Capital Markets & Public Companies Quarterly: The Kokesh Decision’s Impact on SEC Enforcement

by McDermott Will & Emery

McDermott Will & Emery

In Depth

The second quarter of 2017 was relatively quiet for the US Securities and Exchange Commission (SEC). As many commentators anticipated, the SEC’s pace of rulemaking slowed significantly in recent months. Nonetheless, there were several developments of note in the capital markets and public company regulatory fields. The US Supreme Court’s unanimous ruling in Kokesh v. Securities and Exchange Commission could have long-lasting implications for the SEC’s enforcement powers. In addition, the close of the second quarter brings public filers another quarter closer to the FY 2018 effective date of the new revenue recognition guidance (ASC 606) issued by the Public Company Accounting Oversight Board (PCAOB).

 Supreme Court’s Ruling on Disgorgement Order by the SEC

 On June 5, 2017, the Supreme Court ruled 9-0 in Kokesh v. Securities and Exchange Commission that SEC disgorgement claims for violations of federal securities laws constitute a penalty and are therefore subject to the five-year statute of limitations on civil penalties provided in 28 U.S.C. § 2462. Justice Sonia Sotomayor, writing the opinion for the Court, noted that SEC disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”

 The Supreme Court’s holding in Kokesh places a significant limit on the total dollar value of disgorgement penalties the SEC will be able to impose for violations of the federal securities laws. This much was evident in the Kokesh case itself wherein $29.9 million of the $34.9 million disgorgement judgement handed down by the district court against investment fund owner Charles Kokesh pertained to years prior to the five-year window provided for by the statute of limitations.

While the Kokesh ruling itself places a significant constraint on one of the SEC’s primary enforcement tools, the Court’s opinion also leaves open the possibility for future challenges to disgorgement actions. Footnote 3 of the Kokesh opinion provides:

“Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to §2462’s limitations period.”

With that footnote, the Court refrained from commenting on the appropriateness of the application of disgorgement principles in SEC enforcement proceedings, leaving the door open to such a future challenge.

Finally, although the Court’s opinion does not refer to disgorgement as a civil penalty, by finding that disgorgement is within the scope of applicability of § 2462 (which applies to civil penalties), the Court may be signaling that a disgorgement order is in fact a “civil monetary penalty.” The statutory limitations for civil monetary penalties, set pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, consist of fixed, inflation-adjusted figures. If disgorgement orders are determined to be civil monetary penalties subject to those statutory limitations, the SEC’s capacity to seek damages would be further limited.

Reminder: Hyperlinks to Exhibits in SEC Filings

As we have previously reported, the SEC adopted final rules and form amendments requiring issuers to include a hyperlink to each previously filed exhibit in the exhibit index of registration statements and periodic reports.

Issuers must comply with the final rules for filings submitted on or after September 1, 2017. Smaller reporting companies that are neither large accelerated filers nor accelerated filers and that submit filings in American Standard Code for Information Interchange (ASCII) do not need to comply with the final rules until September 1, 2018.

SEC Expands the Availability of Confidential Treatment of Draft Registration Statements

On June 29, 2017, the SEC announced that it will accept voluntary draft registration statements from all issuers for non-public review. Specifically, the Division of Corporation Finance will accept and review, on a confidential basis, registration statements for IPO issuers as well as for issuers registering a new class of securities. In addition, the Division will accept and review, on a non-public basis, draft registration statements submitted prior to the end of the 12th month following the effective date of an issuer’s initial registration statement. The announcement of this new policy signals the SEC’s continued movement towards collaboration with issuers to facilitate access to the US capital markets. The SEC has released further guidance in the form of a Frequently Asked Questions guide regarding the voluntary submission of draft registration statements for those issuers that would like to know more.

SEC Chief Accountant Discusses PCAOB’s Role in Securities Regulation

On June 8, 2017, SEC Chief Accountant Wesley Bricker, made remarks before the 36th Annual SEC and Financial Reporting Institute Conference (“Advancing the Role of Credible Financial Reporting in the Capital Markets”). His remarks reaffirmed the importance of the role played by the Public Company Accounting Oversight Board (PCAOB) in the US securities regulatory framework.

Specifically, he highlighted the PCAOB’s standard setting function and the benefits that have accrued to the US securities regulatory framework (including the quality of independent audits) due to the PCAOB’s active role as a standards setting organization. In particular, Mr. Bricker focused on the final auditor reporting standard recently published by the PCAOB, “The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion” (the ARM release).

If approved by the SEC, the ARM release would “retain a pass/fail opinion, while adding communication of critical audit matters, disclosure of audit firm tenure, and other revisions to clarify the auditor’s role and responsibilities and make the auditor’s report easier to read.” Mr. Bricker noted the importance of such a standard for the capital markets due to the fact that “investors are the primary beneficiaries of an audit and the auditor’s report is the primary means by which the auditor communicates to them.”

Remarks concluded with a call for continued innovation in financial reporting, indicating that the SEC will continue to focus on the use of new technologies to improve the US securities regulatory framework.

New Revenue Recognition Standard

For SEC reporting companies, FY 2018 represents the first year in which they must prepare financial statements consistent with the new revenue recognition standard ASC 606 . The principal change introduced by ASC 606 is the introduction of a five-step model for determining whether or not an entity may recognize revenue under its various agreements. Revenue is therefore only recognized under ASC 606 after completing the following five steps:

  1. Identify the contract with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when the performance obligations are satisfied.

Each of the individual steps noted above require separate analyses and will have substantial implications for the ways that reporting companies recognize revenue.

In addition, reporting companies should remember to include transition disclosures in their Form 10-Q filings prior to the effective date of ASC 606. In SEC Staff Accounting Bulletin Topic 11M (“Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period”), the SEC staff has taken the position that a reporting company should provide transition disclosures with respect to the potential effects a recently issued, but not yet implemented, accounting standard will have on the company’s financial position and results of operations. Generally, a registrant should include the following transition disclosures:

  • A brief description of the new standard, including the adoption date.
  • A discussion of the allowable methods of adoption and the company’s expected adoption method, if determined.
  • A discussion of the impact that adoption of the standard is expected to have on the company’s financial statements, or a statement to the effect that such impact is not known or reasonably estimable.
  • Disclosure of the potential impact of other significant matters that might reasonably result from the company’s adoption of the standard.

With respect to ASC 606 in particular, the SEC’s Chief Accountant noted in recent remarks that the staff expects “a qualitative description of the effect of the new accounting policies, and a comparison to the company’s current accounting to aid investors’ understanding of the anticipated impact” in situations where the company does not know or cannot reasonably estimate the expected financial statement impact of ASC 606.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McDermott Will & Emery | Attorney Advertising

Written by:

McDermott Will & Emery

McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.