[Federal Register Volume 70, Number 29 (Monday, February 14, 2005)]
[Rules and Regulations]
[Pages 7606-7608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-2664]



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Part III





Securities and Exchange Commission





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17 CFR Part 201



Adjustments to Civil Monetary Penalty Amounts; Final Rule

  Federal Register / Vol. 70, No. 29 / Monday, February 14, 2005 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 201

[Release Nos. 33-8530; 34-51136; IA-2348; IC-26748]


Adjustments to Civil Monetary Penalty Amounts

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: This rule implements the Federal Civil Penalties Inflation 
Adjustment Act of 1990, as amended by the Debt Collection Improvement 
Act of 1996. The Commission is adopting a rule adjusting for inflation 
the maximum amount of civil monetary penalties 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.

EFFECTIVE DATE: February 14, 2005.

FOR FURTHER INFORMATION CONTACT: Richard A. Levine, Assistant General 
Counsel, Office of the General Counsel, at (202) 942-0890, or M. Owen 
Donley III, Senior Counsel, Office of the General Counsel, at (202) 
942-0998.

SUPPLEMENTARY INFORMATION:

I. Background

    This rule implements the Debt Collection Improvement Act of 1996 
(``DCIA'').\1\ The DCIA amended the Federal Civil Penalties Inflation 
Adjustment Act of 1990 (``FCPIAA'') \2\ to require that each Federal 
agency adopt regulations at least once every four years, adjusting for 
inflation the maximum amount of the civil monetary penalties (``CMPs'') 
under the statutes administered by the agency.\3\
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    \1\ Pub. L. 104-134, 110 Stat. 1321-373 (codified at 28 U.S.C. 
2461 note).
    \2\ 28 U.S.C. 2461 note.
    \3\ Increased CMPs apply only to violations that occur after the 
increase takes effect.
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    A civil monetary penalty (``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.\4\ This definition covers the 
monetary penalty provisions contained in the statutes administered by 
the Commission. In addition, this definition encompasses the civil 
monetary penalties that may be imposed by the Public Company Accounting 
Oversight Board (the ``PCAOB'') in its disciplinary proceedings 
pursuant to 15 U.S.C. 7215(c)(4)(D).\5\
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    \4\ 28 U.S.C. 2461 note (3)(2).
    \5\ The Commission may by order affirm, modify, remand, or set 
aside sanctions, including civil monetary penalties, imposed by the 
PCAOB. See section 107(c) of the Sarbanes-Oxley Act of 2002, 15 
U.S.C. 7217. The Commission may enforce such orders in Federal 
district court pursuant to Section 21(e) of the Exchange Act. As a 
result, penalties assessed by the PCAOB in its disciplinary 
proceedings should be considered penalties ``enforced'' by the 
Commission for purposes of the Act.
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    The DCIA requires that the penalties be adjusted by the cost-of-
living adjustment set forth in section 5 of the FCPIAA.\6\ The cost-of-
living adjustment is defined in the FCPIAA as the percentage by which 
the U.S. Department of Labor's Consumer Price Index for all-urban 
consumers (``CPI-U'') \7\ for the month of June for the year preceding 
the adjustment exceeds the CPI-U for the month of June for the year in 
which the amount of the penalty was last set or adjusted pursuant to 
law.\8\ The statute contains specific rules for rounding each increase 
based on the size of the penalty.\9\ Agencies do not have discretion 
whether to adjust a maximum CMP, or the methods used to determine the 
adjustment. Although the DCIA imposes a 10 percent maximum increase for 
each penalty for the first adjustment pursuant thereto, that limitation 
does not apply to the adjustments subsequently made.
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    \6\ 28 U.S.C. 2461 note (5).
    \7\ 28 U.S.C. 2461 note (3)(3).
    \8\ 28 U.S.C. 2461 note (5)(b).
    \9\ 28 U.S.C. 2461 note (5)(a)(1)-(6).
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    The Commission administers four statutes that provide for civil 
monetary penalties: The Securities Act of 1933; the Securities Exchange 
Act of 1934; the Investment Company Act of 1940; and the Investment 
Advisers Act of 1940. In addition, the Sarbanes-Oxley Act of 2002 
provides the PCAOB (over which the Commission has jurisdiction) 
authority to levy civil monetary penalties in its disciplinary 
proceedings.\10\ Penalties administered by the Commission were last 
adjusted by rules effective February 2, 2001.\11\ The DCIA requires the 
civil monetary penalties to be adjusted for inflation at least once 
every four years. Therefore, the Commission is directed by statute to 
increase the maximum amount of each penalty by the appropriate 
formulated amount.
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    \10\ 15 U.S.C. 7215(c)(4)(D).
    \11\ See 17 CFR 201.1002.
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    Accordingly, the Commission is adopting an amendment to 17 CFR part 
201 to add section 201.1003 and Table III to Subpart E, increasing the 
amount of each civil monetary penalty authorized by 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. The adjustments set forth in the 
amendment apply to violations occurring after the effective date of the 
amendment.

II. Summary of the Calculation

    To explain the inflation adjustment calculation for CMP amounts 
that were last adjusted in 2001, we will use the following example. 
Under the current provisions, the Commission may impose a maximum CMP 
of $1,200,000 for certain insider trading violations by a controlling 
person. To determine the new CMP amounts under the amendment, first we 
determine the appropriate CPI-U for June of the calendar year preceding 
the year of adjustment. Because we are adjusting CMPs in 2005, we use 
the CPI-U for June of 2004, which was 189.7. We must also determine the 
CPI-U for June of the year the CMP was last adjusted for inflation. 
Because the Commission last adjusted this CMP in 2001, we use the CPI-U 
for June of 2001, which was 178.0.
    Second, we calculate the cost-of-living adjustment or inflation 
factor. To do this we divide the CPI for June of 2004 (189.7) by the 
CPI for June of 2001 (178.0). Our result is 1.0657.
    Third, we calculate the raw inflation adjustment. To do this, we 
multiply the maximum penalty amounts by the inflation factor. In our 
example, $1,200,000 multiplied by the inflation factor of 1.0657 equals 
$1,278,840.
    Fourth, we round the raw inflation amounts according to the 
rounding rules in Section 5(a) of the FCPIAA. Since we round only the 
increased amount, we calculate the increased amount by subtracting the 
current maximum penalty amounts from the raw maximum inflation 
adjustments. Accordingly, the increased amount for the maximum penalty 
in our example is $78,840 (i.e., $1,278,840 less $1,200,000). Under the 
rounding rules, if the penalty is greater than $200,000, we round the 
increase to the nearest multiple of $25,000. Therefore, the maximum 
penalty increase in our example is $75,000.
    Fifth, we add the rounded increase to the maximum penalty amount 
last set or adjusted. In our example, $1,200,000 plus $75,000 yields a 
maximum

[[Page 7607]]

inflation adjustment penalty amount of $1,275,000.\12\
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    \12\ The adjustments in Table III to subpart E of part 201 
reflect that the operation of the statutorily mandated computation, 
together with rounding rules, does not result in any adjustment to 
certain penalties. These particular penalties will be subject to 
slightly different treatment when calculating the next adjustment. 
Under the statute, when we next adjust these particular penalties, 
we will be required to use the CPI-U for June of the year when these 
particular penalties were ``last adjusted,'' rather than the CPI-U 
for 2005.
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III. Related Matters

A. Administrative Procedure Act--Immediate Effectiveness of Final Rule

    Under the Administrative Procedure Act (``APA''), to issue a final 
rule without public notice and comment, an agency must find good cause 
that notice and comment are impractical, unnecessary, or contrary to 
public interest.\13\ Because the Commission is required by statute to 
adjust the civil monetary penalties within its jurisdiction by the 
cost-of-living adjustment formula set forth in section 5 of the FCPIAA, 
the Commission finds that good cause exists to dispense with public 
notice and comment pursuant to the notice and comment provisions of the 
APA.\14\ Specifically, the Commission finds that because the adjustment 
is mandated by Congress and does not involve the exercise of Commission 
discretion or any policy judgments, public notice and comment is 
unnecessary.\15\
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    \13\ 5 U.S.C. 553(b).
    \14\ 5 U.S.C. 553(b)(3)(B).
    \15\ A regulatory flexibility analysis under the Regulatory 
Flexibility Act (``RFA'') is required only when an agency must 
publish a general notice of proposed rulemaking for notice and 
comment. See 5 U.S.C. 603. As noted above, notice and comment are 
not required for this final rule. Therefore, the RFA does not apply.
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    Under the DCIA, agencies must make the required inflation 
adjustment to civil monetary penalties: (1) According to a very 
specific formula in the statute; and (2) within four years of the last 
inflation adjustment. Agencies have no discretion as to the amount of 
the adjustment and have limited discretion as to the timing of the 
adjustment, in that agencies are required to make the adjustment at 
least once every four years. The regulation discussed herein is 
ministerial, technical, and noncontroversial. Furthermore, because the 
regulation concerns penalties for conduct that is already illegal under 
existing law, there is no need for affected parties to have thirty days 
prior to the effectiveness of the regulation and amendments during 
which to adjust their conduct. Accordingly, the Commission believes 
that there is good cause to make this regulation effective immediately 
upon publication.

B. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits that result 
from its rules. This regulation merely adjusts civil monetary penalties 
in accordance with inflation as required by the DCIA, and has no impact 
on disclosure or compliance costs. Furthermore, Congress, in mandating 
the inflationary adjustments, has already determined that any possible 
increase in costs is justified by the overall benefits of such 
adjustments.
    The regulation is in the interest of the public and in furtherance 
of investor protection. The benefit provided by the inflationary 
adjustment to the maximum civil monetary penalties is that of 
maintaining the level of deterrence effectuated by the civil monetary 
penalties, and not allowing such deterrent effect to be diminished by 
inflation.

C. Paperwork Reduction Act

    This rule does not contain any collection of information 
requirements as defined by the Paperwork Reduction Act of 1995 as 
amended.\16\
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    \16\ 44 U.S.C. 3501 et. seq.
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List of Subjects in 17 CFR Part 201

    Administrative practice and procedure, Claims, Confidential 
business information, Lawyers, Securities.

Text of Amendment

0
For the reasons set forth in the preamble, part 201, title 17, chapter 
II of the Code of Federal Regulations is amended as follows:

PART 201--RULES OF PRACTICE

Subpart E--Adjustment of Civil Monetary Penalties

0
1. The authority citation for part 201, subpart E continues to read as 
follows:

    Authority: Pub. L. 104-134, 110 Stat. 1321.


0
2. Section 201.1003 and Table III to subpart E are added following 
Table II to subpart E to read as follows:


Sec.  201.1003  Adjustment of civil monetary penalties--2005.

    As required by the Debt Collection Improvement Act of 1996, the 
maximum amounts of all civil monetary penalties 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 are adjusted for 
inflation in accordance with Table III to this subpart. The adjustments 
set forth in Table III apply to violations occurring after February 14, 
2005.

                      Table III to Subpart E.--Civil Monetary Penalty Inflation Adjustments
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                                                                                      Maximum
                                                                   Year penalty   penalty amount     Adjusted
          U.S. Code citation             Civil monetary penalty     amount was      pursuant to       maximum
                                               description         last adjusted       last       penalty amount
                                                                                    adjustment
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                                       Securities and Exchange Commission
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15 U.S.C. 77t(d)......................  For natural person......            2001          $6,500          $6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses or
                                         risk of losses to
                                         others.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses or
                                         risk of losses to
                                         others.
15 U.S.C. 78ff(b).....................  Exchange Act/failure to             1996             110             110
                                         file information
                                         documents, reports.
15 U.S.C. 78ff(c)(1)(B)...............  Foreign Corrupt                     1996          11,000          11,000
                                         Practices--any issuer.

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15 U.S.C. 78ff(c)(2)(C)...............  Foreign Corrupt                     1996          11,000          11,000
                                         Practices--any agent or
                                         stockholder acting on
                                         behalf of issuer.
15 U.S.C. 78u-1(a)(3).................  Insider Trading--                   2001       1,200,000       1,275,000
                                         controlling person.
15 U.S.C. 78u-2.......................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses to
                                         others/gains to self.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses to
                                         others/gain to self.
15 U.S.C. 78u(d)(3)...................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses or
                                         risk of losses to
                                         others.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses or
                                         risk of losses to
                                         others.
15 U.S.C. 80a-9(d)....................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses to
                                         others/gains to self.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses to
                                         others/gain to self.
15 U.S.C. 80a-41(e)...................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses or
                                         risk of losses to
                                         others.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses or
                                         risk of losses to
                                         others.
15 U.S.C. 80b-3(i)....................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses to
                                         others/gains to self.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses to
                                         others /gain to self.
15 U.S.C. 80b-9(e)....................  For natural person......            2001           6,500           6,500
                                        For any other person....            2001          60,000          65,000
                                        For natural person/fraud            2001          60,000          65,000
                                        For any other person/               2001         300,000         325,000
                                         fraud.
                                        For natural person/                 2001         120,000         130,000
                                         substantial losses or
                                         risk of losses to
                                         others.
                                        For any other person/               2001         600,000         650,000
                                         substantial losses or
                                         risk of losses to
                                         others.
15 U.S.C. 7215(c)(4)(D)(i)............  For natural person......            2002         100,000         110,000
                                        For any other person....            2002       2,000,000       2,100,000
15 U.S.C. 7215(c)(4)(D)(ii)...........  For natural person......            2002         750,000         800,000
                                        For any other person....            2002      15,000,000      15,825,000
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    By the Commission.

    Dated: February 4, 2005.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-2664 Filed 2-11-05; 8:45 am]
BILLING CODE 8010-01-P