Bill would dramatically jack up SEC fines on securities firms

Jul 29, 2012 @ 12:01 am

By Mark Schoeff Jr.

Bipartisan legislation introduced last week in Congress would allow the Securities and Exchange Commission to inflict more pain on securities law violators, which could result in higher compliance costs for investment advisers and brokers.

The law would allow the SEC to levy fines of up to $1 million per securities violation on individuals and up to $10 million per violation on financial firms. Under current law, SEC civil penalties are capped at $150,000 per offense for individuals and $725,000 per offense for firms.

Sharply higher fines would spur financial firms to limit potential exposure and make them more prone to boot brokers if a customer raises any complaint, even if it isn't verified, according to Harley Lance Kaplan, managing principal of advisory firm Beta Industries Inc.

“This bill makes [registered] representatives much more vulnerable to broker-dealers and brokerage houses because we become a greater liability to them,” he said.

It is unclear how far the legislation will get this year. The session ends in December, and any bill not signed into law by then will have to be reintroduced when the new Congress convenes next year.

For now, the bill is generating discussion about putting more muscle into SEC enforcement.

“If you want to change conduct, you have to change the math,” said Pat Huddleston, chief executive of Investor's Watchdog LLC and author of “The Vigilant Investor” (Amacom, 2011). “The bill is a positive step forward.”

The heftier penalties would quickly get the attention of compliance officers.

“If you're a director of compliance, you want to make sure people down the line don't run afoul of a rule that would cost you much more now if you were found to violate it,” Mr. Huddleston said.


The measure was written by Sen. Jack Reed, D-R.I., chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, and Sen. Charles Grassley, R-Iowa, ranking member of the Senate Judiciary Committee.

They are attempting to give the SEC more latitude on sanctions at a time when its fraud penalties are being criticized as too weak.

In November, U.S. District Judge Jed Rakoff declined to approve a $285 million settlement between the SEC and Citigroup Inc. over a case in which the bank allegedly misled investors on $1 billion worth of mortgage-linked securities. He ruled that the agreement didn't serve the public interest.

The case remains on appeal.

Under the measure, the SEC could impose the multimillion-dollar fines or charge three times the amount of ill-gotten gains or investor losses, whichever was greater. In addition, the SEC could triple the penalty for violators who had been convicted of fraud or received an administrative sanction from the commission within the previous five years.

The lawmakers want to make securities law violations more than just a cost of doing business.

“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,” Mr. Reed said in a statement.

A priority for Mr. Grassley is to help the SEC stop repeat offenders.

“I especially like the increased penalties for repeat offenders in this bill,” Mr. Grassley said in a statement. “That should help change the dynamic of business as usual.”

Mr. Grassley, who has been a consistent Capitol Hill critic of the SEC, also views the tougher penalties as a way to help the commission's enforcement professionals make a real impact in fighting securities fraud, according to an aide.

“All of a sudden, you get more-motivated people,” said the aide, who asked not to be identified. “It becomes a self-fulfilling prophesy, and the agency becomes more effective.”

The legislation gives the SEC the punishment latitude called for by Chairman Mary Schapiro in a Nov. 28 letter to Mr. Reed. In fact, the bill contains just about every statutory change to penalty limits that she outlined.

“The chairman welcomes efforts to expand our authority to seek monetary penalties for the most serious securities law violations,” Kevin Callahan, an SEC spokesman, said in a statement.


One expert, however, doubts that raising fines would be an effective deterrent to financial fraud.

“It's easy and popular for Congress to say, "We're going to make these penalties harsher,' but that doesn't address the enforcement problem the SEC is having,” said Ellen Brotman, a partner at Montgomery McCracken Walker & Rhoads LLP.

Although the SEC set a record for enforcement actions and fines last year, Congress should provide the commission with funding for more personnel and more financial expertise so that it can prevent harm to investors, she said.

The SEC can already impose its power through moral suasion, according to Mark Schonfeld, co-chairman of the securities enforcement practice at Gibson Dunn & Crutcher LLP.

“I don't think people view SEC enforcement as a cost of doing business in general,” he said. “For most people in the industry, an SEC action alone is a career-ending event.”

But the bill may end up supporting legal careers, according to Mr. Kaplan.

“The only one that ever wins in this stuff is lawyers,” he said. Twitter: @markschoeff


What do you think?

View comments

Recommended for you

Upcoming Event

Oct 23


Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Transamerica's Boan: Crafting better retirement income conversations

Retirement income is a challenge for investors. How can advisers have better conversations about retirement income? Transamerica's Joseph Boan offers insights and tips for advisers.

Latest news & opinion

As DOL fiduciary rule dies, variable annuities come alive — sales up for first time since 2014

Indexed annuity sales also broke their previous quarterly sales record.

Cambridge Investment Research bags mid-sized broker-dealer

Broker Dealer Financial Services, an IBD with 150 reps and advisers, and $3.5 billion in assets, will become a Cambridge OSJ.

HighTower on prowl for new CEO, Weissbluth to become chairman

Move is latest in Chicago-based RIA consolidator's effort to expand senior leadership team.

What's in a name? For TCA by ETrade, everything

Trust Company of America is gone, and there's big buzz over the name change. But turning the custodian into an industry powerhouse will take a lot longer — if it happens at all.

When it comes to regulating AI in financial services, murky waters are ahead

Laws are unclear on how the technology fits in with compliance.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print