The SEC’s View on Historic Fines

The SEC’s View on Historic Fines

When former federal prosecutor Mary Jo White was appointed the Chairwoman of the Securities and Exchange Commission (“SEC”), everyone in the securities industry knew right away that they could expect a more aggressive and stringent regulatory body.

Over the years, the SEC has grown sizable claws, which have been used to clamp down on wrongdoing in the sector. The biggest weapon wielded by the SEC has obviously been “civil monetary penalties.” Fines have been levied against corporations and individuals found to be breaking the laws enacted by Congress or regulations set by the SEC. As the pressure to sort out the banking and investment sector has grown since the days of the financial crisis so too have the fines the SEC has been able to dole out to the perpetrators found liable.

Monetary punishments have set record highs in the past few years. According to the SEC Chairwoman, these fines are an important instrument in the strong enforcement program her department is trying to develop. She believes these historic numbers set a precedent and ensure that the industry’s big players sit up and take notice. It may encourage them to get their house in order before the SEC has a chance to do so.

Time and again, Mary Jo White has defended her strategy in tackling the wrongdoing perceived to be prevalent on Wall Street. She has managed to enforce rules requiring public companies to admit to wrongdoing in many cases instead of settling and declaring neither innocence nor guilt.

However, not everyone in the industry is on board with the SEC’s strategy of fining public companies such gigantic amounts for actions taken by their management. They argue that the regular shareholders of these publicly traded firms are being unjustly penalized for what those in the management office have done. They want the rules governing the industry to evolve and effectively target managers who are responsible for any illegal behavior.

The way the ’London Whale’ scandal was handled by the regulators and JP Morgan Chase & Co. demonstrates that the debate still rages on behind closed doors. However, the SEC shows no signs of relenting and looks set to fine companies even larger amounts as the years go by.

The SEC stands by its use of monetary penalties, which usually come as either disgorgement, i.e., repayment of “ill-gotten gains” or civil money penalties. Civil money penalties are given to the U.S. Department of Treasury in such cases. Since the Sarbanes-Oxley Act was passed in 2002, amounts recovered for disgorgement by the SEC are redistributed as compensation to the victims of the financial misconduct. The “Fair Funds” program, which is required by the same act, ensures investors are compensated for their losses in the case of any securities law violations.

From the SEC’s perspective, the money collected from firms or individuals involved in such violations goes to the victims, and thus the faith in the capital markets is bolstered while the incentive for wrongdoing is greatly reduced.

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