Dodd-Frank 180-Day “Deadline” For SEC to Take Action Not Really a Deadline After All

Posted on July 15, 2015, by Richard J.L. Lomuscio in Administrative Proceedings, SEC Guidance. Comments Off on Dodd-Frank 180-Day “Deadline” For SEC to Take Action Not Really a Deadline After All

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit recently ruled that Section 4E of the Securities Exchange Act of 1934, 15 U.S.C. § 78d-5(a)(1) – which provides that “[n]ot later than 180 days after the date on which [Securities and Exchange Commission (“SEC”)] staff provide a written Wells notification to any person, the [SEC] staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an action” – did not bar an administrative action against an individual (Ernest V. Montford, Sr.) and his investment advisory firm (Montford Associates) commenced 187 days after such notification.   Montford & Co. v. SEC, No. 14-1126, slip op. at 2 (D.C. Cir. July 10, 2015).

The appeal stemmed from $860,000 in penalties and disgorgement that the SEC imposed on Montford and his firm following the SEC’s affirmance of an administrative law judge’s determination that they violated their fiduciary duties to nonprofit groups that were clients by not disclosing kickbacks allegedly received from an investment manager Montford recommended that the clients use.  Id. at 2.  Both the administrative law judge and the SEC rejected the argument that the 180-day deadline served as a limitations period for any action, finding that: (i) dismissal is not an appropriate remedy when the deadline is exceeded because Section 4E is silent about the consequence for noncompliance; and (ii) there is no jurisdictional consequence for failure to comply with an internal deadline for federal agency action. 8.   The D.C. Circuit ruled that the SEC’s interpretation of Section 4E as not jurisdictional was reasonable and entitled to deference under applicable law.  Id. at 13.  The D.C. Circuit declined to address the SEC’s alternative argument that the Division of Enforcement properly extended the deadline because this was a “complex” action under 15 U.S.C. § 78d-5(a)(2).  Id. at 7, 13.

While it seems unlikely that an Article III court addressing the 180-day issue in the first instance would reach a different result given the statute’s language and U.S. Supreme Court precedent, the D.C. Circuit’s opinion highlights that “deference” can prevent judicial review of SEC decisions affecting substantive rights further adding to the perception that administrative enforcement proceedings provide the SEC with a “home court” advantage.  If nothing else, the decision is another example of the ebbs and flows in the ongoing debate surrounding the SEC’s increasing reliance on administrative rather than court enforcement actions.

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