Commissioner Crenshaw Urges Reconsideration of SEC Policy on Penalties

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Caroline A. Crenshaw disagreed with the SEC's approach to determining the severity of corporate penalties.

In a speech before the Council of Institutional Investors, Ms. Crenshaw argued that that the SEC should not take injury to shareholders into account when imposing penalties. The current SEC approach to corporate penalties was established by a unanimously issued 2006 statement. Ms. Crenshaw stated that "this myopic approach [to taking into account shareholder injury] is flawed" because: (i) corporate penalties should relate to the "egregiousness of the actual misconduct," not the impact on the shareholders; and (ii) the benefits of a company's misconduct include "economic and intangible benefits." She asserted that a company should not incur a less severe penalty because its total benefit cannot be calculated "with exact precision."

Ms. Crenshaw recommended that additional data be gathered regarding assessment of corporate penalties, and that the SEC should place greater weight on the company's self-reporting, cooperation and self-remediation. Ms. Crenshaw clarified that "cooperation credit" requires proactive identification and remediation of wrongdoing that "substantially" shortens the SEC's investigation.

Ms. Crenshaw also recommended that when setting penalties, the SEC should focus on:

  • the extent of harm to victims and the number of harmed investors;

  • the degree of difficulty in detecting the violation (i.e., setting higher penalties for violations that require more SEC resources to investigate); and

  • the "pervasiveness or complicity within the organization" (i.e., corporate culture).


There is not that much variance between the SEC's 2006 statement on the justification for penalties and the position of Commissioner Crenshaw. The factors that Commissioner Crenshaw cites as significant to the determination of penalties are generally consistent with not only the 2006 statement but also with other statements by the SEC, particularly as to the significance of factors such as cooperation.

Ms. Crenshaw seems to part ways with the 2006 statement in distinguishing between crimes that injure a company's shareholders and crimes that injure a company's customers or other third parties. The 2006 statement took the view that where the crime was one that injured shareholders, the SEC primarily should seek penalties from the company employees who had caused the violations rather than from the company (and thus from its shareholders) who were victims of the violations. Ms. Crenshaw argues that it is not practical to make such a distinction. She separately states that she is not even convinced "that SEC penalties actually harm investors."

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