Senator Jack Reed introduced legislation last week to extend the statute of limitations for civil monetary penalties brought by the SEC from five to ten years. The proposed bill would give the Securities and Exchange Commission additional time to discover and investigate financial fraud before the clock runs out on its ability to bring a lawsuit.
In 2013, the Supreme Court unanimously declared that the five year statute of limitations starts running when the law is broken and not when the government discovers that misconduct occured. The case involved a violation of the Investment Advisers Act of 1940. The decision for the Court in Gabelli v. SEC was written by Chief Justice Roberts. The Court rejected application of the discovery rule and set the start to the clock ticking on potential government enforcement at the time the cause of action accrues.
Given the complexity of financial products and the determination that there has been fraud against investors or another violation of the federal securities laws, a short window for the SEC to bring an enforcement action makes it even more important that the securities regulator encourages whistleblowers to file tips under the SEC program.
Earlier this year, the CFTC brought an action for market manipulation and spoofing in the case of the 2010 Flash Crash near the five year statute of limitations for such cases. The CFTC reportedly received assistance in that investigation from a whistleblower tip.
Senator Reed has another piece of legislation in front of the Senate to increase the maximum civil penalty that can be imposed by the SEC for a violation of federal securities laws. Similar legislation has been proposed to increase the potential penalties for delayed recalls that can be issued by the NHTSA.