The William (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA, or the Act), which was enacted into law on New Year’s Day when the US Congress overrode President Trump’s veto of the legislation, establishes a 10-year statute of limitations for the US Securities and Exchange Commission (SEC) to seek disgorgement for certain violations of US securities laws. The NDAA amends the Securities Exchange Act of 1934, as amended (Exchange Act) to provide the SEC with the explicit authority to seek disgorgement in federal court of any unjust enrichment by violators of US securities laws. The Act provides for a five- or 10-year statute of limitations, depending on the violation. In either case, the statute of limitations begins to run “after the latest date of the violation that gives rise to the action or proceeding in which the [SEC] seeks the claim occurs.” Claims subject to the 10-year statute of limitations must involve conduct that violates:
- Section 10(b) of the Exchange Act;
- Section 17(a)(1) of the Securities Act of 1933;
- Section 206(1) of the Investment Advisers Act of 1940; or
- Any other provision of the securities laws for which scienter must be established.
The Act provides that the 10-year statute of limitations applies to any claims for equitable remedies, “including for an injunction or for a bar, suspension, or cease and desist order” that the SEC may seek. These provisions will address some of the challenges the SEC has faced since the US Supreme Court decided Kokesh v. SEC in June 2017. The Supreme Court in Kokesh held that the disgorgement remedy sought frequently by the SEC operates as a penalty, and, as a result, disgorgement claims are subject to a five-year statute of limitations. The Court’s decision has had a demonstrable, negative impact on the SEC’s enforcement efforts, especially with respect to actions involving complex, long-running frauds, such as Ponzi schemes. The SEC Enforcement Division’s 2019 Annual Report estimated that the adverse ruling in Kokesh “caused the [SEC] to forgo approximately $1.1 billion dollars in disgorgement in filed cases,” noting that the dollar amount would have been much higher had the Enforcement Division not shifted priorities in response to Kokesh. The Court revisited the question of the SEC’s disgorgement authority in June 2020. The Court’s decision in Liu v. SEC provided some clarity by explaining that disgorgement could be an equitable remedy, and not a penalty, depending on the circumstances. However, the SEC’s Enforcement Division later expressed the view in its 2020 Annual Report that the Court’s decision in Liu “also imposed some limitations and left open some questions.” The Act’s amendments to the Exchange Act should provide a statutory fix to some of the difficulties faced by the SEC since the Kokesh decision, which will allow the SEC to move forward with more certainty in its enforcement actions in federal court.
Learn more in a set of Legal Updates, where we discuss how the NDAA: