Commissioner Louis Aguilar, in remarks at SEC Speaks last Friday, called for a revamping of the Commission’s 2006 Statement on Corporate Penalties, discussed here. While Commissioner Aguilar makes a good point, any reassessment should begin with a careful undertaking in the broader context of evaluating all of the SEC’s remedies as part of a comprehensive program, not just corporate penalties. See Remarks of Commissioner Luis Aguilar, SEC Speaks, Washington, D.C., February 5, 2010.

Commissioner Aguilar focused only on corporate penalties. Penalties are changing the complexion of SEC enforcement from remedial to punitive. The Commission has had the authority to impose penalties since 1990 with the passage of the Remedies Act. Reliance on huge penalties, however, really began with the WorldCom settlement. Since then, there has been an increasing use of large corporate penalties.

Penalties are punitive and seek to assure future compliance through deterrence. The idea is that imposing a huge fine punishes the wrong doer. Others will be deterred from engaging in wrongful conduct by seeing the huge penalty. The validity of this rationale is difficult to assess at best. It does, no doubt, give SEC enforcement a harsh edge which seems more in tune with criminal enforcement. Interestingly, despite the increasing use of large penalties in recent years, respect for SEC enforcement has declined.

Prior to the Remedies Act of 1990, the SEC relied on equitable remedies. The injunction and related ancillary relief were the only remedies available. Those remedies sought to ensure future compliance, but not through a hard edge punitive approach. Rather, the Commission took a forward-looking, creative approach, crafting mechanisms which would help bring a new ethics to the marketplace. New compliance procedures, monitors and other devices were employed not to punish, but to effectively give the Commission a continuing presence inside the company in a kind of on-going monitoring program. While some may have questioned the effectiveness of this approach, there is little doubt that SEC enforcement was highly respected and effective during those years.

The Remedies Act, with the authority to impose penalties, was viewed by Congress in 1990 as a supplement to the Commission’s arsenal. Penalties were not intended as a substitute for existing remedies, but only as a supplement to be used in certain situations. The idea was to add authority to an existing, highly effective program, not replace it.

By 2006, there was an increasing reliance on corporate penalties by the Commission. Under that statement issued that year, the use of corporate penalties was largely a function of two factors: 1) whether there is a direct benefit to the corporation as a result of the violation; and 2) if the penalty will recompense or further harm the injured shareholders.

Commissioner Aguilar termed the 2006 guidelines approach “misguided” and called for it to be revamped. Since the purpose of a penalty is to punish and deter, the key question in determining whether there should be a penalty is the conduct, not the factors in the 2006 release. The current guidelines do not focus on the conduct and, accordingly, should be revamped, according to Commissioner Aguilar. The Commissioner did not outline specific proposals for revamping the guidelines.

While Commissioner Aguilar raises an important point, any revamping of SEC remedies requires a broader focus. A broader inquiry should be undertaken to determine not just the standards for corporate penalties, but the overall purpose of SEC remedies and how they are to be used. While punishment and deterrence through large penalties may be appropriate in some instances, clearly there are others where the traditional remedial approach may be more effective. Focusing on only one option such as penalties misses the broader context and runs the risk of over emphasizing one remedy at the expense of others. Accordingly, when there is a reassessment of corporate penalties it should be done in the context of analyzing all of the remedial options available to SEC Enforcement to ensure that the most effective approach is used going forward.

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