Lawmakers seek tougher SEC fraud penalties

Institutions could face fines of up to $10 million for each SEC violation under a bipartisan effort to crack down on serious fraud cases and repeat offenders.

A bipartisan bill that would allow the US Securities and Exchange Commission (SEC) to charge higher fines for fraud violations has been introduced in the US Senate. The bill, sponsored by Jack Reed (D-RI) and Chuck Grassley (R-IA), would increase the statutory limits on civil monetary penalties to $1 million per individual and $10 million per institution.

Under existing law, the SEC in some cases can only penalize individual violators a maximum of $160,000 per offense and institutions a maximum of $775,000 per offense.  In other 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 through its in-house administrative proceedings.

The Stronger Enforcement of Civil Penalties Act (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. It would also triple the penalty cap for repeat offenders 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, not just in federal court.

The changes apply to “third tier violations” – the most serious 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.

“Investors deserve real protection, and 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, a senior member of the Senate Banking Committee, in a statement.

“If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent,” Grassley added. “It’s just the cost of doing business. A penalty should mean something, and it should get the recidivists’ attention.”

The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs, which will consider it before possibly sending it on to the Senate as a whole.