The ink is barely dry on the 2010 Dodd-Frank financial-reform law, but Congress is already considering new legislation that would grant the Securities and Exchange Commission its latest wish list of much higher financial penalties, especially against recidivists.

The sponsors of the bill, Senators Charles Grassley and Jack Reed, say the new law would “crack down” on financial misconduct so that “the punishment better fits the crime.” If enacted, this would be the sixth time Congress has ratcheted up SEC penalties in the past 30 years.

There is scant evidence that increasing penalties again would improve deterrence or financial compliance, but that is a secondary concern with the bill. More troubling is that Congress is incrementally blurring the line between civil regulatory enforcement and criminal punishment, reflecting an eerie indifference to due process and the proper constitutional allocation of law-enforcement responsibility.

Although it’s easy to forget, the SEC had no power to punish wrongdoers during its first 50 years. It could ask a court to stop violations and prohibit future misconduct, but it couldn’t impose penalties. The agency was primarily a regulator rather than a law-enforcement agency, and for good reason. Penal law enforcement is an executive branch function under the Constitution. It is therefore entrusted to the Justice Department headed by an attorney general who serves at the pleasure of the president, who in turn is politically accountable to the people.

Constitutional Support

Independent administrative agencies such as the SEC, by contrast, operate beyond the control of the attorney general and are headed by unelected officers who are neither Cabinet members nor removable at will by the president. To the extent they engage in law enforcement, they do so on thinner constitutional ice.

A related concern is that civil SEC law enforcement lacks many due-process safeguards that are taken for granted in criminal cases. That’s mostly because SEC cases can’t lead to incarceration. For most other practical purposes, however, the potential consequences of SEC law enforcement -- severe financial sanctions, lost livelihoods, and destroyed reputations -- can be just as devastating as a criminal conviction.

But when the SEC seeks harsh punishment in civil cases, its burden is much lighter than that of a prosecutor seeking comparable sanctions in a criminal case. The presumption of innocence in SEC cases is negligible, because the agency doesn’t need to prove guilt beyond reasonable doubt; it is enough if guilt appears just slightly more probable than innocence. Moreover, the right to remain silent is of little comfort, because the SEC can treat silence as evidence of guilt and draw an “adverse inference” against the defendant.

Other constitutional rights likewise don’t apply in civil SEC cases. Courts say the double-jeopardy clause doesn’t prohibit successive imposition of civil penalties in an SEC case on top of criminal punishment in a separate prosecution for the same offense. Similarly, courts generally don’t restrict SEC penalties under the Eighth Amendment’s prohibition against “excessive fines.” And if the defendant can’t afford an experienced securities lawyer, tough luck; the government won’t pay for one because the Sixth Amendment right to counsel generally doesn’t apply in civil cases, and the defendant usually isn’t indigent enough to qualify for legal-aid assistance or pro bono representation by a private law firm.

Unilateral Power

Especially ominous is a change wrought by Dodd-Frank on which the proposed new legislation would double down. Before Dodd-Frank, the SEC could win financial penalties against people outside the regulated securities industry only by proving its case in a trial before an independent federal judge and jury. Until recently, it was unthinkable that the SEC could inflict severe monetary punishment on ordinary citizens and companies without this basic check and balance, but Dodd-Frank abandoned that notion with barely a whisper of debate. Since Dodd-Frank, the SEC can unilaterally impose harsh punishment in its own non-jury administrative proceedings, subject only to limited review by a federal court after the fact.

The proposed legislation would discard even the few safeguards left intact by Dodd-Frank. Existing law at least sets maximum dollar limits on penalties the SEC can impose administratively, but the proposed law would remove those, effectively allowing the SEC to get the same sky-high penalties whether it goes to court or not. One might reasonably ask why the agency would ever bother going to court under such a regime.

Making “punishment fit the crime” is a nice sound bite, but civil SEC remedies have no legitimate role in punishing crimes. Those who insist otherwise need to acknowledge that draconian SEC penalties constitute punishment that warrants the full panoply of due-process rights before they are imposed. That means proof beyond reasonable doubt, jury trials and no “adverse inferences” drawn from remaining silent.

It also means SEC penalties should be mutually exclusive of criminal punishment for the same offense and challengeable as excessive under the Eighth Amendment. Finally, it means having a right to competent defense counsel, including appointment at public expense, if necessary.

(Russell G. Ryan, a former assistant director of the SEC’s division of enforcement, is a securities lawyer at King & Spalding LLP in Washington. The opinions expressed are his own.)

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To contact the writer of this article: Russell G. Ryan at rryan@kslaw.com.

To contact the editor responsible for this article: James Greiff at tharshaw@bloomberg.net.