U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) will introduce legislation intended to embolden the Securities and Exchange Commission by raising limits on securities fines, linking penalties to scope of harm, and setting harsher punishments for repeat offenders

Under existing law, the SEC can only penalize individual violators a maximum of $150,000 per offense and institutions $725,000. In some cases, the SEC may calculate penalties to equal the gross amount of illicit gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.

The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2012, which Reed and Grassley were expected to file on Monday, 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.

In cases where the penalty is tied to the amount of money gained by the bad action, the SEC would be able to triple the penalty.  It would also triple the penalty cap for recidivists who have been convicted of securities fraud or subject to SEC administrative relief within the past five years. The Commission would be able to assess these types of penalties in-house, and not just in federal court.

“Some of these institutions that are ‘too big to fail' have also become ‘too big to care,'” Reed, chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment, said in a statement. “If they look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit, the cycle of misconduct will continue. The law needs to change to ensure the punishment fits the crime.”

“If a fine is just decimal dust for a Wall Street firm, that's not a deterrent,” Grassley said.  “It's just the cost of doing business. A penalty should mean something, and it should get the recidivists' attention.”

“If this legislation is enacted, as I hope it will be, I expect the SEC to use these new penalties,” he added. “The SEC doesn't always use all of the penalties at its disposal, and it should.”

To bolster the case for their legislation, Reed and Grassley point out that last year the SEC successfully brought 735 enforcement actions, which resulted in $2.8 billion in penalties and returned funds. However, in a recent case between the SEC and two former Bear Stearns hedge fund managers indicted on charges of wire and securities fraud that cost investors $1.6 billion, it was forced to settle for civil penalties of $800,000 and $250,000. 

If passed, the maximum penalty for an individual charged with less serious violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (second tier violations) could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation. The maximum penalty that could be obtained from entities would cap at $500,000 per violation or gains made as a result of the violation.

The maximum penalty for an individual charged with violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement (first tier violations) could not exceed, for each violation, $10,000 or the illicit gain as a result of the violation; entity violations would be limited to $100,000.

The maximum amount of the penalty for repeated misconduct would be three times the applicable cap when the person or entity, within the five years preceding the act is criminally convicted of securities fraud or subject to a judgment or order concerning securities fraud.

The bill also provides the authority to seek civil penalties for violations of previously imposed injunctions. Each violation of an injunction or order will be considered a separate offense; 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 will be considered a separate offense.