Senate bill would boost penalties on Wall Street securities law violations

Two senators are introducing bipartisan legislation that would give regulators more power to crack down on securities laws violations.

Sens. Jack Reed (D-R.I.) and Chuck Grassley (R-Iowa) are offering a bill that would allow the Securities and Exchange Commission (SEC) to substantially increase fines for misbehavior, directly link the size of the penalties to the scope of investor losses and raise the financial stakes for repeat offenders.

“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," said Reed, chairman of the Banking Subcommittee on Securities, Insurance, and Investment that oversees the SEC.

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"The law needs to change to ensure the punishment fits the crime."

In a letter sent to Reed in November, SEC Chairman Mary Schapiro requested more power for her agency to impose penalties several times larger than currently possible, arguing that current limits on monetary punishments can dwarf the wrongdoing. The SEC can penalize individual violators a maximum of $150,000 per offense and institutions $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, Schapiro said.

The measure would increase the cap for most serious securities laws violations to $1 million for each violation for individuals and $10 million for entities.

“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."

Grassley said he especially likes the increased penalties for repeat offenders in this bill. "That should help change the dynamic of business as usual. If this legislation is enacted, as I hope it will be, I expect the SEC to use these new penalties. The SEC doesn’t always use all of the penalties at its disposal, and it should.”

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 repeat offenders who have been convicted of securities fraud or subject to SEC administrative relief within the past five years.

The agency would be able to assess these types of penalties in-house, not just in federal court.

In a recent case between the SEC and two former Bear Stearns hedge fund managers who were indicted on charges of wire and securities fraud that cost investors $1.6 billion, the SEC was forced to settle for civil penalties of $800,000 and $250,000, respectively.

Neither of the former executives admitted nor denied the allegations and were banned from the securities industry for three years and two years, respectively, the lawmakers said. 

Last year, the SEC brought 735 enforcement actions that resulted in $2.8 billion in penalties and returned funds to harmed investors.