Thursday, August 18, 2016

Former enforcement director asks SEC to limit retroactive application of penalty increases

By John Filar Atwood

Three WilmerHale attorneys, including former SEC Enforcement Division director William McLucas, have written to the SEC to urge it to restrict the application of its civil penalty increases to violations that occur after November 2, 2015. The attorneys said that the SEC’s language in announcing the penalty increases was unclear, but that retroactive application of any increases to violations that occurred prior to November 2, 2015 exceeds the Commission’s authority.

Background. On July 1, the SEC adopted an interim final rule to implement the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The interim final rule adjusts for inflation the maximum amount of civil monetary penalties under the federal securities statutes. By law federal agencies are required to adjust for inflation their maximum civil monetary penalties at least once every four years.

Wilmer’s concerns. In a comment letter to the Commission, the WilmerHale attorneys noted that the release announcing the SEC’s penalty increases stated that the adjustments apply to all penalties imposed after the effective date of the interim final rule, “including to penalties imposed for violations that occur before the effective date of the amendment.” The attorneys expressed concern that this language could indicate the SEC’s intention to apply the penalty increases to violations that occurred before November 2, 2015.

The attorneys noted that the statute authorizing the penalty increases became law on November 2, 2015. It directed agencies to adopt catch-up penalty increases effective no later than August 1, 2016. Although the statute provided that penalty increases could apply to violations predating the regulation increasing the penalty, the attorneys stated, it did not specify whether the penalties apply to violations predating the November 2, 2015 passage of the statute.

The attorneys argued that the statute’s silence on this question is important given the holding in Landgraf v. USI Film Products that a statute does not apply retroactively to conduct prior to the passage of the statute unless the statutory language “requires this result.” The attorneys also cited the Supreme Court’s observation that it has never “read a statute substantially increasing the monetary liability of a private party to apply to conduct occurring before the statute’s enactment.”

Other agencies’ approach. The attorneys advised the Commission that most other federal agencies, including the Department of Justice, are not applying their penalty increases to violations that occurred prior to November 2, 2015. This demonstrates that the statute does not “require the result” the SEC is proposing, the attorneys noted, and they urged the Commission to restrict the application of its penalty increases to violations after November 2, 2015.

No comments: