Start Preamble

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (the “Commission”) is adopting a final rule to implement the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the “2015 Act”), which amended the Federal Civil Penalties Inflation Adjustment Act of 1990 (the “Inflation Adjustment Act”), as previously amended by the Debt Collection Improvement Act of 1996 (the “DCIA”). The 2015 Act requires all agencies to annually adjust for inflation the civil monetary penalties that can be imposed under the statutes administered by the agency. Pursuant to this requirement, this final rule performs the first annual adjustment for inflation of the maximum amount of civil monetary penalties administered by the Commission under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and certain penalties under the Sarbanes-Oxley Act of 2002. This adjustment will apply to all penalties imposed after the effective date of this final rule for violations after November 2, 2015. For violations that occurred on or before November 2, 2015, the Commission is reinstating the penalty amounts in the Commission's prior penalty adjustments performed under the DCIA.

DATES:

Effective Date: January 18, 2017.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

James A. Cappoli, Assistant General Counsel, Office of the General Counsel, at (202) 551-7923, or Stephen M. Ng, Senior Counsel, Office of the General Counsel, at (202) 551-7957.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

I. Background

This final rule implements the 2015 Act,^[1] which amended the Inflation Adjustment Act.^[2] The Inflation Adjustment Act previously had been amended by the DCIA ^[3] to require that each federal agency adopt regulations at least once every four years that adjust for inflation the civil monetary penalties (“CMPs”) that could be imposed under the statutes administered by the agency. Pursuant to the requirements of the DCIA, the Commission previously adopted regulations in 1996, 2001, 2005, 2009, and 2013 to adjust the maximum amount of the CMPs that could be imposed under the statutes the Commission administers.^[4]

Start Printed Page 5368

The 2015 Act replaces the inflation adjustment mechanism prescribed in the DCIA with a new mechanism for calculating the inflation-adjusted amount of CMPs. Each agency was first required to use this new mechanism to adjust the maximum amount of its CMPs ^[5] in an initial “catch-up” adjustment.^[6] Pursuant to this requirement, the Commission issued an interim final rule adjusting its CMPs on June 27, 2016 (the “June 2016 interim final rule”).^[7] After performing the catch-up adjustment, each agency must now perform annual adjustments for inflation, and publish these adjustments in the Federal Register by January 15 of each calendar year.^[8]

A CMP is defined in relevant part as any penalty, fine, or other sanction that: (1) Is for a specific amount, or has a maximum amount, as provided by federal law; and (2) is assessed or enforced by an agency in an administrative proceeding or by a federal court pursuant to federal law.^[9] This definition applies to the monetary penalty provisions contained in four statutes administered by the Commission: The Securities Act of 1933; the Securities Exchange Act of 1934 (the “Exchange Act”); the Investment Company Act of 1940; and the Investment Advisers Act of 1940. In addition, the Sarbanes-Oxley Act of 2002 provides the Public Company Accounting Oversight Board (the “PCAOB”) authority to levy civil monetary penalties in its disciplinary proceedings pursuant to 15 U.S.C. 7215(c)(4)(D).^[10] The definition of a CMP in the Inflation Adjustment Act encompasses such civil monetary penalties.^[11]

II. Adjusting the Commission's Penalty Amounts for Inflation

This final rule implements the first of the required annual adjustments under the 2015 Act for all penalties under the Securities Act, the Exchange Act, the Investment Company Act, and the Investment Advisers Act, and certain penalties under the Sarbanes-Oxley Act.

As the baseline in calculating these new penalty amounts, the Commission uses the penalty amounts in the Commission's June 2016 interim final rule. The penalty amounts in that interim final rule used the new inflation adjustment mechanism in the 2015 Act as part of the “catch-up adjustment” required by that Act. The Commission affirms that the amounts in the June 2016 interim final rule were correct and that the adjusted amounts were appropriate.^[12]

Pursuant to the 2015 Act, the Commission now adjusts the penalty amounts in the June 2016 interim final rule by multiplying these amounts by the percentage change between the Consumer Price Index for all Urban Consumers (“CPI-U”) for October 2015, and the October 2016 CPI-U.^[13] OMB has provided its calculation of this multiplier (the “CPI-U Multiplier”) to agencies.^[14] After multiplying the June 2016 interim final rule amounts by this multiplier, the Commission must round all penalty amounts to the nearest dollar to determine the new inflation-adjusted penalty amounts.

For example, the CMP for certain insider trading violations by controlling persons under Exchange Act Section 21A(a)(3) ^[15] was readjusted for inflation on August 1, 2016, to $1,978,690. To determine the new CMP under this provision, the Commission multiplies the current CMP by the CPI-U Multiplier of 1.01636, and rounds to the nearest dollar. Thus, the new CMP for Exchange Act Section 21A(a)(3) is $2,011,061.

Below is the Commission's calculation of the new penalty amounts for the penalties it administers.

Pursuant to the 2015 Act, the Commission has determined that the adjusted penalty amounts in this final rule (and all penalty adjustments performed pursuant to the 2015 Act) will apply to penalties imposed after the effective date of the adjustment for violations that occurred after November 2, 2015, the 2015 Act's enactment date. Start Printed Page 5370Consistent with this determination, the Commission is reinstating the penalty amounts contained in its prior penalty adjustments under the DCIA for violations that occurred from December 10, 1996, through November 2, 2015.^[16]

The Commission's prior penalty adjustments under the DCIA were previously included in the Code of Federal Regulations at 17 CFR 201.1001through 1005 and Tables I through V to Subpart E. In the June 2016 interim final rule, Section 201.1001 and Table I were replaced with the new penalty amounts from the interim final rule, and Sections 201.1002 through 201.1005 and Tables II to V were removed. As part of this final rule, the information in these tables will be added back into the Code of Federal Regulations. However, for ease of reference, the information in these tables will be consolidated and included in a single section (17 CFR 201.1001(a)) and Table (Table I to Section 201.1001).

Further, each penalty adjustment performed pursuant to the 2015 Act supersedes the prior adjustments under that Act. Thus, the penalty amounts in this final rule supersede the amounts in the June 2016 interim final rule (except that for the first day this final rule is effective, the prior year's penalty amounts shall apply, see 28 U.S.C. 2461 note Sec. 6). Because of this, the amounts in the June 2016 interim final rule will be removed from the Code of Federal Regulations. The penalty amounts in this final rule, however, need only be published in the Federal Register and will not be added to the Code of Federal Regulations, in accordance with the 2015 Act and OMB guidance.^[17] As a result, the Commission is amending 17 CFR 201.1001 to add subsection (b) to indicate that all penalty adjustments performed under the 2015 Act will be published in the Federal Register and will be made available on the Commission's Web site.^[18] This framework will avoid the necessity of revising the Code of Federal Regulations every year to include the new inflation-adjusted penalty amounts. Section 201.1001(b) will also clarify that penalty adjustments performed pursuant to the 2015 Act will only apply to violations that occurred after November 2, 2015, the enactment date of the 2015 Act.

III. Procedural and Other Matters

The Commission is required by the 2015 Act to adjust the CMPs within its jurisdiction for inflation using a statutorily prescribed formula and the 2015 Act mandates that agencies perform this adjustment annually by January 15th of each year.^[19] The 2015 Act further provides that these annual adjustments shall be made “notwithstanding section 553 of title 5, United States Code.” ^[20] In light of this Congressional mandate, the Commission is not required to provide for public notice and comment pursuant to the notice and comment provisions of the Administrative Procedure Act.^[21] Under the Regulatory Flexibility Act, a regulatory flexibility analysis is required only when an agency must publish a general notice of proposed rulemaking.^[22] Because public notice and comment is not required for this final rule, a regulatory flexibility analysis is not required. Further, this rule does not contain any collection of information requirements as defined by the Paperwork Reduction Act of 1995 as amended.^[23]

IV. Economic Analysis ^[]

The Commission is sensitive to the costs and benefits that result from its rules. This regulation merely adjusts CMPs for inflation as required by the 2015 Act. It has no impact on disclosure or compliance costs. The Commission further notes that the CMPs ordered in SEC proceedings and PCAOB disciplinary proceedings in fiscal year 2016 totaled approximately $1.28 billion. The inflationary adjustment required by the 2015 Act results in the increase of the maximum amount of the CMPs administered by the Commission of 1.636%. Assuming that the Commission is successful in obtaining civil monetary penalties in fiscal year 2017 in similar proportion to that obtained in fiscal year 2016, the inflationary adjustment pursuant to this final rule would result in an increase in the CMPs ordered of approximately $21 million.

This potential increase, however, overstates the effect of the rule. First, this figure represents the amount of penalties that could be potentially ordered, whereas the amount of penalties collected in any given year—the amount of penalties that would affect the economy—can be lower than the ordered amount. Second, the adjusted penalty amounts will not apply to all penalties ordered, but rather only to those penalties whose associated violations occurred after November 2, 2015. Third, penalties imposed in insider trading cases brought in district court are based on the profit gained or loss avoided as a result of the violation rather than by reference to a statutory dollar amount that is affected by this regulation.^[25] The average annual amount of penalties obtained in insider trading cases from FY 2010 through FY 2016 is $95.7 million. Third, in many cases where the Commission has obtained large civil monetary penalties, such penalties were calculated on the basis of the defendant's gross pecuniary gain rather than the maximum penalty dollar amount set by statute that will be adjusted by the proposed rule.^[26] In addition, the intent of the new regulation is merely to keep pace with changes in the economy, not to impose new costs. Therefore, for the instances in which CMPs affected by this rulemaking are imposed, the Commission does not believe that adjusting civil monetary penalties pursuant to the 2015 Act will significantly affect the amount of penalties it obtains beyond that necessary to keep pace with inflation.

The benefit provided by the inflationary adjustment to the maximum CMPs is that of maintaining the level of deterrence effectuated by the CMPs, and not allowing such deterrent effect to be diminished by inflation. The costs of implementing this rule should be negligible because the only change from the current, baseline situation is determining potential penalties using a new maximum dollar amount.Start Printed Page 5371

V. Statutory Basis

The Commission is adopting these revisions to 17 CFR part 201, subpart E pursuant to the directives and authority of the Federal Civil Penalties Inflation Adjustment Act of 1990, Public Law 101-410, 104 Stat. 890-892 (1990), codified at 28 U.S.C. 2461 note, as amended.

Start List of Subjects

List of Subjects in 17 CFR Part 201

• Administrative practice and procedure
• Claims
• Confidential business information
• Lawyers
• Penalties
• Securities

End List of Subjects

Text of Amendment

For the reasons set forth in the preamble, part 201, title 17, chapter II of the Code of Federal Regulations is amended as follows:

Start Part

PART 201—RULES OF PRACTICE

Subpart E—Adjustment of Civil Monetary Penalties

End Part Start Amendment Part

1. The authority citation for Part 201, Subpart E continues to read as follows:

End Amendment Part Start Authority

Authority: 28 U.S.C. 2461 note.

End Authority Start Amendment Part

2. Revise 201.1001 to read as follows:

End Amendment Part Start SignatureEnd Signature End Supplemental Information

Footnotes