The United States Senate is introducing a bill with bipartisan support to try to increase the effectiveness of fines levied by the Securities and Exchange Commission (SEC). The bill is being sponsored by Democratic Senator Jack Reed of Rhode Island who is the Chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment, and by Republican Senator Chuck Grassley who is a Ranking Republican Member in the Judiciary Committee.
The bill is being introduced as a way to ensure a change in culture for investments firms who often associate the small fines levied against them as the cost of doing business. Currently, the maximum penalty for a firm is $725,000 and for an individual is $150,000. What usually ends up happening when the SEC issues a fine is essentially nothing, the companies pay the cost, write it off as part of the business cost and continue to do that for which they were fined. Mr. Reed states it very clearly, “If they (the companies) 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”.
The proposed bill is planned to be introduced on August 6th, when the Senate reconvenes and is crafted to allow the SEC to have more power when it comes down to flexing its muscle. It will not only increase the personal fine maximum to $1 million and the firm fine maximum to $10 million, but also allow the SEC to triple the penalty when it is tied to the amount of ill-gotten gains or investor losses. It will also allow for the creation of a system by which repeat offenders, which are those who have gotten convicted of securities fraud or have been reprimanded by the SE once in the last five years, to get the fine cap tripled, meaning that they could potentially get fined up to $30 million. The biggest change though, could be the ability to assert these fees within the SEC, without having to go through the federal court system, thus saving time and money for regulators.
The authors of the bill are hoping that this will be the beginning of a new era in which bad behavior is properly punished, and not continued. There is a fundamental problem with the current structure which prevents the regulators from doing their job, which is what the authors of this bill are trying to address. Senator Grassley said it best, “If a fine is just decimal dust for a Wall Street firm, that’s not a deterrent, it’s just the cost of doing business. A penalty should mean something, and it should get the recidivists’ attention”. What these Senators are attempting to do is shift the current status quo to “help change the dynamic of business as usual” as Senator Grassley stated.
There is a chance that the bill will not be voted during this congressional session, but the authors seem to be determined to see this change occur, which means that if it does not happen this session they would have to present it again during the next session, which commences in January with the new members.