Supreme Court Ruling Curbs SEC Disgorgement Power

The U.S. Supreme Court ruled on Monday that the SEC is bound by a five-year limitation period when it seeks disgorgement from those who have been found to violate federal securities laws.

The Court held that “Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of §2462 [a five-year statute of limitations,]” and thus, “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”

U.S. Supreme Court (Photo Credit – Joe Ravi CC-BY-SA 3.0)

Section 2462 expressly applies to “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” and the Court had already held that the five-year statute applies when the SEC seeks statutory monetary penalties.

The Court’s reasoning included that SEC disgorgement is imposed as a consequence for violating public laws; the violation for which the SEC seeks disgorgement is against the United States rather than an aggrieved individual; SEC disgorgement furthers the policy mission of “protecting  investors and safeguarding the integrity of the markets[;]” SEC disgorgement is imposed to deter infractions and, therefore, is “inherently punitive[;]” and SEC disgorgement—“in many cases”—is not compensatory and can be required regardless of whether funds are used as restitution.

While the government argued SEC disgorgement is “remedial” in that it “restor[es] the status quo,” the Court disagreed, citing cases where defendants were ordered to disgorge third-party profits and without consideration of expenses that reduced illegal profits. “In such cases, disgorgement does not simply restore the status quo; it leaves the defendant worse off.”

The Court therefore found that SEC disgorgement operates as a penalty under §2462.

The Court reversed the judgment of the Court of Appeals for the Tenth Circuit. Justice Sonia Sotomayor delivered the opinion of the Court.

For a complete reading of this unanimous opinion, please click here.

Related Content

Latest Content

OCIE Examined 15% of RIAs in 2017

In 2017, the SEC examined 2,114 investment advisers, approximately 15 percent of the 14,000+ registered investment advisers, the SEC confirmed in its Fiscal Year 2019 Congressional Budget Justification Annual Performance Plan. In the same report, the SEC said the staff will continue to improve its efforts of RIAs, noting that nearly 35 percent of all … Continued

Ascendant’s Adam DiPaolo Discusses Hypothetical & Model Performance Marketing Pitfalls

A Jan. 12 article in HFMCompliance titled “Best practice for hedge funds using hypothetical and model performance” outlines best practices for hedge fund managers when using hypothetical performance or model data in marketing efforts, and how managers relying on such data can avoid enforcement actions. Adam DiPaolo, Senior Consultant in Ascendant’s Private Funds group, is quoted in the … Continued

SEC’s Exam Priorities Offer Insight Into National Exam Program

On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued their 2018 Examination Priorities (see Ascendant’s summary here). In addition to defining their examination priorities for the year, the OCIE staff offered some insight into the National Exam Program.  Specifically, they defined the following five principles in executing their exam priorities: … Continued

SEC Updates: ICO Gatekeeper Standards, SEC/CFTC Swap Rules

SEC Chairman Jay Clayton had some stern advice for market professionals, especially gatekeepers, who he said need to act responsibly and hold themselves to high standards. Speaking via videoconference during Securities Regulation Institute’s recent annual conference, he said, “To be blunt, from what I have seen recently, particularly in the initial coin offering (“ICO”) space, they … Continued

Mailing List

Subscribe to the Ascendant Compliance email list for the latest compliance resources, conferences, ComplianceCasts™, and more.

Loading form...

Contact Us

Ascendant works together with clients to identify and assess critical needs through customized plans. If you need assistance with compliance functions, regulatory services, cybersecurity or technology tools, we’d love to speak with you.