United States: SEC Holds Kokesh Does Not Impact FINRA Industry Bar

On August 23, 2019, the Securities and Exchange Commission (SEC or Commission) held in In re John M.E. Saad that the US Supreme Court's decision in Kokesh v. SEC had no impact on the Financial Industry Regulatory Authority's (FINRA) authority to bar individuals from association with FINRA member firms.1 Kokesh held that disgorgement claims brought by the Commission are a "penalty" and therefore subject to the five-year statute of limitations in 28 U.S.C. § 2462.2 Since then, litigants have sought to extend the case's application to other contexts. Though subject to further appeal, the Commission's decision here seeks to weaken those efforts and poses a challenge to those seeking to limit the SEC's or other agencies' ability to impose certain sanctions and/or impose those sanctions after expiry of a statutory limitations period. 

The Commission's decision follows a protracted procedural history. As relevant here, FINRA imposed a lifetime bar prohibiting Mr. Saad from associating with any FINRA member firms. Under Section 19(e)(2) of the Exchange Act, the Commission's review of whether sanctions imposed by a self-regulatory organization (SRO), such as FINRA,3 are improperly excessive or oppressive is based on "due regard for the public interest and the protection of investors."4 The Commission and federal courts have interpreted this language to mean that the Commission may approve SRO sanctions that are remedial, but not those that are punitive.5   

While Mr. Saad's second appeal was before the US Court of Appeals for the District of Columbia Circuit, the Supreme Court decided Kokesh. One of the factors that led the Kokesh Court to conclude that disgorgement was a penalty under Section 2462 was that at least part of the purpose of disgorgement was punitive, rather than remedial.6 The D.C. Circuit remanded Mr. Saad's proceedings to the Commission without extensive comment, to permit the Commission to determine, in the first instance, whether Kokesh was relevant to whether the bar imposed on Mr. Saad was "impermissibly punitive."7   

Then-D.C. Circuit Judge Brett M. Kavanaugh wrote separately to communicate his belief that the FINRA bar was punitive on the same grounds as the disgorgement discussed in Kokesh: it deters future wrongdoers, an expulsion is inherently punitive, and it protects the public rather than compensating a victim. Judge Patricia Millett, also writing separately, expressed doubt as to whether Kokesh affected Mr. Saad's claims at all, viewing Kokesh as narrowly applicable to the context in which it was decided—i.e., disgorgement—and likening FINRA's sanction to other cases of "occupational debarment" previously deemed "nonpunitive" by federal courts.9 

The Commission's opinion follows Judge Millett's reasoning. The Commission carefully cabins Kokesh to the scenario presented to the Supreme Court in that case—whether a particular pecuniary sanction fell within the scope of a particular statutory provision, 28 U.S.C. § 2462. SRO bars, the Commission reasons, are distinct in that they are nonpecuniary sanctions authorized by and subject to review under a different statutory scheme.10 The Commission determines that Congress specifically instructed SROs to discipline members, including through imposition of industry bars,11 and directed the Commission to review such sanctions to determine whether, in light of the Commission's obligation to advance the public interest and protect investors, industry bars are excessive, oppressive, or an unnecessary or inappropriate burden on competition.12 This statutory scheme, the Commission reasons, indicates that Congress took the view that SRO bars could be in the public interest and for the protection of investors and therefore served remedial purposes.13 The Commission concludes that it is "nonsensical to say that a sanction Congress explicitly authorized" could be "categorically impermissible."14

The Commission determined that the bar at issue is consistent with the securities laws and the policies underlying them, that Kokesh is not applicable to such bars, and that even if it were applicable to industry bars, FINRA bars are not categorically punitive.15 The Commission's decision here appears intended not only to address industry bars but also to attempt to rebut future efforts by litigants to apply the Kokesh test to other sanctions the SEC may impose. The decision's emphasis on the statutory scheme setting up SRO disciplinary requirements and review standards also appears to anticipate—and set up grounds for refuting—an argument that even if FINRA bars are not categorically punitive and therefore impermissible at all times, they may nonetheless constitute a "civil fine, penalty, or forfeiture, pecuniary or otherwise" subject to the five-year statute of limitations in 28 U.S.C. § 2462. 

In light of the Commission's determination that Kokesh does not apply and that the FINRA bar here was permissively remedial, we expect another appeal to the D.C. Circuit by Mr. Saad, reiterating the points from now-Supreme Court Justice Kavanaugh's concurring opinion in the last appeal—namely, that an SRO bar is inherently punitive because it does not make victims whole or remedy their losses, and that a bar is about deterring future conduct, not remediating a past harm.16 The issue thus is not resolved entirely. The Commission's decision here appears to anticipate future challenges and reflects the importance to the Commission's enforcement program of preserving the strength of its authority to police market participation. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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