SEC asks Congress to let it hand out heftier fines

Bad actors on Wall Street may want to look out: The Securities and Exchange Commission (SEC) wants Congress to substantially boost the size of monetary penalties it can dish out for misbehavior.

In a letter sent Monday, SEC Chairman Mary Schapiro said the Wall Street watchdog needs access to penalties several times larger than currently possible, arguing that current limits on monetary punishments can dwarf the actual malfeasance. The letter was sent to Sen. Jack Reed (D-R.I.), who chairs the Senate Banking subcommittee that oversees the agency.

Currently, the SEC can only penalize individual violators a maximum of $150,000 per offense and entities $725,000. The agency can sometimes calculate penalties to equal the gross amount of ill-gotten gain but only when the matter reaches federal court, not when the SEC handles it administratively.

Those limits pose "substantial constraints" on the SEC's ability to levy penalties, which sometimes come up far short of the damage actually done by the misbehavior. For example, Schapiro argued that a company that misrepresents its financial condition might only reap a small benefit for committing that fraud, but its action exposes investors to massive losses should the firm fail because of hidden problems.

"In those cases, the maximum penalty available to the commission may not adequately reflect the seriousness of the violation or the impact on victims of the fraud," she wrote.

Instead, Schapiro asked Congress to boost potential penalties to $1 million for individuals and $10 million for entities. And in cases in which the penalty is tied to the amount of money gained by the bad action, the SEC should be able to penalize up to three times that amount. The agency should also be able to assess that type of penalty in-house, and not just in court.

Finally, Congress should authorize a third type of financial penalty that allows the SEC to take into account investor losses for severe violations, which would allow the agency to directly consider the damage inflicted on investors when levying fines.

For investors or institutions that repeatedly run afoul of the SEC, Schapiro asked for the ability to triple potential penalties to discourage repeat offenders. And if a financial participant previously had been barred from engaging in financial matters, the SEC should be able to tack on additional fine for violating that ban as well.

At the end of the letter, Schapiro said SEC staff members were drafting legislation to accomplish these goals, which would be passed along shortly.

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