February 2, 2021
Authored by: Ashley Ebersole and Eric Rieder
The National Defense Authorization Act (“NDAA”) became law on January 1, 2021 after Congress overrode a presidential veto of the legislation. While the NDAA appropriates funds for defense-related activities and the then-President objected to the legislation based primarily on collateral issues like liability for online content, the Act also will have a significant impact on securities law enforcement. The legislation included language that significantly bolsters the power of the Securities and Exchange Commission (“SEC”) to obtain disgorgement of ill-gotten gains from securities law violators who are unjustly enriched. This is a reversal of fortune for the SEC, which has lost a string of recent notable court cases that curtailed its disgorgement authority.
The NDAA’s SEC-friendly provisions both solidify the agency’s authority to obtain disgorgement through its enforcement actions and provide a materially longer statute of limitations in which the SEC can file these actions. First, Section 6501 of the NDAA amends Section 21(d) of the Securities Exchange Act of 1934 (“Exchange Act”) to expressly authorize the SEC to obtain disgorgement as a remedy for violations of the securities laws. Prior to this amendment, the Exchange Act authorized the SEC to seek “any equitable relief that may be necessary or appropriate,”1 and courts routinely awarded the agency disgorgement as an equitable remedy. But this longstanding practice was hampered by two recent Supreme Court opinions, Kokesh v. SEC and Liu v. SEC.
In Kokesh, the Supreme Court unanimously ruled that disgorgement constituted a “penalty” rather than “equitable relief” and was therefore subject to the five-year statute