In a letter to SEC Chair Elisse Walter, House Financial Services Committee Chair Jeb Hensarling (R-TX) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ) expressed their concern that the SEC continues to commit its limited resources to the pursuit of dubious legal theories at the same time that it struggles to meet statutorily imposed deadlines for promulgating regulations mandated by Congress. The oversight chairs are particularly alarmed by the juxtaposition of the SEC’s recent request for an additional $350 million in funding for fiscal year 2014 and the U.S. Supreme Court’s recent unanimous opinion in Gabelli v. SEC rejecting the SEC’s position of the application of a discovery rule to a federal statute of limitations.
With that in mind, Chairmen Hensarling and Garrett asked the SEC to provide, by April 5, 2013, the total number of staff hours dedicated to the Gabelli case, including but not limited to the total number of SEC staff labor hours spent litigating and appealing the case and the exact dollar figure associated with that labor. Also, if applicable, the SEC is asked to provide an accounting of any funds paid to outside counsel related to the Gabelli efforts.
On February 27, 2013, the Supreme Court ruled that the SEC must seek civil penalties within five years of an alleged violation of the Investment Advisers Act not, as the SEC had urged, five years from the date on which the SEC discovered or could have discovered the violation. In so ruling, the Court rejected application of the discovery rule approach to extending the statute of limitations in enforcement actions brought by the SEC. In the enforcement action, the SEC had alleged market timing violations of the 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 28 USC 2462 is applied. Gabelli v. SEC, Dkt. No. 11-1274.
In his opinion, noted the House leaders, Chief Justice Roberts drew a distinction between private parties who may be unwitting victims of fraud and government agencies whose core mission is to identify and pursue wrongdoing. Unlike the private party who has no reason to suspect fraud, said the Court, the SEC’s very purpose it to root it out and it has many legal tools at hand to aid it in that pursuit.
The House leaders observed that the Court’s opinion outlined the numerous legal tools available to the SEC to investigate securities fraud, including access to books and records, subpoena power, and authority to compensate whistleblowers. Given these significant investigative powers, the House oversight chairs agreed with the Supreme Court’s observation that, armed with these weapons, the SEC as an enforcer is a far cry from the defrauded victim the discovery rule evolved to protect. Chairmen Hensarling and Garrett expressed surprise that the SEC was unable to discover potential wrongdoing and institute civil proceedings against the Gabelli funds within a five-year time period. The Chairs again emphasized that the SEC should use its limited resources more productively, mentioning in this context meeting the statutory deadlines imposed by the JOBS Act, rather than pursuing baseless claims through several layers of appeal.