[Federal Register Volume 62, Number 65 (Friday, April 4, 1997)]
[Rules and Regulations]
[Pages 16076-16080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8360]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 202

[Release Nos. 33-7408, 34-38447, 35-26696, 39-2350, IC-22588, and IA-
1625; File No. S7-14-97]


Penalty-Reduction Policy for Small Entities

AGENCY: Securities and Exchange Commission.

ACTION: Policy statement; request for comments.

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SUMMARY: The Securities and Exchange Commission is issuing a statement 
of its penalty-reduction policy for small entities as required by the 
Small Business Regulatory Enforcement Fairness Act, Pub. L. No. 104-
121, 110 Stat. 857 (1996). The Commission also requests comments on the 
policy. After the comment period has closed and the Commission has 
gained experience in applying the policy, the Commission intends to re-
evaluate the policy in light of its experience and the comments of 
interested persons.

DATES: Effective March 29, 1997. Interested persons may submit comments 
on the policy on or before December 31, 1997.

ADDRESSES: Interested persons should submit three copies of their 
written data, views, and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth St. N.W., Washington, 
D.C. 20549. Comment letters also may be submitted electronically to the 
following electronic mail address: <a href="/cdn-cgi/l/email-protection#5f2d2a333a723c3032323a312b2c1f2c3a3c71383029"><span class="__cf_email__" data-cfemail="ccbeb9a0a9e1afa3a1a1a9a2b8bf8cbfa9afe2aba3ba">[email protected]</span></a>. All comment 
letters should refer to File No. S7-14-97; this file number should be 
included on the subject line if E:mail is used. All comment letters 
will be made available for public inspection and copying at the 
Commission's Public Reference Room, Room 1024, 450 Fifth St., N.W., 
Washington, D.C. 20549. Electronically submitted comment letters will 
be posted on the Commission's Internet Web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Joan McKown (202-942-4530) or Susan 
Mathews (202-942-4737), Office of the Chief Counsel, Division of 
Enforcement, or Amy Kroll (202-942-0927) or Anne Sullivan (202-942-
0954), Office of the General Counsel.

SUPPLEMENTARY INFORMATION: The Small Business Regulatory Fairness Act 
(``SBREFA'' or ``the Act'') was enacted on March 29, 1996.<SUP>1 SBREFA 
seeks to improve the regulatory climate for small entities <SUP>2 by, 
among other things:
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    \1\ Pub. L. No. 104-121, 110 Stat. 857 (codified in scattered 
sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. Sec. 601) 
(1996).
    \2\ The definition of ``small entity'' under SBREFA is the same 
as the definition of ``small entity'' under the Regulatory 
Flexibility Act, 5 U.S.C. Sec. 601 et seq. (``Reg. Flex. Act''). 
SBREFA Sec. 221(1). The Reg. Flex. Act defines ``small entity'' to 
include ``small business.'' Pursuant to the Reg. Flex. Act, 5 U.S.C. 
Sec. 601(3), the Commission has adopted appropriate definitions of 
``small business'' for purposes of the Reg. Flex. Act. See infra 
n.10.
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    <bullet> Expanding the extent to which the rule making process must 
include evaluation of the impact of proposed rules (and rule changes) 
on small entities; <SUP>3
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    \3\  5 U.S.C. Secs. 603(a), 604, and 605(b), codifying SBREFA 
Secs. 241 and 243.

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[[Page 16077]]

    <bullet> Expanding the rights of action for small businesses to 
seek judicial review of rules impacting small entities; <SUP>4
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    \4\ 5 U.S.C. Sec. 611, codifying SBREFA Sec. 242.
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    <bullet> Requiring agencies to establish small entity penalty 
reduction or waiver policies; <SUP>5 and
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    \5\ SBREFA Sec. 223.
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    <bullet> Directing agencies to expand their efforts to provide 
formal and informal guidance to small entities.<SUP>6
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    \6\ SBREFA Secs. 212, 213, 214 (codified at 15 U.S.C. 
Sec. 648(c)(3)), and 215. In a companion release, the Commission is 
adopting an informal guidance program as required by SBREFA. 
Informal Guidance Program for Small Entities, Securities Act Rel. 
No. 33-7407 (Mar. 27, 1997). The Commission previously, on January 
28, 1997, adopted small entity compliance guides as required by 
SBREFA. Securities Act Rel. No. 7342, 62 FR 4104 ( Jan. 28, 1997) 
(codified at 17 CFR 202.8).
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    In this release, the Commission announces a small entity penalty-
reduction policy (``Penalty-Reduction Policy'' or ``Policy'') as 
mandated by SBREFA and solicits comment on the Policy.
    SBREFA provides a general standard for penalty-reduction policies:

    Each agency regulating the activities of small entities shall 
establish a policy or program within 1 year of enactment of this 
section to provide for the reduction, and, under appropriate 
circumstances for the waiver, of civil penalties for violations of a 
statutory or regulatory requirement by a small entity. Under 
appropriate circumstances, an agency may consider ability to pay in 
determining penalty assessments on small entities.<SUP>7

    \7\ SBREFA Sec. 223(a). SBREFA also establishes that ``[i]n any 
civil or administrative action against a small entity, guidance 
given by an agency applying the law to facts provided by the small 
entity may be considered as evidence of the reasonableness or 
appropriateness of any proposed fines, penalties or damages sought 
against such small entity.'' Id. Sec. 213(a).
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    A statement entered into the Congressional Record after enactment 
of SBREFA explains that agencies have ``flexibility to tailor their 
specific programs to their missions and charters'' and instructs 
agencies ``to develop the boundaries of their program and the specific 
circumstances for providing for a waiver or reduction of penalties.'' 
<SUP>8 To that end, SBREFA specifies that a penalty-reduction policy 
adopted by an agency may be subject to the requirements or limitations 
of other applicable statutes. SBREFA also lists six possible exclusions 
or conditions that an agency may incorporate in its policy.<SUP>9
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    \8\ ``Small Business Regulatory Enforcement Fairness Act--Joint 
Managers Statement of Legislative History and Congressional 
Intent,'' 142 Cong. Rec. S3244 (daily ed. Mar. 29, 1996).
    \9\ SBREFA Sec. 223(b).
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    The Commission has reviewed the current requirements of the federal 
securities laws, its current practice in assessing penalties on small 
entities, and the appropriate conditions and exclusions for a penalty-
reduction policy for small entities that violate the federal securities 
laws. On the basis of that review, the Commission announces its 
Penalty-Reduction Policy for small entities. Although the Commission's 
informal practice has been to consider some or all of the factors 
contained in the policy in its penalty analysis for all entities, in 
accord with the mandates of SBREFA, the Commission sets forth in this 
release a formal policy specifically for small entities that embodies 
these factors. The Commission also invites comments on this Policy.

I. Penalty-Reduction Policy

A. Text of Policy

    The text of the policy follows:

    The Commission's policy with respect to whether to reduce or 
assess civil money penalties against a small entity is:
    (a) The Commission will consider on a case-by-case basis whether 
to reduce or not assess civil money penalties against a small 
entity. In determining whether to reduce or not assess penalties 
against a specific small entity, the following considerations will 
apply:
    (1) Except as provided in paragraph (a)(3) below, penalty 
reduction will not be available for any small entity if:
    (i) The small entity was subject previously to an enforcement 
action;
    (ii) Any of the small entity's violations involved willful or 
criminal conduct; or
    (iii) The small entity did not make a good faith effort to 
comply with the law.
    (2) In considering whether the Commission will reduce or refrain 
from assessing a civil money penalty, the Commission may consider:
    (i) The egregiousness of the violations;
    (ii) The isolated or repeated nature of the violations;
    (iii) The violator's state of mind when committing the 
violations;
    (iv) The violator's history (if any) of legal or regulatory 
violations;
    (v) The extent to which the violator cooperated during the 
investigation;
    (vi) Whether the violator has engaged in subsequent remedial 
efforts to mitigate the effects of the violation and to prevent 
future violations;
    (vii) The degree to which a penalty will deter the violator or 
others from committing future violations; and
    (viii) Any other relevant fact.
    (3) The Commission also may consider whether to reduce or not 
assess a civil money penalty against a small entity, including a 
small entity otherwise excluded from this policy under paragraphs 
(a)(1)(i)-(iii) above, if the small entity can demonstrate to the 
Commission's satisfaction that it is financially unable to pay the 
penalty, immediately or over a reasonable period of time, in whole 
or in part.
    (4) For purposes of this policy, an entity qualifies as 
``small'' if it is a small business or small organization as defined 
by Commission rules adopted for the purpose of compliance with the 
Regulatory Flexibility Act.<SUP>10 An entity not included in these 
definitions will be considered ``small'' for purposes of this policy 
if it meets the total asset amount that applies to issuers as set 
forth in Rule 157(a) of the Securities Act of 1933.<SUP>11
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    \10\ Pursuant to the Reg. Flex. Act, 5 U.S.C. Sec. 601(3), the 
Commission has adopted appropriate definitions of ``small business'' 
for purposes of the Reg. Flex. Act. Based on an analysis of the 
language and legislative history of the Reg. Flex. Act, Congress 
does not appear to have intended that Act to apply to natural 
persons (as opposed to individual proprietorships) or to foreign 
entities. The Commission understands that staff at the Small 
Business Administration (SBA) have taken the same position. 
Telephone conversation with Gregory J. Dean, Jr., Assistant Chief 
Counsel for Finance and Programs, SBA Office of Advocacy (Mar. 13, 
1997). See 17 CFR 270.0-10, 275.0-7, 240.0-10, 230.157, 250.110, and 
260.0-7. The Commission recently proposed amendments to certain of 
these definitions. Definitions of ``Small Business'' or ``Small 
Organization'' Under the Investment Company Act of 1940, the 
Investment Advisers Act of 1940, the Securities Exchange Act of 
1934, and the Securities Act of 1933, Securities Act Rel. No. 7383, 
62 FR 4106 (Jan. 28, 1997). The Commission extended the comment 
period for the proposed amendments to April 30, 1997, 62 FR 13356 
(Mar. 20, 1997).
    \11\ At present, this threshold is $5 million. Thus, non-
regulated entities, such as general partnerships, privately held 
corporations or professional service organizations, with assets of 
$5 million or less may qualify for penalty-reduction.
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    (b) The foregoing policy does not create a right or remedy for 
any person. This policy shall not apply to any remedy that may be 
sought by the Commission other than civil money penalties, whether 
or not such other remedy may be characterized as penal or remedial.

B. Penalties Eligible for Reduction

    The Policy will apply only to civil money penalties. It will not 
apply to any remedy that the Commission may seek other than civil money 
penalties, whether or not such other remedy may be characterized as 
penal or remedial.<SUP>12 SBREFA provides that an agency may consider 
an entity's ``ability to pay,'' and requires agencies to report to 
Congress on the ``total amount of penalty reductions.'' The Commission 
interprets these statements to refer to civil money penalties. 
Committee statements that were included in the Congressional Record 
after enactment of SBREFA also support limiting penalty reduction 
policies to civil money penalties.<SUP>13 Moreover, an Environmental 
Protection Agency (``EPA'') policy cited

[[Page 16078]]

in the statements as an example of an appropriate policy is limited to 
civil money penalties.<SUP>14
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    \12\ See Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996) (six-month 
suspension from supervisory positions at broker-dealers constitutes 
a penalty for the purposes of 28 U.S.C. Sec. 2462).
    \13\ ``Small Business Regulatory Enforcement Fairness Act: Views 
of the House Committees of Jurisdiction on the Congressional Intent 
Regarding the `Small Business Regulatory Enforcement Fairness Act of 
1996,' '' 142 Cong. Rec. E572 (daily ed. Apr. 19, 1996); 142 Cong. 
Rec. at S3244.
    \14\ See EPA, Policy on Compliance Incentives for Small 
Business, 61 FR 27984 (June 3, 1996).
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C. Other Relevant Statutes

    The Policy is consistent with the statutory provisions in the 
Securities Enforcement Remedies and Penny Stock Act of 1990,<SUP>15 the 
Insider Trading Sanctions Act of 1984,<SUP>16 and other statutes 
<SUP>17 that grant the Commission the authority to impose civil money 
penalties for a broad range of violations of the federal securities 
laws.<SUP>18 These Acts give the Commission flexibility to tailor 
sanctions and recommend factors that guide the Commission's discretion 
in imposing money penalties. Although each decision is based on fact-
specific circumstances, with respect to each violator the Commission 
presently may consider: (1) the violator's financial ability to pay a 
penalty; (2) whether the violator is a repeat offender; (3) cooperation 
provided during the investigation; (4) subsequent remedial efforts; (5) 
whether the violation was willful; (6) the degree to which a penalty 
will deter future violations; and (7) any other relevant fact.<SUP>19
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    \15\ Pub. L. 101-429, 104 Stat. 931 (1990) (codified in 
scattered sections of 15 U.S.C.) (``Remedies Act'').
    \16\ Pub. L. No. 98-376, 98 Stat. 1264 (1984) (codified in 
scattered sections of 15 U.S.C.) (``Insider Trading Act'').
    \17\ See, e.g., Insider Trading and Securities Fraud Enforcement 
Act of 1988, Pub. L. No. 100-704, 102 Stat. 4677 (1988) (codified in 
scattered sections of 15 U.S.C.).
    \18\ See section 20(d)(2) of the Securities Act of 1933 (civil 
actions) (15 U.S.C. 77t(d)(2)); sections 21(d)(3) (civil actions), 
21A (insider trading actions), and 21B (administrative proceedings) 
of the Securities Exchange Act of 1934 (``Exchange Act'') (15 U.S.C. 
Secs. 78u(d)(3), 78u-1, and 78u-2); sections 203(i)(2) 
(administrative proceedings) and 209(e) (civil actions) of the 
Investment Advisers Act of 1940 (15 U.S.C. Secs. 80b-3(i)(2) and 
80b-9(e)); and sections 9(d) (administrative proceedings) and 42(e) 
(civil actions) of the Investment Company Act of 1940 (15 U.S.C. 
Secs. 80a-9(d) and 80a-41(e)).
    \19\ See, e.g., section 21B(c)(1)-(6) of the Exchange Act (15 
U.S.C. Sec. 78u-2(c)(1)-(6)); see also SEC v. Brumfield et al., SEC 
Lit. Rel. No. 14,956 (June 20, 1996) (penalty not imposed in light 
of respondent's cooperation).
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D. Exclusions From and Conditions to the Penalty-Reduction Policy

    Section 223(b) of SBREFA lists six possible exclusions or 
conditions that agencies may incorporate in their penalty-reduction 
policies, some of which are similar to those factors the Commission may 
consider when fashioning a penalty under the statutes described above. 
For the reasons discussed below, the Commission incorporates in the 
Policy three of the suggested exclusions, which are contained in 
paragraph (a)(1) of the Policy, but does not incorporate the other 
three.
1. Multiple Enforcement Actions
    SBREFA permits an agency to exclude from its policy small entities 
that have been subject to multiple enforcement actions. The Commission 
historically has made a similar determination under Section 21B(c) of 
the Exchange Act when considering whether a penalty is in the public 
interest.<SUP>20 The Commission believes it is appropriate to deny 
access to the Penalty-Reduction Policy to small entities against which 
the Commission previously has filed an action. Therefore, the Policy 
contains this exclusion.
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    \20\ Under this section, the Commission will consider whether 
the entity previously violated the federal or state securities laws 
or rules.
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2. Willful or Criminal Conduct
    SBREFA permits an agency to exclude from its policy a small entity 
whose violation involves willful or criminal conduct. Thomas J. Bliley, 
Jr., Chairman of the House Commerce Committee, explained in a statement 
entered into the Congressional Record after enactment of SBREFA that:

    We will not tolerate, and this bill does not create, any free 
pass for financial fraud. Specifically, Section 323(b)(4) of the 
bill expressly excludes ``violations involving willful or criminal 
conduct'' from the small business enforcement variance. In the 
context of the federal securities laws, I understand ``willful'' to 
have the longstanding judicial construction as expressed in, for 
example, Tager v. Securities and Exchange Commission, 344 F.2d 5, 7 
(2d. Cir. 1965).<SUP>21

    \21\ ``Contract with America Advancement Act of 1996,'' Speech 
of Hon. Thomas J. Bliley, Jr., 142 Cong. Rec. E591-92 (daily ed. 
Apr. 19, 1996).
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    Consistent with Chairman Bliley's statement, the Policy is not 
available to small entities if their violations involve willful or 
criminal conduct.
3. Good Faith Compliance
    SBREFA permits an agency to require that a small entity has made a 
good faith effort to comply with the law in order for the small entity 
to avail itself of the penalty reduction policy. The Policy contains 
this exclusion. Under the Policy, a small entity may qualify for 
penalty reduction only if the Commission has not alleged that its 
actions were undertaken in bad faith and if the entity proffers 
evidence satisfactory to the Commission that it made a ``good faith'' 
effort to comply with the securities laws.
4. Reasonable Correction Period
    SBREFA permits an agency to condition the availability of penalty 
reduction on a small entity's correction of a violation within a 
reasonable time period. If a small entity violates the securities laws, 
the violation cannot be ``undone.'' Rather, the Commission's 
enforcement program focuses on stopping current violative conduct or 
preventing future conduct through the use of injunctions and temporary 
restraining orders, and by recovering ill-gotten gains in the form of 
disgorgement or by requiring undertakings to improve compliance 
procedures at firms. The Office of Compliance Inspections and 
Examinations (``OCIE'') issues deficiency letters to regulated entities 
found to have weaknesses in their compliance systems and or to have 
violated applicable rules and regulations. Depending on the nature of 
violations found, however, even if an entity corrects the violations, 
OCIE may make an enforcement referral in an effort to deter future 
violations by the entity. Because enforcement action is initiated when 
a violation is particularly egregious, or when an entity has failed to 
correct adequately its violations, penalty reduction for correcting a 
violation that is the basis of an enforcement action would send the 
wrong message to regulated entities. Consequently, the Commission is 
not including this condition in the Policy.
5. Compliance Assistance Program
    SBREFA also permits an agency to apply penalty reduction to 
violations discovered through an entity's participation in a compliance 
assistance or audit program operated or supported by the agency or a 
state.<SUP>22 Specifically, some agencies, for example the Occupational 
Safety and Health Administration and EPA, have offices that will audit, 
and pass judgment on, a regulated entity's compliance program. SBREFA 
suggests that agencies could consider applying their penalty reduction 
policies to small entity violations found in the course of such a 
compliance audit. Although various divisions within the Commission 
provide regulatory guidance, the Commission does not operate a formal 
``compliance assistance or audit program.'' <SUP>23 Rather than specify 
how every regulated entity should structure its compliance program, the 
Commission sets standards and then relies on the ability of each 
regulated entity, and when applicable its self-regulatory organization, 
to determine how best to implement its compliance

[[Page 16079]]

program, based on the nature of its business. Because the Commission 
does not have a compliance program of the type described in SBREFA, 
this condition is not in the Policy. Notably, however, as a general 
matter, the Commission does take into consideration compliance efforts 
and gives appropriate weight to the existence of effective compliance 
procedures both in making prosecutorial decisions regarding bringing 
charges and in determining sanctions or penalties.
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    \22\ SBREFA Sec. 223(b)(2).
    \23\ Inspections and examinations by OCIE do not constitute 
formal compliance assistance or audit programs.
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6. Health, Safety or Environmental Threats
    Finally, SBREFA mentions excluding from a penalty reduction policy 
those violations ``that pose serious health, safety or environmental 
threats.'' The Commission does not regulate health, safety or 
environmental entities. Therefore, this exclusion is not in the Policy.

E. Elements the Commission May Consider When Assessing Whether to 
Reduce or Not Assess Penalties

    Consistent with the Commission's practice and the statutes which 
enable the Commission to assess money penalties, paragraph (a)(2) of 
the Policy identifies eight elements the Commission may consider when 
determining whether to reduce or not assess a civil money penalty 
against a small entity. Although derived from considerations the 
Commission already applies when determining whether, and the level at 
which, to apply penalties,<SUP>24 the Policy gives the Commission 
discretion to consider any or all of these in any case where the Policy 
may apply.
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    \24\ See supra n.19 and accompanying text.
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F. Ability to Pay

    SBREFA permits an agency to consider ability to pay in determining 
penalty assessments on small entities.<SUP>25 Since passage of the 
Remedies Act in 1990, the Commission has complied with the spirit of 
SBREFA, considering an entity's ability to pay before setting a penalty 
amount. Generally, the Commission seeks money penalties in an amount 
that, after careful examination of financial information provided by 
the violator, the Commission determines the violator is able to pay. 
When analyzing appropriate sanctions in a particular case, the 
Commission typically will direct its staff to examine an entity's 
ability to pay disgorgement first; if the entity has the ability to pay 
a penalty after paying disgorgement, the Commission will demand an 
appropriate penalty amount based on the entity's ability to pay.<SUP>26
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    \25\ See SBREFA Sec. 223(a).
    \26\ In accordance with section 21B(d) of the Exchange Act, for 
example, the staff considers an entity's ``ability to continue in 
business and the collectability of a penalty, taking into account 
any other claims of the United States or third parties upon such 
person's assets and the amount of such person's assets.''
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    Consistent with this practice, paragraph (a)(3) of the Policy makes 
penalty-reduction available to small entities that may otherwise be 
excluded under paragraph (a)(1). A small entity must demonstrate to the 
Commission's satisfaction that it is unable financially to pay a 
penalty before the Commission will consider whether penalty-reduction 
is warranted. The Policy establishes that the Commission, in its sole 
discretion, may consider the eight factors in paragraph (a)(2) of the 
Policy as well as reviewing evidence presented by the small entity 
requesting penalty-reduction, such as sworn financial statements, to 
determine whether reduction is warranted in a particular case. The 
small entity must demonstrate to the Commission's satisfaction that it 
presently is unable financially to pay the penalty, in whole or in 
part, and that it will be unable to pay the penalty, in whole or in 
part, over a reasonable period of time.

II. Regulatory Requirements

    The Commission is announcing a Penalty Reduction Policy as required 
by SBREFA. As a general statement of policy, the Administrative 
Procedure Act (``APA'') does not require that the Commission publish 
the Policy for notice and comment.<SUP>27 The Commission wishes, 
however, to provide interested parties, particularly small entities, an 
opportunity to comment on the Policy. The Commission intends to revisit 
the Policy when a reasonable period has passed after the end of the 
comment period. In its re-evaluation, the Commission will consider its 
experience administering the Policy and comments the Commission 
receives.
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    \27\ 5 U.S.C. Sec. 553(a)(3)(A).
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List of Subjects in 17 CFR Part 202

    Administrative practice and procedure.

Text of Amendment

    In accordance with the foregoing, 17 CFR, Chapter II, is amended as 
follows:

PART 202--INFORMAL AND OTHER PROCEDURES

    1. The authority citation for Part 202 is amended by adding the 
following citation to read as follows:

    Authority: 15 U.S.C. 77s, 77t, 78d-1, 78u, 78w, 78ll(d), 79r, 
79t, 77sss, 77uuu, 80a-37, 80a-41, 80b-9, and 80b-11, unless 
otherwise noted.
* * * * *
    Section 202.9 is also issued under section 223, 110 Stat. 859 (Mar. 
29, 1996).
    2. Section 202.9 is added to read as follows:


Sec. 202.9  Small entity enforcement penalty reduction policy.

    The Commission's policy with respect to whether to reduce or assess 
civil money penalties against a small entity is:
    (a) The Commission will consider on a case-by-case basis whether to 
reduce or not assess civil money penalties against a small entity. In 
determining whether to reduce or not assess penalties against a 
specific small entity, the following considerations will apply:
    (1) Except as provided in paragraph (a)(3) of this section, penalty 
reduction will not be available for any small entity if:
    (i) The small entity was subject previously to an enforcement 
action;
    (ii) Any of the small entity's violations involved willful or 
criminal conduct; or
    (iii) The small entity did not make a good faith effort to comply 
with the law.
    (2) In considering whether the Commission will reduce or refrain 
from assessing a civil money penalty, the Commission may consider:
    (i) The egregiousness of the violations;
    (ii) The isolated or repeated nature of the violations;
    (iii) The violator's state of mind when committing the violations;
    (iv) The violator's history (if any) of legal or regulatory 
violations;
    (v) The extent to which the violator cooperated during the 
investigation;
    (vi) Whether the violator has engaged in subsequent remedial 
efforts to mitigate the effects of the violation and to prevent future 
violations;
    (vii) The degree to which a penalty will deter the violator or 
others from committing future violations; and
    (viii) Any other relevant fact.
    (3) The Commission also may consider whether to reduce or not 
assess a civil money penalty against a small entity, including a small 
entity otherwise excluded from this policy under paragraphs (a)(1) (i)-
(iii) of this section, if the small entity can demonstrate to the 
Commission's satisfaction that it is financially unable to pay the 
penalty, immediately or over a reasonable period of time, in whole or 
in part.
    (4) For purposes of this policy, an entity qualifies as ``small'' 
if it is a small

[[Page 16080]]

business or small organization as defined by Commission rules adopted 
for the purpose of compliance with the Regulatory Flexibility 
Act.<SUP>1 An entity not included in these definitions will be 
considered ``small'' for purposes of this policy if it meets the total 
asset amount that applies to issuers as set forth in Sec. 230.157a of 
this chapter.<SUP>2
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    \1\ Pursuant to the Reg. Flex. Act, 5 U.S.C. Sec. 601(3), the 
Commission has adopted appropriate definitions of ``small business'' 
for purposes of the Reg. Flex. Act. See 17 CFR 270.0-10, 275.0-7, 
240.0-10, 230.157, 250.110, and 260.0-7. The Commission recently 
proposed amendments to certain of these definitions. Definitions of 
``Small Business'' or ``Small Organization'' Under the Investment 
Company Act of 1940, the Investment Advisers Act of 1940, the 
Securities Exchange Act of 1934, and the Securities Act of 1933, 
Securities Act Rel. No. 7383, 62 FR 4106 (Jan. 28, 1997). The 
Commission extended the comment period for the proposed amendments 
to April 30, 1997, 62 FR 13356 (Mar. 20, 1997). Based on an analysis 
of the language and legislative history of the Reg. Flex. Act, 
Congress does not appear to have intended that Act to apply to 
natural persons (as opposed to individual proprietorships) or to 
foreign entities. The Commission understands that staff at the Small 
Business Administration have taken the same position.
    \2\ At present, this threshold is $5 million. Thus, non-
regulated entities, such as general partnerships, privately held 
corporations or professional service organizations, with assets of 
$5 million or less may qualify for penalty-reduction.
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    (b) This policy does not create a right or remedy for any person. 
This policy shall not apply to any remedy that may be sought by the 
Commission other than civil money penalties, whether or not such other 
remedy may be characterized as penal or remedial.

    Dated: March 27, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8360 Filed 4-3-97; 8:45 am]
BILLING CODE 8010-01-M


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