WASHINGTON, DC – In an effort to protect investors and strengthen oversight and accountability of Wall Street, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA), reintroduced bipartisan legislation this week to strengthen the Securities and Exchange Commission’s (SEC) ability to crack down on violations of securities laws.

The Stronger Enforcement of Civil Penalties Act (“SEC Penalties Act”) would update and strengthen the SEC’s civil penalties statute 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 securities law violators.  The goal of this legislation is to create meaningful penalties to serve as an effective deterrent to crack down on fraud.

Under existing law, the SEC is constrained to penalizing violators in some cases to a maximum of $223,229 per offense and institutions to $1,116,140.  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 administratively.

This bill strives to make potential and current offenders think twice before engaging in misconduct by increasing the maximum civil monetary penalties permitted by statute, directly linking the size of the maximum penalties to the amount of losses suffered by victims of a violation, and substantially raising the financial stakes for repeat offenders of our nation's securities laws.

Specifically, 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.  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.  The agency would be able to assess these types of penalties in-house, and not just in federal court.

The bill was introduced this week amidst an SEC probe into weather executives from Silicon Valley Bank improperly sold shares before the bank collapsed.

“It’s simple: the SEC needs to get tougher on fraud and this bipartisan bill will enhance the ability of securities regulators to protect investors, deter bad behavior, and punish repeat offenders. When Wall Street is trading billions of dollars, miniscule penalties are not an effective deterrent.  Millions of Americans depend on the stock market to help secure their retirement and send their kids to college.  They shouldn’t have to suffer undue risk or incur losses while violators of securities laws get away with a minimal fine and a slap on the wrist.  Investors deserve real protection.  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 Senator Reed, a senior member of the Senate Banking Committee.

“If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent,” Senator Grassley said. “It’s just the cost of doing business. A penalty should mean something, and it should get the recidivists’ attention. I welcome the increased penalties for repeat offenders in this bill. That step should help change the dynamic of business as usual. As we’ve seen this week, there should be strong penalties in place ahead of time so that we don’t have to protect the markets from bad actors after the fact.”

 

SUMMARY: S. 837 - The SEC Penalties Act of 2023

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:

  • 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.

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 held criminally or civilly liable for 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.