SEC Enforcement in 2021: A New Administration and New Powers

A new administration always brings changes to the Securities and Exchange Commission. Whereas here the new President is of a different party than the outgoing President, changes are more pronounced. The composition of the Commission changes moving from a Republican majority to a Democratic majority. The new President picks a new chair and important lower-level officials, such as the head of the Enforcement Division.

True to his campaign promises, Joe Biden intends to make the federal regulatory agency less business-friendly and far more aggressive. For the SEC, President Biden has tapped Gary Gensler to be the new chairman of the SEC. He previously ran the Commodities Futures Trading Commission. While at the CFTC, Gensler developed a reputation as a bold and aggressive regulator. He is widely expected to increase enforcement activity, particularly against large public corporations and financial-market players.

This is not to say that the SEC’s enforcement efforts were lackluster under the prior administration, although they were slowed by the pandemic in 2020. In 2019, the SEC brought 862 enforcement actions recovering $4.35 billion.[1] This was up slightly from 821 enforcement actions recovering $3.95 billion in 2018.[2] 2020 was a somewhat slower year: The SEC brought only 715 actions but recovered $4.68 billion.[3]

As we move out of the pandemic and the SEC returns to a more normal mode of operations, we can expect a rise in enforcement activity. The increase will be, in part, due to the SEC’s workflow returning to normal and, in part, due to more aggressive leadership. Moreover, there is a strong, historical correlation between economic downturns (such as we are experiencing now) and a rise in the commission of new frauds and the discovery of old frauds.

In addition, Congress gave the SEC more tools to work with in the recently passed National Defense Authorization Act. First, the NDAA expressly authorizes a disgorgement remedy from any person who was unjustly enriched due to a securities violation. Second, the act extends the statute of limitations for any (nondisgorgement) equitable remedy to 10 years and sets the statute of limitations for disgorgement at 10 years if the violation involves a violation of § 10(b) of the ’34 Act, § 17(a)(1) of the ’33 Act, § 206(1) of the ’40 Act or “any other provision of the securities laws for which scienter must be established.”

These statutory changes partially override the Supreme Court’s opinions in Liu v. SEC[4] (limiting the disgorgement remedy) and Kokesh v. SEC[5] (imposing a five-year statute of limitations on disgorgement). By extending the statute of limitations and removing the requirement that the SEC pay disgorged funds to investors, the NDAA reinvigorates the disgorgement remedy, allowing the SEC to apply it to a broader category of violations.

The extension of the statute of limitations from five to 10 years should be particularly impactive. Since the Supreme Court decided Kokesh, the SEC has repeatedly complained that a five-year statute of limitations would substantially reduce the SEC’s efforts to investigate and prosecute long-standing frauds.[6] It estimated that Kokesh forced the SEC to forego over $800 million in 2018 alone.[7] Former SEC officials and other commentators have echoed these concerns, noting that the reduced statute of limitations would reduce the SEC’s leverage in settlement negotiations, as well as limit the types of actions the SEC could bring.[8] Extending the statute of limitations should alleviate many of these concerns, freeing the SEC to pursue a broader range of cases.

So what can we expect from a more aggressive SEC with additional powers? We can surely expect a greater emphasis on rule-writing and regulation of large corporations and financial institutions — matters admittedly of little interest to most insolvency professionals. But there is something in all of this for us as well. As the limitations imposed by Kokesh have eased, we can expect the SEC to bring more fraud actions and to increase its use of receivers. In fraud cases, the SEC routinely uses disgorgement as a tool to return funds to injured investors. When it does so, it generally seeks the appointment of a receiver to monetize the disgorged assets, to file tort and fraudulent transfer suits, and to distribute recovered funds to the injured investors. We can also expect additional bankruptcy filings as fraudfeasors seek to evade the SEC.