The U.S. House Committee on Financial Services heard testimony on eight bills intended to enhance SEC and Public Company Accounting and Oversight Board ("PCAOB") enforcement authority.

The eight bills would, respectively:

  • require the SEC to stop U.S. public companies from trading on an exchange or alternative trading system if the companies are audited by a foreign firm that the PCAOB has been unable to inspect for three or six consecutive years, depending on the type of firm;
  • increase the SEC's statutory limits on civil monetary penalties;
  • create a whistleblower program at the PCAOB;
  • make PCAOB hearings and related notices, orders and motions available to the public, with some exceptions;
  • overturn the Supreme Court's decision in Kokesh v. SEC, which held that disgorgement was a penalty and subject to a five-year statute of limitations, and allow the SEC to obtain equitable relief, including disgorgement and restitution, without being subject to a statute of limitations;
  • force publicly traded companies to disclose whether their senior executives or shareholders are helping to bear the costs of company fines and/or penalties;
  • extend the five-year statute of limitations for the SEC to seek a civil penalty to 10 years from the date of the violation (remedying the restrictions to SEC authority caused by Gabelli v. SEC); and
  • amend the current waiver process for "bad actor" disqualifications.

Labaton Sucharow Partner Jordan A Thomas proposed alternatives to addressing Gabelli and Digital Realty Trust, Inc. v. Somers. In regard to Gabelli, Mr. Thomas recommended that the SEC keep the five-year statute of limitations, but provide an exception for cases with ongoing violations or fraudulent concealment. To remedy Digital, which "seriously undermined" the anti-retaliation protections for securities law whistleblowers, Mr. Thomas advised that Congress amend the statutory decision of "whistleblower" to include individuals who report internally as well as to the SEC.

Georgetown University Law Center Professor Urska Velikonja stated that the SEC's enforcement practices are "threatened" by Kokesh and Gabelli. Inaction, according to Ms. Velikonja, would greatly impede SEC enforcement matters.

University of Virginia School of Law Professor Andrew N. Vollmer expressed concerns regarding the SEC's increased enforcement authority under these bills. Specifically, he questioned the "need" for allowing the SEC to recover investor losses and for the extended 10-year limitations period. Additionally, he advised the SEC to consider alternative solutions to delisting firms that do not cooperate with the PCAOB.

Murphy & McGonigle PC Partner Stephen Crimmins advocated for, among other things:

  • the creation of a uniform limitation period for SEC claims (e.g., disgorgement claims);
  • a hybrid approach for statutes of limitations to ensure "reliable testimony";
  • confirmation of the SEC's ability to compel the disgorgement of illegal gains; and
  • a measured approach to enhancing the SEC's penalty authority.

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