Twenty-first-century problems cannot be solved with twentieth-century solutions. This applies with particular force to securities regulation, in which regulators must constantly adapt to rapid financial innovation. In an era of high-frequency trading and unprecedented market connectivity, the SEC has struggled to apply its existing regulatory framework. Specifically, the Commission’s tiered civil-penalty regime—a remnant of the 1990 Penny Stock Reform Act—is outdated and presents a number of challenges as applied to sophisticated trading violations. Primarily, the current structure, which allows Administrative Law Judges to punish financial misconduct for each illegal “act or omission” that has occurred, permits excessive discretion to impose monetary penalties and can result in varying penalty amounts. This lack of predictability introduces too much uncertainty into market behavior and also accelerates settlement rates, depriving industry members of valuable precedent. Punishing for each “act or omission” can also be an improper proxy for the severity of a particular offense, such as when a single act causes severe damage to market confidence. This Note argues that Congress should alter this outdated tier structure in favor of a gain-based penalty system, which would reduce variability and more accurately punish wrongdoing.

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