The Securities and Exchange Commission’s (SEC) active enforcement program demands substantial monetary penalties from defendants. Last fiscal year, the SEC ordered approximately $4.2 billion in penalties across 462 enforcement cases, equating to an average of over $9 million per case.
While these hefty fines frequently capture media attention, they often inflict harm on investors and can seem shockingly high relative to the misconduct at hand. Notably, they also overlook Congressional confines on penalty sums.
The Supreme Court will soon get a chance to regulate the SEC’s deleterious penalty practices. It is set to review the definition of the maximum penalty amounts in the securities statutes in the Murphy v. SEC case.
Under current statues, a penalty of anywhere between $11,000 and $1.1 million can be enforced for a violation of the securities laws. However, the SEC has used these laws to extract significantly larger civil monetary penalties from defendants, primarily in settled cases.
For instance, in 2022, several large broker-dealers agreed to pay a $125 million penalty each for not maintaining records of instant messages. A decade prior, Goldman Sachs had to pay a $535 million penalty to the SEC for one single transaction.
Such escalated penalties are possible because the maximum statutory penalty provisions apply to ‘each violation’ of the securities laws, leading to varying interpretations of the number of violations that were committed.
In the Murphy case awaiting Supreme Court review, the courts imposed a fine based on the number of months a defendant had not registered as a broker with the SEC, and on the number of inaccurate zip codes submitted to sellers of securities.
The SEC’s assertion that it, along with the courts, have complete discretion over penalty amounts can have detrimental implications for investors, securities markets, and defendants. Amid these circumstances, businesses could avoid securities markets for fear of unjust enforcement and exorbitant penalty demands, thereby stalling their growth.
By accepting the Murphy case for review, the Supreme Court could question the SEC’s viewpoint, hoping to bring much-needed logic and consistency to the system. It could reexamine why a statute setting a maximum of $1.1 million for each serious violation of securities laws is interpreted to provide the SEC and courts unchecked authority to impose fines ranging in tens or hundreds of millions of dollars.
This article was authored by Andrew Vollmer, a scholar with the Mercatus Center at George Mason University and a former deputy general counsel of the SEC, who supports the Supreme Court’s review of the Murphy case.