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Bill May Let SEC Get Tougher on Fraud

Jul 20th 2015
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outside the Securities and Exchange Commission
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A newly introduced bipartisan bill could toughen the US Securities and Exchange Commission's (SEC) pursuit of Wall Street fraudsters, and raise and link penalties to the degree of harm caused and for repeat offenders.

Sens. Jack Reed (D-RI) and Chuck Grassley (R-IA) want their Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2015 to increase the muscle behind the SEC's civil penalties.

“More than half of all US households own securities,” Reed said in a prepared statement on his website. “They depend on the market to help 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. This bill gives the SEC more tools to demand meaningful accountability from Wall Street.”

Specifically, the bill proposes these penalties:

Individuals facing the most serious violations. The maximum penalty for 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 would be, per violation, the greater of $1 million, three times the gross pecuniary gain, or the losses to victims.

Institutions facing the most serious violations. The maximum penalty couldn't exceed, for each violation, the greater of $10 million, three times the gross pecuniary gain, or the losses to the victims.

Individuals facing less serious violations. The maximum penalty for violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (second-tier violations) would be $100,000 per violation, or the gross pecuniary gain as a result of the violation in some cases.

Institutions facing less serious violations. The maximum penalty would be $500,000 for each second-tier violation, or the gross pecuniary gain.

Non-fraud violations. Individuals facing first-tier violations (not involving fraud, deceit, manipulation, or deliberate or reckless disregard of regulations) could be penalized $10,000 for each violation or the gross pecuniary gain. For institutions, the maximum penalty would be $100,000 for each violation, or the gross pecuniary gain.

Repeat offenders. The maximum penalty would be three times the applicable cap if an individual or entity was found liable for securities fraud within the preceding five years.

Violations of injunctions or bars. Violators can face civil penalties and each violation shall be considered a separate offense. Each day of noncompliance shall be considered a separate offense.

In a prepared statement, Grassley said that Wall Street firms shouldn't consider fines as “decimal dust” that is simply the cost of doing business. “A penalty should mean something, and it should get the recidivists' attention,” he said. “I especially like the increased penalties for repeat offenders in this bill.  That should help change the dynamic of business as usual.”

Under existing law, individuals in some cases can only face a maximum penalty of $160,000 per offense. For institutions, the maximum is $775,000. In other cases, the SEC may charge penalties equal the gross amount of the illegal gain only if the matter goes to federal court.

If the proposed bill is enacted, Grassley said he hopes the SEC actually puts it to use. “The SEC doesn't always use all of the penalties at its disposal, and it should,” he said.

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