Bi-Partisan Senate Bill Seeks to Give SEC Power to Levy Tougher Fines on Investment Advisers

July 26, 2012

U.S. Senators Jack Reed (D – RI) and Chuck Grassley (R – IA) introduced the Stronger Enforcement of Civil Penalties Act (“SEC Penalties Act”) on Monday to “strengthen the U.S. Securities and Exchange Commission’s (“SEC”) ability to crack down on securities laws violations.” The SEC Penalties Act could have a serious impact on investment advisers and broker/dealers who violate securities laws.

The proposed SEC Penalties Act breaks violations down into three tiers. The third tier is major violations “involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses or substantial pecuniary gain.” The SEC Penalties Act increases the cap on penalties for major violations by individuals from $150,000 per offense to $1 million and for institutions it raises the cap from $725,000 to $10 million. When the fine is tied to ill-gotten gains of the actions, the SEC can triple the penalty. The second tier involves “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” The maximum penalty for individuals with these tier two violations is $100,000 or the gross amount of pecuniary gain. The maximum for institutions involved in less series violations is $500,000 or the gross pecuniary gain. The lowest tier is for violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. The maximum penalty for individuals is $10,000 or gross pecuniary gain and for institutions it is $100,000 or the gross pecuniary gain from the action.

The current law only allows the SEC to penalize individuals up to $150,000 per major offense and institutions up to $725,000. It also only allows penalties up to the amount of ill-gotten gain when taken to federal court. If the SEC handles the matter itself, it cannot extend that level of penalty.

“In order to protect taxpayers and investors, we need tougher anti-fraud laws and forceful oversight of Wall Street.  The law needs to change to ensure the punishment fits the crime,” Reed said. Some of these financial institutions that are ‘too big to fail’ have also become ‘too big to care.’ If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent,” added Grassley. Full comments from Reed and Grassley and details on the SEC Penalties Act can be read at Reed’s website.

A recent example illustrates the SEC’s lack of power to penalize securities law violations. It involved hedge fund managers who were indicted on charges of wire and securities fraud costing investors over $1 billion and the SEC was forced to settle with the hedge fund managers for $800,000 and $250,000. The prososed SEC Penalties Act allows the SEC to penalize individuals either up to $1 million, three times the gross pecuniary gain, or  the losses incurred by victims as a result of the violation and penalize institutions $10 million, three times the gross pecuniary gain, or the losses incurred by victims.

The SEC Penalties Act could have a significant impact on investment advisers and broker/dealers. It is a steep deterrent because it could put a significant strain or even run investment advisers and broker/dealers out of business altogether. The penalties increase for repeat offenders making it even more of a deterrent tool to keep investment advisers and broker/dealers from participating in any such actions.

If passed, the SEC Penalties Act provides significantly sharper teeth for the SEC to penalize those who are involved in securities laws offenses. Stay tuned to RIA Compliance Consultants for updates on the SEC Penalties Act.

Posted by Bryan Hill
Labels: SEC