims as a result of the violation. Securities Act Sec. 8A(g)(2)(C) currently sets the limits at $150,000 and $725,000 for individuals and entities, respectively. The agency can currently impose penalties at an amount equal to the gross amount of the ill-gotten gain if the case goes to federal court.

First and second tier penalties. The bill sets the cap for first tier penalties, for each violation, at $10,000 for natural persons or the gross pecuniary gain, and $100,000 or the gross pecuniary gain for entities. The maximum currently set for first tier penalties are $7,500 per offense for a natural person or $75,000 for an entity.

The bill calls for second tier penalties to increase to $100,000 or the gross pecuniary gain, and $500,000 or the gross pecuniary gain for entities. Second tier penalties are currently capped at $75,000 per offense for a natural person or $375,000 for an entity.

Recidivists. A fourth tier would also be added to Securities Act Sec. 8A that would specify that the maximum amount of penalty for each offense shall be three times the otherwise applicable fine if the offending party has been held criminally or civilly liable for securities fraud within the preceding five years.

Violations of injunctions or bars. The bill further provides increased penalty authority for violations of previously imposed injunctions or bars. Each violation of an injunction would be considered a separate offense, and in the event of an ongoing failure to comply, “each day of the failure to comply with the injunction or order shall be deemed a separate offense.”

Sen. Reed said that more than half of U.S. households depend on the market to secure their retirement and send their kids to college.  “They shouldn’t have to suffer undue risk or incur losses while securities law violators get away with a slap on the wrist. Investors deserve real protection, and the law needs to change to ensure the punishment fits the crime.”

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