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House Committee Moves to Bolster SEC Enforcement Regime

Legislation

A key House committee has moved forward on a package of bills that, among other things, would expand the Securities and Exchange Commission’s civil monetary penalty authority and extend the statute of limitations for imposing such penalties.  

The House Financial Services Committee on July 16 approved eight separate bills that would implement a broad array of consumer, investors and small business protections. Two of these bills include the Stronger Enforcement of Civil Penalties Act of 2019 (H.R. 3641) and the Strengthening Fraud Protection Provisions for SEC Enforcement Act of 2019 (H.R. 3701). 

Stronger Enforcement of Civil Penalties Act

Originally introduced by Rep. Katie Porter (D-CA), H.R. 3641 would increase the SEC’s statutory limits on civil monetary penalties, directly link the size of these penalties to the scope of harm and associated investor losses, and substantially raise the financial stakes for repeat securities law violators. It passed the Financial Services Committee by a party-line vote of 33-25.

According to a summary, the bill would increase the per-violation cap applicable to the most serious securities laws violations from $181,071 to $1 million per violation for individuals and from $905,353 to $10 million per violation for entities. The legislation would also triple the penalty cap for recidivists who have been held criminally or civilly liable for securities fraud within the preceding 5 years. The SEC would be able to assess these types of penalties through administrative action and not just in federal court. 

In citing a need for the legislation, a committee memorandum explains that this increased authority is consistent with that requested by former SEC Chair Mary Schapiro and agreed to by former SEC Chair Mary Jo White. White had previously noted in a letter to the Senate that the federal securities law imposes constraints on the penalties that a court or the SEC can assess because the gross amount of the pecuniary gain to a defendant may be small relative to the seriousness of the violation and the resulting harm to investors.

Additionally, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets in June heard witness testimony stating that the current law “one-size-fits-all approach” does not fit well with the varied universe of securities violations and the legislation “provides alternative measures for setting civil fines to deter appropriately.” 

Strengthening Fraud Protection 

H.R. 3701 – originally introduced by Rep. Vicente Gonzalez (D-TX) – would provide the SEC with a 10-year statute of limitations for civil monetary penalties, beginning on the date at which the violation occurred. The committee also passed this legislation by a party-line vote of 33-25.

In general, an action or proceeding brought or instituted by the Commission under any provision of the securities laws for a civil monetary penalty may be brought not later than 10 years after the alleged violation. The legislation also specifies that the period of limitations would not run during any time when an alleged violator is absent from or has no reasonably ascertainable place of abode or work within the United States.

As for the purported need for this legislation, the committee points to the U.S. Supreme Court’s 2013 ruling in Gabelli v. SEC, holding that the SEC has a 5-year limit to seek a civil penalty against a defendant which begins the date the violation occurs – not the date the SEC discovers it. By providing the SEC with a 10-year limitation, H.R. 3701 would essentially overturn that holding. 

At the same June hearing before the Subcommittee, Georgetown University Professor Urska Velikonja contended that if the Gabelli ruling remains the governing law for civil monetary penalties in securities enforcement cases, “securities violators could defraud investors with impunity, so long as they avoid prosecution for 5 years.” Former SEC prosecutor Jordan Thomas echoed that statement, noting that the legislation would help strengthen the SEC’s “enforcement arsenal” because “many of the largest and most egregious securities violations occur over extended periods of time.”

What’s Next?

H.R. 3641 and H.R. 3701 will next move to the full House of Representatives, where they will likely be approved. What’s unclear is whether there will be any Republican support in the Senate. 

During the House Financial Services Committee’s consideration of the legislation, Republican members held firm in their opposition to the bills, but there is a history of bipartisan support with similar legislation. In the last Congress, for example, provisions comparable to those contained in H.R. 3641 were included in legislation that was approved by the House and put forward by the former Republican House Financial Services Committee Chairman, Rep. Jeb Hensarling (TX). 

What’s more, related legislation has been introduced in the Senate on a bipartisan basis by Sens. Mark Warner (D-VA) and John Kennedy (R-LA). Their Securities Fraud Enforcement and Investor Compensation Act of 2019 (S. 799) would give the SEC a broader range of tools to seek compensation for investors who’ve lost money to investment scams and would extend the period for which the SEC can pursue a claim on an investor’s behalf from 5 years to 10. 

In addition, under S. 799 the SEC would retain the power to bring disgorgement claims for up to 5 years. The SEC would also gain the authority to file restitution claims, allowing it to recover funds and refund investors the full amount of their losses, up to 10 years after the fact. 

 


 

 

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