The House of Representatives (on Dec. 8, 2020) and the Senate (on Dec. 11, 2020) passed the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395 (the NDAA). While the bill’s principal focus is on defense appropriations, it includes as Section 6501, titled “Investigations and Prosecution of Offenses for Violations of the Securities Laws,” significant amendments to Section 21(d) of the Securities Exchange Act of 1934. First, the proposed amendments would grant the Securities and Exchange Commission (SEC) express statutory authority to pursue disgorgement in civil enforcement actions in federal court. Second, the bill doubles the statute of limitations applied to disgorgement actions for all cases involving fraud or scienter from five years to 10 years (leaving a five-year statute for disgorgement in non-fraud cases). The bill also sets a 10-year statute of limitations for other equitable remedies, including an injunction, bar, suspension, and cease and desist order. Although President Trump has threatened to veto the bill over disputes unrelated to its securities law provisions, the bill was passed by veto-proof majorities in both chambers. If enacted into law, the NDAA would potentially strengthen the SEC’s regulatory arsenal, but would nonetheless leave significant questions unanswered or unchanged as to the scope of the disgorgement remedy.
While the Securities Exchange Act does not explicitly authorize the SEC to seek disgorgement in federal court, the SEC has long sought and won disgorgement of ill-gotten gains under the federal courts’ power to order equitable relief. In 2017, the Supreme Court held in Kokesh v. SEC that disgorgement constitutes a punitive remedy for statute of limitations purposes, and is therefore subject to the five-year statute under 28 U.S.C. Section 2462. See "In Two Unanimous Rulings, U.S. Supreme Court Limits Penalties in SEC Enforcement and Criminal Actions." The Court in Kokesh left open the question of whether federal courts have the authority to require disgorgement in the first place.
In June 2020, the Supreme Court in Liu v. SEC confirmed the federal courts’ ability to order disgorgement under their statutory authority to seek equitable relief. See "Liu v. S.E.C.: Supreme Court’s Narrowing of SEC Disgorgement Raises Questions for Insider Trading Cases." The Court, however, imposed a number of limitations on the remedy’s scope. In particular, the Court required that any disgorgement be of an amount less than the wrongdoer’s net profits; that disgorgement be used for the benefit of wronged investors; and that the disgorged profits come from the wrongdoer itself, with possible exceptions for certain relationships such as business partners and married couples.
The NDAA’s securities law amendments are a partial response to Kokesh and Liu. Kokesh’s five-year limitations period for disgorgement had previously drawn congressional ire, with some legislative responses proposing as long as a 14-year statute. By granting the SEC express authority to seek disgorgement, the NDAA removes any lingering doubts about the SEC’s ability to seek this remedy and would potentially sway judges to order disgorgement in addition to civil penalties or other remedies. At the same time, the NDAA’s language indicating that disgorgement may be sought for unjust enrichment “by the person who received such unjust enrichment” could be more restrictive than the limitation previously set by the Court. While the bill would now enumerate both disgorgement and equitable relief as remedies available to the SEC in federal court, the bill does not define “disgorgement,” nor does it explicitly undercut any of the limitations that the Court imposed in Liu.
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