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US Securities and Exchange Commission

SEC Disgorgement Fix Included in Defense Spending Bill

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Bill Flook

Language strengthening the SEC’s ability to recoup ill-gotten gains on behalf of defrauded investors is included in a final defense spending bill negotiated between the House and Senate.

President Donald Trump, however, is threatening to veto the bill unless Congress agrees to strip liability protections from social media companies.

The provision of the National Defense Authorization Act (NDAA) for the current fiscal year would codify the SEC’s authority to seek disgorgement in federal court, allowing the commission to reach back as far as 10 years into the past for certain securities law violations.

In disgorgement, the commission, separate from penalties and other sanctions, takes back illicit profits to repay fraud victims. But since that authority does not explicitly exist in law, the extent of the SEC’s power to collect disgorgement in federal court has long been in dispute, and was recently subject to two Supreme Court rulings in Kokesh v. SEC and Liu v. SEC.

The budget language comes from H.R. 4344, the Investor Protection and Capital Markets Fairness Act, with some changes. The bill, sponsored by Rep. Ben McAdams, a Utah Democrat, passed the House a year ago on a 385-22 vote, but never made any progress in the Senate. McAdam’s bill had proposed to give the SEC a 14-year statute of limitations.

The statute of limitations issue is particularly important following the 2018 Supreme Court ruling in Kokesh, in which the High Court placed a five-year time limit on disgorgement collections in federal court and left some ambiguity over the commission’s ability to seek disgorgement in the first place.

That ambiguity was cleared up earlier this year in Liu, in which the court affirmed the SEC’s underlying disgorgement authority, concluding that a “disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief” under the law.

A core question in Liu was whether disgorgement qualifies as “equitable relief” under the Securities Exchange Act of 1934, as amended by the Sarbanes-Oxley Act of 2002, which authorized federal courts the power to grant the SEC “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC and its defenders argue that disgorgement is, indeed, a form of equitable relief authorized by statute.

McAdams’s bill is one of several financial services provisions that made their way into the final NDAA bill. Also included are provisions that would crack down on anonymous shell companies, help authorities detect international money laundering, and stymie the use of digital currency in drug and sex trafficking, among others.

House Financial Services Committee Chair Maxine Waters, in a statement, said she and committee members “worked hard to ensure that the National Defense Authorization Act includes measures that will help law enforcement prevent these criminals from using shell companies to hide their activities and will close loopholes and increase penalties on those bad actors who are using our system for activities that threaten the U.S. and our allies.”


This article originally appeared in the December 7, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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