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Regulation and Compliance > Federal Regulation > SEC

SEC Overstepped Authority in Retroactive Civil Fine Hike: Lawyers

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The Securities and Exchange Commission overstepped its authority by embracing a retroactive civil monetary penalty fee hike that could spark lawsuits from broker-dealers and advisors with outstanding fees, securities attorneys warn.

WilmerHale attorneys told the agency in an Aug. 15 letter that the proposed retroactive effect of the SEC’s adjustments to its civil monetary penalty amounts that took effect by interim rule on Aug. 1 could not withstand judicial scrutiny.

Unlike other federal agencies, the SEC seeks to apply its penalty increases to violations that occurred before Nov. 2, 2015, when legislation signed by Congress required federal agencies to make adjustments to civil money penalties to “catch up” with inflation, the attorneys say.

“The SEC’s approach to the penalty increases is likely to generate litigation in enforcement actions as defendants contest the retroactive application of the increases,” Matthew Martens, partner in WilmerHale’s securities department and former chief litigation counsel in the SEC’s enforcement division, told ThinkAdvisor in an email message.

In some instances, Martens adds, “the penalty increases are quite significant, approaching as much 30%.”

The catch-up adjustments allow agencies to increase their penalty amounts by as much as 150% of their Nov. 2, 2015, values, the WilmerHale attorney explains, and agencies must make annual adjustments to their civil money penalties for inflation going forward.

The SEC’s inflation-adjustment hike retroactively affects “unpaid penalties prior to 2015,” the WilmerHale attorneys said, with the SEC being only one of four agencies (out of 22) “to take such a drastic step.”

The WilmerHale attorneys cite an SEC press release announcing the hike, which states: “The adjustments set forth in the amendment apply to all penalties imposed after the effective date of this interim final rule, including to penalties imposed for violations that occur before the effective date of the amendment.”

Said the attorneys: “To the extent the SEC intends by this language to apply the penalty increases to violations that occur before Nov. 2, 2015, we respectfully submit that such retroactive application of the penalty increases is beyond the agency’s authority,” as the statute “says nothing about whether the penalties apply to violations predating the Nov. 2, 2015, passage of the statute directing those increases.”

The Supreme Court “has observed that it has never ‘read a statute substantially increasing the monetary liability of a private party to apply to conduct occurring before the statute’s enactment,’” the WilmerHale attorneys noted, and urged the SEC “to revise its position and restrict the application of its penalty increases to violations that occur after Nov. 2, 2015.”


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