United States: Noteworthy US Securities Law Litigation In The Matter Montford And Company, Inc. V. SEC: 180-Day Time Limit For SEC To Bring Action Following A Wells Notice Does Not Preclude SEC From Bringing Actions After That Time

On 10 July 2015, the federal appellate court in Washington, D.C., held that the SEC can continue to bring actions for securities violations even after the 180-day time limit in the Exchange Act for bringing such actions has passed. After reaching this conclusion, the court also affirmed the disgorgement order and civil monetary penalty that the SEC imposed on Montford and Company ("Montford") and its founder for failing to disclose that the company received payments from an investment manager to which Montford recommended its clients even though Montford described itself as an independent and unbiased investment advisor.

Montford is a registered investment advisor to institutional investors that described itself as "independent" and as a firm that "did not accept any fees from investment managers" and that would disclose any information that might compromise its "ability to make unbiased and objective recommendations". Despite these disclosures, Montford received $210,000 from an investment manager at least in part in exchange for Montford's strongly recommending that its clients invest with that manager. In March 2011, the SEC sent a letter, known as a "Wells notice," advising Montford of an ongoing investigation and potential securities violations based on this arrangement. Then, 187 days later, in September 2011, the SEC commenced an administrative proceeding against Montford and its founder that resulted in industry bars, cease-and-desist orders, and a disgorgement order and civil penalties totalling $860,000.

The Montford parties argued that the SEC was not permitted to bring this action because the Exchange Act provides that the SEC "shall" file an action no later than 180 days after it issues a Wells notice. Based on a well-established rule that federal agencies are afforded deference in their reasonable interpretations of ambiguous statutes that they administer, the court held that the Exchange Act left open whether its 180-day time limit precludes the SEC from bringing actions after that period expires. The SEC's view "that the provision is intended to operate as an internal-timing directive, designed to compel our staff to complete investigations, examinations, and inspections in a timely manner and not as a statute of limitations," was a reasonable interpretation. This ruling was based in part on "the strong presumption that, where Congress has not stated that an internal deadline shall act as a statute of limitations, courts will not infer such a result."

Having ruled that the SEC was permitted to bring its action against the Montford parties following the 180-day deadline, the court went on to affirm the SEC's imposition of a disgorgement order and civil monetary penalties. Noting that the SEC "has flexibility in ordering disgorgement" and that it is owed "great deference" in its choice of sanctions, the court held that the Montford parties' referral payments were sufficiently connected to their failure to disclose those payments and that the record supported the amount of civil penalties imposed.

The court in this case has established an important rule: namely, that the SEC can continue to bring enforcement proceedings even after its 180-day internal time limit has expired.

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