The congressional override of Trump’s veto of the annual defense bill means that the SEC disgorgement provision is now law. Separately, President Trump signed legislation that includes funding for the SEC and the CFTC.
The conference report for the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) (H.R. 6395), named for Rep. Thornberry (R-Texas), who recently retired from Congress, was vetoed by President Trump but, in a sign of institutional cohesiveness, Congress has overridden that veto to enact the annual defense legislation that had become law in each of the prior 59 consecutive fiscal years. The NDAA conference report also contains a provision clarifying the SEC’s authority to seek disgorgement in enforcement matters. The U.S. Constitution requires that veto override votes must consist of two-thirds of the members of both houses of Congress and that members’ votes be on the record. The House voted 322-87 and the Senate voted 81-13 to override Trump’s veto of the NDAA.
Separately, President Trump, after having raised the prospect that he may veto the FY21 appropriations legislation, ultimately signed that legislation into law. The bill sets the SEC’s and CFTC’s funding for FY21 and includes two studies for the SEC to conduct. The appropriations bill had faced the prospect of not becoming law if Trump had opted not to sign or veto the bill before the 116th Congress adjourned. The House had approved the bill in two parts by votes of 359-53 and 327-85, while the Senate had approved the entire bill by a vote of 92-6.
SEC disgorgement. The NDAA contains the bulk of the Senate version of legislation aimed at securing the SEC’s right to seek, and the authority of federal courts to order, disgorgement in securities enforcement matters. The original Senate bill (S. 799) was sponsored by Sen. Mark Warner (D-Va). A version of the Senate disgorgement bill also appeared in the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (S. 2563), also sponsored by Sen. Warner.
Under Section 6501 of the NDAA, the Commission 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 Commission seeks the claim occurs (the NDAA version adds the words "latest" and "occurs"—emphasis added); 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 Commission seeks the claim if the violation involves scienter-based conduct.
The NDAA adds the 10-year limitations period, which did not appear in the original Senate version. The Commission can invoke the 10-year limitations period in matters that involve scienter-based violations, such as under Securities Act Section 17(a)(1), Exchange Act Section 10(b), Investment Advisers Act Section 206(1), or any other scienter-based provision in the federal securities laws.
The NDAA version of the legislation also includes from the original Senate bill a provision stating that any time in which the person against which the action or claim is brought is outside the U.S. does not count towards the accrual of the limitations period. A rule of construction provides that the disgorgement provision does not alter the rights of private parties to sue for violations of the federal securities laws. The SEC’s new disgorgement authority will apply to any action or proceeding that is pending on, or commenced on or after, the date of enactment of the NDAA (the NDAA version adds the phrase "pending on"—emphasis added).
The Senate version had originally included new authority for the SEC to seek restitution from broker-dealers and transfer agents on behalf of harmed investors subject to related provisions for offsetting disgorgement awards by the amount of any restitution awarded or ordered. This provision, however, has been struck from the NDAA version of the legislation. Nevertheless, the NDAA version does retain from the Senate bill a provision clarifying that the SEC may seek equitable remedies (e.g., an injunction, a bar, a suspension, or a cease and desist order) no later than 10 years after the latest date on which a violation that gives rise to the claim occurs.
The House version, the Investor Protection and Capital Markets Fairness Act (H.R. 4344), sponsored by Rep. Ben McAdams (D-Utah), would have provided for a more generous 14-year limitations period regarding SEC disgorgement claims. The House Financial Services Committee reported the McAdams bill by a vote of 49-5 in September 2019 and the bill passed the full House two months later by a vote of 314-95.
Lawmakers elected to pursue legislation to solidify the SEC’s ability to obtain disgorgement after a series of Supreme Court opinions in recent years had largely upheld the SEC’s disgorgement authority but left open potential questions about that authority that courts may be asked to address in future cases. In Kokesh the justices held that disgorgement was a penalty for purposes of the general five year federal limitations period. In Liu, the justices held 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).
SEC-CFTC funding. The Consolidated Appropriations Act, 2021 (H.R. 133), not only funds the SEC and the CFTC, but it includes several GOP-led bills that had previously passed the House regarding SEC studies of smaller issuers and diversified companies. The appropriations portion of the bill funds the SEC for FY21 at $1.895 billion. Of the funds available to the SEC, $16.3 million are earmarked for the agency’s inspector general. Two other provisions would account for replacement leases for the SEC’s Washington, D.C. and San Francisco Regional offices ($18.7 million and $12.7 million, respectively). The CFTC will receive $304 million in FY21 appropriations, of which $3.6 million is set aside for the agency’s inspector general.
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