In interim final rulemakings (“IFRs”) issued over the summer, federal financial regulators (including the SEC, CFTC, FERC, OCC, FDIC, CFPB, and the Federal Reserve), at Congress’ direction, systematically increased the maximum civil monetary penalty amounts (“CMPs”) that can be imposed for violations of the statutes they administer and enforce.  Although these adjustments were made in order to account for inflation, in some cases they have yielded significantly higher potential penalties.  The agencies, however, have not taken a uniform approach as to which violations are subject to the increased CMPs, which may create confusion in application that ultimately requires a judicial resolution.

Statutory background

Ever since 1996, federal agencies have been required to adjust for inflation any maximum CMPs authorized by their governing statutes.  Such adjustments, however, were only required every 4 years, and were capped at 10%, which contributed to a decline in the real value – and deterrent effect – of the penalties.

Congress addressed this late last year by enacting the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the “2015 Act”), which requires federal agencies to adjust the maximum CMPs through:  1) an initial “catch-up” adjustment implemented by IFRs effective no later than August 1, 2016; and 2) annual inflation adjustments published by January 15 of every year thereafter.

Penalties may increase significantly

Penalties in some enforcement actions may increase significantly under the formula for calculating the inflation adjustments under the 2015 Act.  For example, for certain insider trading violations by controlling persons, the previous maximum CMP of $1.525 million under the Securities Exchange Act of 1934 is now nearly $2 million ($1,978,690).  Overall, the SEC has said that the inflation adjustments required by the 2015 Act increase the maximum CMPs administered by the agency by approximately 7.67%.

The maximum CMPs for manipulation offenses enforced by the CFTC and FERC also have jumped – by almost $100,000 for the CFTC (from $1.025 million to $1,098,190), and by almost twice that for FERC (from $1 million to $1,193,970).  These increases may not seem high in the abstract – but, given FERC’s statutory authority to impose manipulation penalties “per violation, per day” and the CFTC’s view that each day of a manipulative scheme is a separate violation, the extra $100,000-$200,000 in CMPs can add up fast.

The difference in the amount of the inflation adjustment for manipulation offenses prosecuted by the CFTC and FERC exists because the calculation of the adjustments under the 2015 Act depends in part on when the statutory CMP was established or last set by law.  This has created some quirky results.  For example, the CFTC’s maximum CMP for violations other than manipulation has increased to $167,728 if the enforcement action is filed in federal district court, but has increased only to $152,243 if the enforcement action is brought administratively.  This does not seem to be much of an issue for the SEC, though, as most of its previous penalty amounts were last set by law in the same year.

Retroactivity of increased CMPs is unclear

The increased CMPs apply when the penalty is assessed after the effective date of an agency’s IFR making the catch-up adjustment.  For most agencies, that date was August 1, 2016 (though some IFRs became effective in July).  The 2015 Act provides that the increased CMPs can be applied in these circumstances even if the underlying conduct occurred prior to that date.

Where the financial regulators’ rules vary is on whether the increased CMPs will be applied even if the underlying conduct occurred prior to the date that the 2015 Act became law – November 2, 2015:

  • Conservative approach: The rules issued by the Department of Justice and most non-financial regulatory agencies answer that question “no.” And some financial regulators, such as FinCEN and OFAC in the Treasury Department, have followed this approach.
  • Aggressive approach: By contrast, some financial regulators explicitly provide that their higher, inflation-adjusted CMPs apply to misconduct that occurred prior to November 2, 2015. For example, the CFPB rules state that its adjustments “shall apply to civil penalties assessed after [the IFR’s effective date] regardless of when the violation for which the penalty is assessed occurred.” The IFR issued by FERC does likewise.
  • Seemingly aggressive approach: Other financial regulators, such as the Federal Reserve and the SEC, seem to apply their increased CMPs to pre-November 2, 2015 misconduct, but are not as explicit. The Federal Reserve’s IFR states that it will apply the adjusted maximum penalty levels “to any penalties assessed on or after August 1, 2016,” and the SEC’s rules provide in similar fashion that its adjustments “apply to all penalties imposed after August 1, 2016, including to penalties imposed for violations that occur before August 2016” (emphasis added).
  • Vague approach: The intent of other financial regulators on this issue is rather vague. The OCC rules provide that the maximum amount applies to penalties assessed on or after August 1, but its IFR does not refer to “any penalties” or “all penalties” as do the IFRs issued by the Federal Reserve and SEC. And the IFR issued by the FDIC simply states the maximum CMPs “that may be assessed on or after August 1, 2016, after the required inflation adjustment.”
  • Inexplicable approach: The approach of the CFTC, like that of the OCC and FDIC, is unclear regarding its applicability to conduct that pre-dates November 2, 2015. On another point, though, the CFTC has taken a very conservative – and rather inexplicable – approach. Seemingly alone among federal agencies, the CFTC’s IFR limits the increased CMPs not just to enforcement cases where the penalties are imposed on or after August 1, 2016 – but to where the enforcement action itself was initiated on or after that date.

Conclusion

The application of heightened CMPs pursuant to the 2015 Act, where the conduct underlying the penalty occurred prior to enactment of the 2015 Act, may be subject to challenge. See, Landgraf v. USI Film Products, 511 U.S. 244, 264 (1994) (“congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result,” quoting Bowen v. Georgetown University Hospital, 488 U.S. 204, 208 (1988)).

Nevertheless, those who find themselves defending an enforcement action brought by a federal financial regulator in which a penalty has not yet been assessed, must be aware of the new CMPs that could be imposed.  The degree of the risk presented will be determined by the specific statute authorizing the penalty (and the resulting amount of the inflation adjustment), and the specific agency involved (and the extent of retroactivity it has provided for in its rules).

Photo of Angelo Carosio Angelo Carosio

Angelo has been a LexBlog employee for over 8 years, starting on the Success team and then moving into a developer role. These days he mostly spends his time working on the back-end of the LexBlog platform fixing bugs and working on new…

Angelo has been a LexBlog employee for over 8 years, starting on the Success team and then moving into a developer role. These days he mostly spends his time working on the back-end of the LexBlog platform fixing bugs and working on new features for our customers.