Regulators desire punishment that restores individuals to monetary positions before the damage and deters future violations. Thus, enforcement effectiveness is partially a function of punishment severity. Under the Securities and Exchange Commission's oversight, the Financial Industry Regulatory Authority provides enforcement and punishment guidelines for securities fraud cases. However, motivation crowding theory suggests extenuating and aggravating circumstances may complicate punishment. We investigate the concern that individuals charged with punishing securities fraud might be excessively tolerant, illustrated by recommended sanctions. Using two samples of participants—compliance examiners and securities arbitrators—in an experimental task that manipulates the fraudster's motivation, history, and personal gain, we find participants may be overly influenced by situational circumstances. Further, participants recommend monetary sanctions that fail to achieve regulators' restoration goals. We discuss practical implications of these findings for regulators. Further, we illustrate the need to extend motivation crowding theory to consider factors associated with non-direct financial benefits.

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