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SEC Penalty Policy to Change: Report

The basic argument against fining companies is that shareholders, who may have been victimized by corporate misdeeds, are penalized again when a fine reduces earnings.
Stephen Taub, CFO.com | US
April 13, 2007

The Securities and Exchange Commission may soon assess smaller fines on some companies that settle charges with the regulator, according to The Washington Post.

The proposal — which is not yet public and will certainly generate a fair amount of debate — must receive approval from the five SEC commissioners before it can take effect. According to the newspaper, which cites current and former officials, the initiative is being led by chairman Christopher Cox, who has indicated a desire to avoid split decisions among the five commissioners.

SEC spokesman John Nester told the Post that the pilot program would affect a relatively small percentage of cases and would make negotiations between businesses and enforcers more efficient. He also told the paper the plan "will increase investor protection because it will give our enforcement division a stronger hand in settlement negotiations."

The basic argument against fining companies is that shareholders, who may have been victimized by corporate misdeeds, are penalized again when a fine reduces earnings. Commissioner Paul S. Atkins and other officials have asserted that corporate executives who break the law should pay the price themselves, the Post pointed out.

Disagreements regarding corporate fines have slowed the resolution of several cases, many involving backdated stock options, according to numerous published accounts. Last year, for example, the Department of Justice and the SEC filed criminal and civil fraud charges against Gregory Reyes, former CEO, president, and chairman of Brocade Communications Systems; SEC staffers are now weighing a fine against the company itself, according to the Post.

In January 2006, the SEC clarified its policy on fines; since then, according to the Post, the commission has urged its enforcement division to reconsider certain cases.




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