SEC's Corporate Penalty Statement Turns 20: Call for Updates to Strengthen Accountability in Evolving Corporate Landscape

Statement Summary

The press release discusses the SEC's Corporate Penalty Statement, established in 2006 to provide a structured analysis for imposing civil penalties on corporations for securities violations. It emphasizes the need for penalties to consider the impact on shareholders, especially those who suffered from the violations. Over the years, application of the Statement has evolved, revealing challenges such as changes in shareholder composition and differing corporate structures, like SPACs. The author argues that while the principles of the Statement remain relevant, they require updates to address modern complexities. Furthermore, it stresses the importance of holding individuals accountable for corporate misconduct, reinforcing that penalties should not merely burden shareholders. The anniversary of the Corporate Penalty Statement serves as an opportunity to refine its framework and align enforcement mechanisms with current market dynamics.

Original Statement

On January 19, 2006, in the clear blue Florida sky, an Atlas V rocketed off from Cape Canaveral carrying a small spacecraft called New Horizons. This mission, planned by NASA—that is the National Aeronautics and Space Administration, the other NASAA, the North American Securities Administrators Association—exited the Earth at more than 36,000 miles per hour for a long-term “voyage to visit the planet Pluto and then beyond.” That same month, the Securities and Exchange Commission launched something of similar importance, at least in my view: its Statement Concerning Financial Penalties, also known as the “Corporate Penalty Statement.” Announced in conjunction with two settled accounting fraud cases, one with a $50 million civil penalty and the other with no penalty, the Corporate Penalty Statement was issued in a unanimous, 5-0 decision under the leadership of Chairman Cox, after over 40 hours of meetings reconciling differing views amongst the Commissioners.

The Statement is a concise document with a specific mission: to provide an analytical framework so when the Commission imposes a civil penalty on a corporate issuer, it can explain why, and that explanation should rest on what Congress authorized and why it authorized it. As a measure approved by Commission vote, the Statement should have a similar stature to other regulatory guidance provided by the Commission, whether in amicus briefs, adjudicatory opinions, administrative orders, interpretive releases, or otherwise.

Key Considerations of the Corporate Penalty Statement

The Corporate Penalty Statement starts with the most salient consideration on the imposition of civil penalties: the underlying statutory authority. In passing the Remedies Act of 1990, Congress gave the Commission authority to seek civil penalties against corporate issuers. In its accompanying report, the Senate Banking Committee recognized that shareholders may ultimately bear the cost. The report stated that a corporate penalty should be sought where shareholders received an improper benefit, and that in situations where they were the principal victims, the “Committee expects that the SEC, when appropriate, will seek penalties from the individual offenders acting for a corporate issuer.”

The Corporate Penalty Statement is grounded in the statute and its legislative history. The Statement identifies two principal considerations:

• Whether the corporation received a direct benefit from the violation, such as reduced expenses, increased revenues, or some other unjust enrichment. The strongest case for a penalty is one in which shareholders received an improper benefit due to the violation; the weakest is one in which shareholders are the principal victims of the securities law violation.
• The degree to which the penalty will compensate or further harm injured shareholders.

The Statement then lists seven additional factors:

• The need to deter the particular type of offense;
• The extent of injury to innocent parties;
• Whether complicity was widespread within the corporation;
• The level of intent;
• The difficulty of detecting the offense;
• The presence or absence of remedial steps;
• The extent of cooperation with the Commission and other authorities.

Reflections on the Corporate Penalty Statement

This year marks the twentieth anniversary of the Statement – and also my twentieth year of continuous employment at the Commission. In that sense, I have had an insider’s view on how the Statement has fared over those two decades. After twenty years, we ought to look back at why the Statement was needed, consider how it has fared, and then consider questions that confront the Commission today in the application of the Statement’s principles.

So how has the framework fared? Like the New Horizons mission, its journey has had a number of stages. The Commission attempted, in 2007, to give the Statement practical force through a pilot program in which the Commission provided feedback to the staff on potential penalties prior to reaching a settlement with the proposed defendants. However, that approach was discontinued in 2009 by Chair Schapiro. In the years that followed, the Corporate Penalty Statement and its factors were seldom visible in reasoning the public could see.

Yet, the Commission continued to impose civil penalties against corporate issuers in significant amounts. By fiscal year 2024, the Commission was announcing some of the largest financial remedies in its history. Upon becoming the Acting Chairman on January 20, 2025, one of my first directives was for the staff to follow the Corporate Penalty Statement, which has never been rescinded or withdrawn.

Modern Challenges and Considerations

In some ways, the Statement has parallels to the New Horizons mission. Seven months after New Horizons launched towards Pluto, while it was en route, astronomers voted that Pluto was no longer a “planet.” The spacecraft was still headed to the same place, but the objective to which it was headed had been redefined. The Corporate Penalty Statement is in a similar position. Its principles still point in the right direction. But the world to which the Commission applies them today is not the same world in which they were written.

Some areas that require attention include:

• Shareholder Composition: The Statement’s framework implicitly recognizes that for most public companies, shareholders are a continuously changing group.
• Use of Fair Funds: When funds from civil penalties are returned to harmed investors who are also shareholders of the penalized company, they are in effect paying themselves, less the cost of distribution.
• Intent Element: The Statement’s intent factor assumed a meaningful distinction between deliberate fraud and lesser conduct, but significant penalties have been imposed for violations that do not require intent.
• New Forms of Organization: The rise of SPACs presents challenges for the 2006 framework regarding who pays penalties.
• Dual-Class Stock Structures: Civil penalties may disproportionately impact public shareholders who had little influence on company decisions.
• Whistleblower Program Interaction: The whistleblower program's potential awards may be affected by the size of corporate penalties.
• Direct and Material Benefits: The definition of what constitutes a corporate benefit from an offense needs clarification.

Conclusion

These developments suggest that additional refinements need to be made to the application of the Corporate Penalty Statement. Its central thesis—that shareholders ultimately pay corporate penalties, which must be justified with that in mind—matters as much today as when it was first published. The twentieth anniversary of the Corporate Penalty Statement is a fitting occasion for the Commission to consider supplementing, or revising, the Statement to address situations that were not originally contemplated.

Moreover, a framework that asks the Commission to think carefully before penalizing shareholders is credible only if the Commission is equally willing to pursue the people responsible. Corporations do not act on their own. Every misstatement in a filing was drafted, reviewed, and signed by someone. Corporate misconduct flows through people, and deterrence must flow back to them.

In conclusion, the Corporate Penalty Statement can continue to serve its purpose, but it requires course corrections to adapt to the evolving landscape of corporate governance and accountability.