Wednesday, November 30, 2011

SEC Chair Schapiro Asks Senators for Statutory Changes Enhancing the Commission’s Enforcement Program

In a letter to Senators Jack Reed (D-RI) and Larry Crapo (R-ID), SEC Chair Mary Schapiro requested statutory changes that would substantially enhance the effectiveness of the SEC enforcement program by addressing existing limitations. The SEC seeks five specific statutory enhancements to its enforcement authority that collectively would allow the Commission to impose appropriate monetary penalties for serious violations and authorize greater penalties for recidivists. Senator Reed is Chair of the Securities Subcommittee and Senator Crapo is the Ranking Member.

The first legislative change suggested by the SEC Chair would increase the per violation cap applicable to the most serious violations of the federal securities laws (tier three violations) to $1 million per violation for individuals and $10 million per violation for entities. Chairman Schapiro said that these increases would ensure that a third tier penalty has an appropriate deterrent on both individual and corporate violators and is not just viewed as a cost of doing business.

The second proposed change would amend the maximum tier three penalty to authorize penalties equal to three times the gross amount of pecuniary gain to the defendant and make a calculation method based on the gross amount of pecuniary gain available in SEC administrative proceedings for all violations. This change would allow the SEC to address situations where the actual pecuniary gain to the violator is relatively small compared to the nature or magnitude of the wrongdoing, noted Chairman Schapiro, and would eliminate the current disparity between the penalty relief available in a federal district court and an SEC administrative proceeding.

The third proposed statutory change would authorize a calculation method for tier three penalties based on the amount of investor losses incurred as a result of a defendant’s violations that would be available in both civil and administrative actions. This would allow the SEC to consider more directly the harm inflicted on investors in seeking appropriate penalties. Chairman Schapiro also noted that implementing this change may require the SEC to expend significant additional resources to determine and prove the amount of investor losses in particular cases, such as conducting event studies or retaining expert witnesses to evaluate and opine on such losses.

These three changes would, in the Chair’s view, provide the SEC with greater flexibility regarding monetary penalties in cases where the misconduct is very serious, repeated or involves substantial losses, but current statutes do not allow for an appropriately significant penalty.

The fourth proposed change would authorize the SEC to seek a penalty enhancement in the current action equal to three times the otherwise applicable penalty cap if within the preceding five years a defendant has been criminally convicted of securities fraud or become subject to a judgment or order imposing monetary, equitable or administrative relief in any SEC action alleging fraud.

The fifth legislative change would be authorizing the SEC to seek a civil penalty for violations of a federal court injunction or an industry bar obtained by the SEC from a federal court or imposed by the Commission, including officer and director bars, penny stock bars, and other court-ordered equitable disqualifications. This approach, said Chairman Schapiro, would be more effective and flexible than the limited and cumbersome civil contempt remedy.

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