New Time Limitations for SEC Enforcement Cases

Congress passed a new disgorgement statute and limitations periods for enforcement cases brought by the Securities and Exchange Commission (section 6501 of a long 2021 act). A major and remarkable consequence of the statute is that a limitations period now governs most types of SEC enforcement cases. That is a significant reversal of the law as it stood since the Securities Act of 1933. This post describes the broad coverage of the new limitations periods and mentions a few open issues.

Statutes of limitations and the SEC before the new law

To appreciate the significance of the limitations periods in the new disgorgement statute, a little history is useful. For much of its existence, the SEC enforcement program had been largely unencumbered by time restrictions.

The general rule has been that the United States in its governmental capacity is not subject to a limitations period unless a congressional enactment clearly imposes one. The Securities Act and the 1934 Securities Exchange Act gave federal courts the power to enter an injunction against a violator, but the Acts did not specify a time limit for the SEC or its predecessor to bring a claim seeking an injunction. The SEC was subject to the federal statute imposing a five-year limitations period for a case seeking a fine, penalty, or forfeiture, but an injunction and other equitable remedies were not typically viewed as penalties.[1] Therefore, for many years, the accepted position was that no statutory time period limited the SEC’s ability to sue for an injunction or other forms of equitable relief. The SEC did not have a broad basis to obtain money penalties until 1990.

Defendants began to challenge the lack of a limitations period for SEC enforcement cases, arguing that various SEC remedies or forms of relief were a fine, penalty, or forfeiture governed by the five-year limitations period in 28 U.S.C. § 2462. Defendants asserted that an injunction, disgorgement, administrative discipline, and a prohibition on serving as an officer or director of a public company operated as a penalty and should be subject to section 2462. Courts reached different conclusions.[2]

The new SEC disgorgement statute

The new disgorgement statute, which became law on January 1, 2021, disposes of most of those arguments. The new statute has two main parts. First, an amendment to section 21(d)(3)(A) of the Exchange Act and a new section 21(d)(7) authorize the SEC to seek and a federal court to order disgorgement, defined as “any unjust enrichment by the person who received such unjust enrichment as a result of” a securities law violation. The SEC already had statutory authority to obtain disgorgement in an SEC administrative proceeding (AP).

The second main part is the statute of limitations to be added as section 21(d)(8). The SEC may not bring a claim for disgorgement in federal court “later than 5 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim occurs” or later than 10 years after the latest date of a violation “for which scienter must be established,” such as section 17(a)(1) of the Securities Act and Rule 10b-5.[3] The legislation added a ten-year statute of limitations for equitable remedies in section 21(d)(8)(B): “The Commission may seek a claim for any equitable remedy, including for an injunction or for a bar, suspension, or cease and desist order, not later than 10 years after the latest date on which a violation that gives rise to the claim occurs.”

Statutes of limitations in the new disgorgement law

The SEC disgorgement statute changed the legal landscape for limitations periods applicable to different types of relief in SEC enforcement cases. The main types of relief the SEC obtains are injunctions in federal court, cease-and-desist orders in APs, and civil money penalties and disgorgement in both court and APs. Now, a statute of limitations applies to those remedies and many others, although gaps remain.

The ten-year period in new section 21(d)(8)(B) applies to a claim for an injunction. That provision eliminates the traditional rule that a government claim for an injunction could be brought at any time and likely supersedes arguments that an injunction acts as a penalty subject to the five-year limitation.

The five- and ten-year periods in new section 21(d)(8)(A) apply to federal court claims for disgorgement based on violations without or with scienter. The limitations do not explicitly govern a claim for disgorgement in an AP. Whether a limitations period applies to a disgorgement claim asserted in an AP and, if so, which one, are among the unanswered questions about the new disgorgement statute.

The five-year period in section 2462 continues to apply to claims for civil money penalties. The securities laws give district courts and the SEC authority to impose civil penalties in securities enforcement cases,[4] and in the past few years the SEC obtained judgments and orders for penalties totaling $1.5 billion and $1.1 billion.

The ten-year period in new section 21(d)(8)(B) applies to “a claim for any equitable remedy, including … for a bar, suspension, or cease and desist order.” Some of the mentioned remedies correspond closely to types of relief in enforcement cases, such as cease-and-desist orders that the SEC may enter in an AP[5] or the ability of courts or the SEC to take action called a bar or suspension.[6] The federal securities laws contain additional types of relief in enforcement cases, however, and whether the limitations period for equitable remedies, bars, and suspensions applies to them requires further research and analysis.

The main types of sanctions in SEC enforcement are injunctions or cease-and-desist orders, fines, and disgorgement. Statutes of limitation now cut off all those claims after five or ten years. That is a significant change from the general rule that existed in 2017 before the Supreme Court’s decision in Kokesh v. SEC when only civil monetary penalties were subject to a limitations period.

[1] See Liu v. SEC, 140 S. Ct. 1936, 1940, 1941 (2020); SEC v. Gentile, 939 F.3d 549, 555–63 (3d Cir. 2019) (holding “SEC injunctions that are properly issued and valid in scope are not penalties and thus are not governed by § 2462”); SEC v. Graham, 823 F.3d 1357, 1360–62 (11th Cir. 2016) (not applying section 2462 to an injunction); but see SEC v. Bartek, 484 F. App’x 949, 957 (5th Cir. 2012) (applying section 2462 to an injunction).

[2] See, e.g., Kokesh v. SEC, 137 S. Ct. 1635 (2017) (applying section 2462 to disgorgement in SEC cases); SEC v. Gentile, 939 F.3d 549 (3d Cir. 2019) (not applying section 2462 to an injunction and prohibition on participation in penny-stock offering); SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016) (not applying section 2462 to an injunction but applying it to declaratory relief); SEC v. Bartek, 484 F. App’x 949 (5th Cir. 2012) (applying section 2462 to an injunction and prohibition on service as an officer or director of a public company); SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008) (not applying section 2462 to injunctive relief or disgorgement); Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996) (applying section 2462 to a censure and a six-month disciplinary suspension from a securities industry position imposed in an SEC administrative proceeding).

[3] 15 U.S.C. § 77q(a)(1); 17 C.F.R. § 240.10b-5.

[4] See, e.g., 15 U.S.C. §§ 77h-1(g), 77t(d), 78u(3), 78u-2, 80a-9(d), 80a-41(e), 80b-3(i), 80b-9(e).

[5] See, e.g., 15 U.S.C. §§ 77h-1, 78u-3, 80a-9(f), 80b-3(k).

[6] See, e.g., id. §§ 78o(b)(6)(A), 78s(h)(3), 80b-3(f).

Andrew N. Vollmer is a Senior Affiliated Scholar, Mercatus Center at George Mason University. Former Deputy General Counsel of the Securities and Exchange Commission; former Professor of Law, General Faculty, University of Virginia School of Law; and former partner in the securities enforcement practice of Wilmer Cutler Pickering Hale and Dorr LLP.