September 26, 2021

Volume XI, Number 269


September 24, 2021

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Congress Extending the SEC Statute of Limitations to 10 Years?!!

Congress recently overrode President Trump’s veto of the $740 billion 2021 National Defense Authorization Act (“NDAA”) and signed it into law. While the focus of the NDAA is not on the U.S. Securities and Exchange Commission (“SEC”), the NDAA does include a provision that gives the SEC, for the first time ever, statutory authority to seek disgorgement in federal court for securities enforcement matters. Further, the NDAA also provides for a 10-year statute of limitations for the SEC to seek such disgorgement for scienter-based violations, extending and doubling the current 5-year statute of limitations.

By way of background and as many of our readers understand, while not expressly authorized by federal securities laws, federal courts have historically allowed the SEC to pursue disgorgement actions as a form of equitable relief. However, two recent Supreme Court cases curtailed the SEC’s disgorgement powers. Prompted to provide clarity on these two cases addressing the issue of federal disgorgement,[1] the new NDAA gives the SEC express statutory authority to pursue disgorgement remedies.

Specifically, Section 6501 of the NDAA provides three impactful points. First, it amended Section 21(d) of the Securities Exchange Act and expressly authorizes the SEC, in actions filed in federal district court, to seek “disgorgement … of any unjust enrichment by the person who received such unjust enrichment as a result of [a] violation” of the securities laws.

Second, and most significantly, the NDAA extended the 5-year statute of limitations period to 10 years for securities violations that involve scienter. Section 6501 of the NDAA discusses the extension for scienter-based violations and holds that it applies to violations of: (1) Section 10(b) of the Exchange Act; (2) Section 17(a)(1) of the Securities Act; (3) Section 206(1) of the Investment Advisers Act; or (4) “any other provision of the securities laws for which scienter must be established.” Thus, as it stands under Section 6501 of the NDAA, the SEC may bring a claim for disgorgement: (1) no later than 5 years after the latest date of the violation that gives rise to the action or proceeding in which the SEC seeks the claim occurs; or (2) no later than 10 years after the latest date of the violation that gives rise to the action or proceeding in which the SEC seeks the claim if the violation involves scienter-based conduct.

Finally, the NDAA revised the Act to toll the disgorgement and equitable relief statutes of limitations for any amount of time that an offender spends outside of the United States.

While the new provision only applies to actions pending on, or commenced after, the date of enactment of the NDAA, it will likely significantly affect the SEC, and any offenders of federal securities laws. The impact of the new provisions of the NDAA are still unknown and will be shaped by the SEC’s enforcement actions in the months and years to come after enactment.

[1] See Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017) (holding that disgorgement was a penalty for purposes of the general five-year federal statute of limitations period); Liu v. Securities and Exchange Commission, 140 S. Ct. 1936 (2020) (holding that disgorgement not exceeding a wrongdoer’s net profits, and which is awarded for victims, is permissible equitable relief under Exchange Act Section 21(d)(5)).

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume XI, Number 11

About this Author

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

Sophie H. Gotlieb Litigation Attorney Faegre Drinker Law Firm

Sophie Gotlieb assists clients with various aspects of legal proceedings and trial preparation, including legal research and the drafting of motions and other legal memoranda.

Sophie served as a judicial extern for the Honorable Donovan W. Frank, U.S. District Court for the District of Minnesota, and as a 711 law clerk for the Cook County (IL) State Attorney’s office (Felony Trial Division). She has provided assistance on discovery requests and compilation, case management and case dispositions.

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