SEC Chair Jay Clayton outlined how the agency is responding to certain recent legal decisions that have impacted the agency's enforcement activities.

In an address at the Mid-Atlantic Regional Conference, Chair Clayton highlighted:

  • Kokesh v. SEC, which held that SEC claims for disgorgement are subject to a five-year statute of limitations that limited the agency's ability to return disgorged funds to defrauded investors. According to SEC estimates, the Kokesh decision led to the loss of approximately $900 million in disgorgement in filed cases for FY 2018.
  • Lucia v. SEC, which forced the SEC to reassign 200 administrative proceedings. While many have been resolved, he said, the remaining reassigned cases may require "substantial litigation resources going forward." Mr. Clayton stated that he is committed to using the administrative process only where appropriate.
  • The Robare Group, Ltd. v. SEC, which held that an investment adviser is not considered to have "willfully" omitted material facts for purposes of Section 207 of the Investment Advisers Act if the adviser acted negligently. While the Robare decision did not disturb the "decades-old standard" employed by most courts, Mr. Clayton stated, the decision requires the agency to "carefully consider" future Investment Advisers Act cases.
  • Lorenzo v. SEC, which will allow the SEC to continue to charge those involved in the dissemination of misstatements under the anti-fraud provisions.

Chair Clayton also emphasized the use of data analytics by the SEC's Office of Compliance and Exams and Enforcement Division, and stressed the importance of safeguarding the data collected by the SEC.

Commentary / Kyle DeYoung

Chair Clayton's remarks, which are his most significant to date discussing the SEC's enforcement program, provide valuable insight into how the SEC is likely going to approach some significant issues impacting the program. His reference to the fallout of the Lucia decision as a "speed bump, not a long-term" issue, shows that the Commission is not worried about additional challenges to its use of Administrative Proceedings ("APs"). At the same time, his comments suggest that the Division of Enforcement will not return to an aggressive use of APs in all kinds of cases, like it pursued in 2014 and 2015 before the Constitutional challenges to the process, but instead will take a measured approach and primarily pursue cases against registered persons and entities similar to the pre-Dodd-Frank era.

The extent of the impact of the D.C. Circuit's decision in Robare remains to be seen. Chair Clayton's statement that the SEC will carefully consider the appropriate standard for future Investment Act cases suggests that the Commission is still analyzing the decision and assessing its options. While his comments specifically mention only claims under Section 207 of the Advisers Act, the SEC is likely evaluating its ability to bring other charges that require willfulness based on allegations of negligence, as well as the decision's impact on the Commission's ability to obtain suspensions or bars against registered individuals or entities in administrative proceedings - either through settlements or contested actions. One can expect the SEC to choose its cases very carefully until there is more certainty in this area.

In contrast, Chair Clayton's remarks on the Lorenzo case suggest the SEC will continue to aggressively pursue fraud cases where an individual disseminates misleading statements even when he or she did not make the misleading statements at issue. In particular, his comment that the decision will help the SEC ensure that those who engage in "deceptive conduct" are held liable, will provide little comfort to practitioners concerned that the decision will embolden the SEC to be more aggressive in pursuing fraud claims where an individual's involvement in the alleged scheme and fraudulent intent are less than clear.

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