SEC forced to try new ways of pursuing bad financial advisers

The US investment regulator’s powers to recoup losses from financial advisers who break the law were dealt a blow by a landmark Supreme Court decision this summer. But the Securities and Exchange Commission has stressed to the FT that the court’s decision will have a limited impact on its ability to go after wrongdoers.

In a June case, the court unanimously agreed that the SEC can recover money from individuals found guilty of violating federal securities laws only within five years of the incidents taking place. Previously there was no time limit.

Several legal experts have claimed the case puts the regulator at a considerable disadvantage when seeking redress. “The decision clearly imposes a limit on SEC enforcement powers and may force the staff to rely more on civil money penalties,” says Howell Jackson, a professor at Harvard Law School.

However, the SEC says its ability to recoup losses remains a useful tool for pursuing wrongdoers and that the majority of relevant enforcement actions would still probably fall within the five-year period.

Ordering advisers to return funds to their clients is one of the regulator’s strongest powers. From 2007 to 2016 the SEC recouped $20.6bn of losses, compared to ordering $9.1bn of penalties.

The decision also does not stop retirement plans and savers suing advisers for recompense in private courts.

Eben Colby, a litigation partner at Skadden Arps, Slate, Meagher and Flom, believes the SEC is pursuing a “workaround” that effectively extends the regulator’s investigation timeframe beyond the five-year window.

These so-called “tolling agreements”, where regulators can extend the legal timeframe if the individual being investigated agrees, also give the SEC longer to make its case. The SEC declined to comment on how it planned to use tolling in its enforcement policy but Mr Colby says he has already seen an increase in such agreements being used.

He warns, however, that the decision could hamstring the SEC from going after offenders who commit fraud over decades.

While the decision may seem unjust to investors, John Coffee, a Columbia Law School professor, says the ruling was no surprise for most Supreme Court watchers. “The court was not willing to tolerate regulators having a potentially infinite period in which they could sue for damages that had grown to an immense level over decades of alleged violations — with interest running,” he says.

The court said that recouped funds rarely made their way to victims. Instead such money usually went to the Treasury.

Clinton Marrs of Marrs Griebel Law, the attorney who brought the case against the SEC to the Supreme Court, says the decision gives the government an incentive to go after only the most serious criminals and allocate resources effectively.

“It’s a plus for investors to have a more efficient regulator. After this decision, the SEC should think twice about chasing marginal cases,” Mr Marrs says.