Securities Regulation Daily SEC disgorgement, anti-money laundering among prominent additions to defense bill
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Friday, December 4, 2020

SEC disgorgement, anti-money laundering among prominent additions to defense bill

By Stephanie K. Mann, J.D. and Mark S. Nelson, J.D.

The text is based on the bipartisan Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act, which was originally introduced in September 2019.

As the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) (H.R. 6395), named for Rep. Thornberry (R-Texas), who is retiring from Congress, is set to be voted on by both the House and Senate, multiple legislators applauded the inclusion of the Anti-Money Laundering Act and Corporate Transparency Act in the final version. These sections are intended to strengthen national security and help combat illicit financial activity carried out by terrorists, drug and human traffickers, and other criminals. The NDAA conference report also contains a provision clarifying the SEC’s authority to seek disgorgement in enforcement matters.

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) is 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 would be able to 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 would 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).

AML provisions. The text included in the NDAA is based on the ILLICIT CASH Act, originally introduced by Sen. Warner, Sen. Doug Jones (D-Ala), and Mike Rounds (R-SD) in September 2019 (see Banking and Finance Law DailySept. 27, 2019). Senators Jones, Warner, and Rounds commended Congressional leaders for including the text in the NDAA. "For too long, our anti-money laundering laws haven’t kept up with the rapidly evolving methods that criminals and terrorists use for illicit financial activities. Our bipartisan bill is the largest comprehensive effort in decades to improve transparency and will give prosecutors, national security officials, law enforcement, and financial institutions the modern tools they need to crack down on money laundering and terrorist financing," said Jones.

According to the bipartisan group, the bill will update anti-money laundering and combating the financing of terrorism policies by giving Treasury and law enforcement the tools necessary to fight these criminal enterprises. This includes improving overall communication between law enforcement, financial institutions, and regulators, as well as facilitating the adoption of 21st century technologies.

Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, applauded the move, saying that the reforms "are long overdue" because money laundering is not a victimless crime. "Updating and strengthening our money laundering and corporate transparency laws and insisting on tighter enforcement will finally provide for a 21st-century system to combat money laundering-related financial crimes, estimated by Treasury to generate about $300 billion per year in illicit proceeds."

Representative Maxine Waters (D-Calif), Chair of the House Financial Services Committee, released her own statement, praising the inclusion of multiple Democratic financial services measures.

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