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U.S. senator wants to grant the SEC more time to seek penalties
August 14, 2013 / 8:02 PM / 4 years ago

U.S. senator wants to grant the SEC more time to seek penalties

WASHINGTON, Aug 14 (Reuters) - A U.S. Senate Democrat is developing legislation that would double from five to 10 years the amount of time that federal securities regulators have to seek penalties, in an effort to help buy them more time to investigate complex cases.

Rhode Island Senator Jack Reed, a high-ranking member of the Senate Banking Committee, has been working with officials at the U.S. Securities and Exchange Commission and expects to introduce the measure some time this fall, his staffer confirmed.

The draft bill would extend the statute of limitations for the SEC and give it more flexibility as it tries to turbocharge its enforcement division. It is still haunted by its failure to catch the Bernard Madoff and Allen Stanford Ponzi schemes and has been criticized for a lack of marquee financial-crisis cases against Wall Street executives.

President Barack Obama earlier this year brought in former federal prosecutor Mary Jo White to head the agency, and in recent months it has charged hedge fund tycoon Steven A. Cohen and stepped up actions against municipal fraud, among other big cases.

“Securities cases can be exceedingly complex,” Senator Reed said in a statement provided exclusively to Reuters.

“If the SEC has a strong case that would serve to protect investors and those who do business appropriately, it would be a shame if a short statute of limitations were the reason for a case not being brought.”

It is not clear if such legislation would help the SEC bring cases tied to the 2007-2009 financial crisis. Case law is not definitive about whether such a change would apply to violations that occurred before the legislation is signed but had still not hit the original five-year statute of limitations.

The legislation’s chances of becoming law are also uncertain. Reed is hoping to get an influential Republican as a co-sponsor in the Senate.

The House of Representatives, which is controlled by Republicans, is more of a wild card. Republicans have generally been reluctant to boost funding for the SEC, but they have also called for the agency to be tougher in enforcing securities law violations.

This will mark the second time Reed has sought to help the SEC expand its enforcement authority.

In 2012, he and Iowa Republican Senator Charles Grassley introduced a bill that would boost the penalties the SEC can seek and triple the cap on funds it could obtain from repeat offenders. So far, that bill has not advanced.


The SEC’s five-year statute of limitations took center stage in February following the agency’s defeat in a case before the Supreme Court involving mutual fund manager Marc Gabelli and his colleague, Bruce Alpert.

The court ruled the SEC’s clock to seek civil penalties ran out five years after the violation occurs, not five years after investigators could have reasonably uncovered the fraud.

Extending the statute of limitations could put the agency on similar footing as the U.S. Department of Justice, which has 10 years to bring cases against financial firms under the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA.

The Justice Department has been increasingly using FIRREA to go after financial firms for their conduct during the financial crisis, from McGraw Hill’s Standard & Poor’s to Bank of America.

George Canellos, a co-director of enforcement at the SEC, said he endorses Reed’s proposal to extend the SEC’s statute of limitations.

“Given the complexity of these cases and the nature of the frauds we investigate, it makes sense to have a statute of limitations at least equal to the civil and criminal authorities of other agencies that also investigate frauds,” Canellos told Reuters.

Defense attorneys, however, warn the legislative proposal could lead to negative, unintended consequences.

“The real concern I think that Congress should have is with not holding the SEC’s feet to the fire,” said Robert Anello, a partner at Morvillo Abramowitz Grand Iason & Anello PC. “We expect them to ferret out misconduct and to proceed expeditiously. It doesn’t necessarily foster that if you give them the out of an extended statute of limitations.”

Russell Ryan, a partner at King & Spalding and former SEC enforcement lawyer, said the agency in most cases doesn’t need extra time to complete investigations, and that extending the limit could harm defendants.

“It would probably lead to the prosecution of a higher number of stale claims, which raises fairness issues to a defendant when witnesses can’t remember what happened or they died,” he said.


If Reed’s bill is enacted, it would be arguably the biggest boost to the SEC’s enforcement division since the 2010 Dodd-Frank Wall Street reform law.

That legislation gave the SEC broader national subpoena authority, allowed the SEC to charge individuals with aiding and abetting in wrongdoing and expanded the agency’s fining powers in is own administrative court.

However, the Dodd-Frank law short-changed the SEC when it granted the Department of Justice six years instead of five years to bring criminal securities cases, but failed to extend the statute of limitations for civil cases.

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