Sunday, November 25, 2012

Securities Industry Urges the Supreme Court to Apply Bright Line Limitations Period to SEC Enforcement Action

In a case involving an SEC enforcement action for market timing, the securities industry urges the US Supreme Court to apply the five-year statute of limitations in 28 US Code Sec. 2462 as written without implying the discovery rule requested by the SEC and erroneously applied by the Second Circuit Court of Appeals. In an amicus brief, SIFMA said that the Court has repeatedly stressed that the financial markets need predictability and that the Second Circuit violated that principle by engrafting a discovery rule on to a five-year statute of limitations, thereby transforming it from a bright line into a shifting and uncertain inquiry. SIFMA was joined on the brief by the US Chamber of Commerce. The case is set for oral argument on January 8, 2013. (Gabelli v. SEC, Dkt. No.  11-1274 )

Judicially applying a discovery rule is particularly inappropriate in the securities law context, said SIFMA, because it invades the legislative province and creates an uncertainty in the markets that Congress deems unwise. The plain text of Section 2462 does not contain a discovery rule, noted amicus, and Congress knows how to insert a discovery rule into a statute when it wants to. It has incorporated a discovery rule into other statutes of limitations. In addition, SIFMA argued that engrafting a discovery rule onto Section 2462 would degrade, not enhance, enforcement of the securities laws. Indefinite extension of the statute of limitations for SEC enforcement actions would lead to perverse incentives, diminish the SEC's enforcement capabilities and injure innocent businesses.

The SEC alleged that the market timing conduct violated the Investment Advisers Act and sought monetary penalties for those violations. The Advisers Act, like many federal statutes, does not set forth a specific time period within which the government must institute an enforcement action. In such instances, the five-year limitations period in Section 2462 is applied. Despite this five-year limitations period, the SEC instituted the enforcement action eight years after the alleged misconduct began and six years after it ended, excusing the delay by asserting that the claim did not accrue until the SEC first discovered the alleged wrongdoing.

The plain text of Section 2462 precludes the SEC's interpretation, argued SIFMA. The term accrue means the occurrence of the event giving rise to the cause of action, said the brief, and does not support application of a discovery rule. Thus, contended SIFMA, the SEC's enforcement action is untimely.