Supreme Court Rules 5-4 That Pendency of Class Action Suit Does Not Toll 3-Year Statute of Repose for Claims Brought Under § 11 of Securities Act

On June 26, 2017, the Supreme Court ruled, in California Public Employees’ Retirement System v. ANZ Securities, Inc., that a pending putative class action does not toll the running of the three-year time bar for claims brought under § 11 of the Securities Act. The Court ruled that the three-year time limit set forth in § 13 of the Securities Act is a statute of repose designed to provide defendants full and final protection from suit after three years and is therefore not subject to equitable tolling principles, including the class action-tolling rule.

The decision was split 5-4, with Justice Kennedy writing for the majority and Justice Ginsburg authoring the dissent. The decision is here.

In 2007 and 2008, Lehman Brothers raised capital through several public securities offerings. In 2008, a putative class action was filed in the Southern District of New York, alleging that the registration statements for certain of the securities offerings contained material misstatements or omissions, in violation of § 11 of the Securities Act. CalPERS was a member of the putative class.

Section 13 of the Securities Act provides two time limits for § 11 lawsuits: the action must be brought (i) within one year after the untrue statement or omission was or reasonably should have been discovered; but (ii) in no event more than three years after the securities were offered to the public.

In February 2011, more than three years after the relevant securities offerings, CalPERS filed a separate complaint against the same defendants in the Northern District of California, alleging the same claims.

Soon thereafter, a proposed settlement was reached in the putative class action, but CalPERS opted out. The defendants then moved to dismiss CalPERS’ separate action, alleging that the claims were untimely.

CalPERS argued that the limitations period was tolled during the pendency of the class action, under the rule previously set forth by the Supreme Court in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974).

The district court disagreed with CalPERS and dismissed the case as untimely; the Second Circuit affirmed.

The Supreme Court affirmed, holding that the three-year limit in § 13 is a statute of repose and is therefore not subject to equitable tolling, including the equitable tolling provided under the American Pipe class action-tolling rule.

The Court distinguished American Pipe by noting that the statute in that case was one of limitations, not of repose; it began to run when the cause of action accrued. Slip Op. at p. 11. The three-year statute at issue in CalPERS’ case, on the other hand, is a statute of repose. The statute runs from the offering of the securities, not from a plaintiff’s discovery of defects in the registration statement, and it provides that “[i]n no event” shall the action be brought more than three years after the offering.

The Court noted that the “text, purpose, structure, and history of the [§ 13] statute all disclose the congressional purpose to offer defendants full and final security after three years.” Slip Op. at 11.

Therefore, the Court held, while the statute in American Pipe could be tolled by equitable principles, the three-year limit in § 13 could not. The Court reasoned that “the object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity.” Slip Op. at 7.

The Court provided a clear summary of its ruling, as follows:

The 3-year time bar in §13 of the Securities Act is a statute of repose. Its purpose and design are to protect defendants against future liability. The statute displaces the traditional power of courts to modify statutory time limits in the name of equity. Because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3-year period. Slip Op. at 16-17.

Given the Court’s reasoning, the ruling likely applies as well to claims under Rule 10b-5, which may be brought not later than the earlier of two years after discovery of the facts constituting the violation or five years after such violation.

Accordingly, plaintiffs who wish to preserve their right to separately litigate claims that are subject to a running statute of repose cannot rely on the pendency of a putative class action to toll their claims. They will need to either file a separate protective case or intervene in the class action within the time period to protect their rights. Defendants, on the other hand, can feel secure that, after they settle a class action, they will not be exposed to opt-out litigation filed after the statute of repose has run.

Posted in Uncategorized

Supreme Court Limits SEC’s Disgorgement Power

On June 5, 2017, the United States Supreme Court unanimously held in Kokesh v. Securities and Exchange Commission, No. 16-529, that “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”  Slip. Op. at 11.  The Opinion can be found here.

Equally important is the ruling’s implication that, even if the case is timely filed, the SEC can only seek disgorgement of funds or property that was received in the five years prior to the filing of the SEC’s action. In other words, even if the alleged wrongdoing occurred over more than five years, the SEC’s claim for disgorgement can only go back five years from the date the action was filed.

The SEC brought its case against Kokesh in 2009, and alleged that Kokesh had misappropriated $34.9 million between 1995 and 2009. After a jury found for the SEC, monetary sanctions were imposed. The district court held that, when it came to a penalty, the five-year statute of limitations precluded any penalties for misconduct that occurred more than five years prior to the date the SEC filed its action.

As to disgorgement, however, the district court held that there was no statutory provision that limited the time period for which a disgorgement claim could be asserted, and therefore entered judgment against Kokesh for the full $34.9 million misappropriated over fourteen years, plus interest.

The Tenth Circuit affirmed.

The Supreme Court  reversed and held that disgorgement constitutes a “penalty,” and is therefore subject to the five-year statute of limitations found in 28 U.S.C. § 2462.

Interestingly, the Supreme Court explicitly noted that Kokesh should not be viewed as a determination of whether courts have the authority to order disgorgement in SEC enforcement proceedings or on whether the district court in Kokesh properly applied disgorgement principles.

In other words, in Kokesh, the Supreme Court not only severely limited the SEC’s ability to “claw back” alleged ill-gotten gains, it pointedly raised the issue of whether courts even possess the authority to order disgorgement in SEC enforcement proceedings.

Posted in Uncategorized

Should the DOL Fiduciary Duty Rule be Rescinded While the SEC Ponders its Own Standard?

On June 1, 2017, the Securities and Exchange Commission requested input regarding the DOL Fiduciary Duty Rule and the SEC’s development of its own fiduciary standard governing investment advice to retail investors. To view Chair Clayton’s public statement requesting Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, click here.

In the public statement, Chair Clayton remarked: “The [DOL’s] Fiduciary Rule may have significant effects on retail investors and entities regulated by the SEC. It also may have broader effects on our capital markets. Many of these matters fall within the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” Chair Clayton stressed the need for intergovernmental coordination and “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

Curiously, the SEC did not specify a deadline for the requested input, which raises the question: Just how long is this analysis going to take? After all, the RAND study concluded almost ten years ago. And, the DOL Fiduciary Duty is scheduled for full implementation on January 1, 2018.

In our view, the SEC’s reasoning leads to one, and only one conclusion: The DOL Rule should be rescinded until the Commission completes its analysis and there has been full and complete intra-agency review and publication of (a) whether there should be a uniform fiduciary duty standard and, if so, (b) its scope. The Commission is charged with regulation of our capital markets, of which retirement accounts are only a part.

Otherwise, chaos will reign and the retail investor will ultimately suffer, as “orderly disorder is based on careful division.”

Posted in Department of Labor (DOL), Fiduciary Duty Rule, SEC, Uncategorized

Acosta and New DOL FAQs Confirm: Fiduciary Standard Will Take Effect June 9, But Expect Changes to the DOL Rule Before January 1, 2018

On May 22, 2017, new DOL Secretary Alexander Acosta published an Op-Ed piece in the Wall Street Journal (found here; a subscription to the Journal is required to access the piece), confirming that, as we previously suspected, the DOL will allow the fiduciary standard for retirement advice to take effect on June 9. (Our previous blog post discussing the delay to June 9 is here.)

In his piece, Acosta sounds, at best, skeptical about the Rule. He writes, “the Fiduciary Rule as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them.” However, Acosta concedes that the DOL has “found no principled legal basis to change the June 9 [applicability] date while we seek public input.”

Acosta advises that the DOL will seek additional public input on the entire Fiduciary Duty Rule and on “how to revise this rule.” Acosta explicitly hopes that the SEC will be a “full participant” in revising the Rule as the SEC has “critical expertise in this area.” (Our previous blog post discussing the interplay between the DOL and the SEC in considering a fiduciary standard is here.)

So, that means on June 9, the Fiduciary Duty Rule will go into partial effect. Persons who make recommendations to retirement investors will be considered fiduciaries. Full implementation is currently scheduled for January 1, 2018, but, given Acosta’s comments, it seems clear that further (and probably significant) changes will be made before then.

The DOL also issued new Conflict of Interest FAQS last week, further explaining what firms and advisers must do during the transition period from June 9, 2017 to January 1, 2018. (The FAQs can be found here.)

  • Firms and advisers advising retirement investors must comply with an exemption (such as the BICE or PTE 84-24) after June 9 if they receive compensation for investment advice that varies based upon the transaction or product sold.
  • The BICE will be less onerous during the transition period. To rely on the BICE during the transition period, firms and advisers need only comply with the “Impartial Conduct Standards,” which are: (i) give advice that is in the “best interest” of the retirement investor (meaning advice that is prudent and loyal); (ii) charge no more than reasonable compensation; and (iii) make no misleading statements about investment transactions, compensation, and conflicts of interest. The other BICE conditions, including the requirement to execute a contract with the customer containing certain enforceable promises, making certain specified disclosures, and implementing certain policies and procedures, will not be required during the transition period.
  • Also, during the transition period, firms and advisers may continue to rely on PTE 84-24 for all annuity contracts, except that they must also comply with the Impartial Conduct Standards.
  • The DOL again cautioned that it “expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the Impartial Conduct Standards.” However, the DOL specified that it “does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures, nor does it insist that they adhere to all of the specific provisions of [the BICE].” FAQs at p. 5.

The FAQs reaffirm that, during the transition period, “even if a fiduciary adviser recommends proprietary products or investments that generate commissions or other payments that vary with the investment recommended, the adviser can meet the impartial conduct standards by ensuring that the recommendations are prudent; the investment advice is based upon the customer’s financial interests, rather than the adviser’s competing financial interests in the transaction; the communications are free from material misrepresentations; and the associated fees and charges are reasonable.” FAQs at p. 5.

Consistent with Acosta’s Op-Ed piece, the FAQs state that the DOL intends to issue a Request for Information soon for additional public input on the Rule and its exemptions, including whether an additional delay to the full implementation date is prudent.

Finally, the DOL attempts to reassure firms and advisers that it will work together with them “to help them come into compliance with the Fiduciary Rule” and that its focus will be “marked by an emphasis on compliance assistance (rather than citing violations and imposing penalties).” FAQs at p. 10. The DOL states that it is issuing “a new temporary enforcement policy for the transition period, under which the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” FAQs at pp. 10-11.

Some insiders in the financial markets are taking comfort from the DOL’s assurances that it will work with firms and advisers to assist in achieving compliance rather than to punish good faith efforts that may nevertheless fall short. Others, however, have said that they are reminded of President Reagan’s famous quote that “the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’”

Posted in Administration, Department of Labor (DOL), Fiduciary Duty Rule, Retirement Planning, Uncategorized | Tagged , , , , ,

Cybersecurity Alert: WannaCry Ransomware Attack

In response to the “WannaCry” ransomware attack, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued an alert (available here) warning firms that they should immediately evaluate whether their computer systems are operating properly and whether they have updated their operating systems to patch the vulnerabilities that the attack has exploited.  The United States Department of Homeland Security also issued an alert (available here).

Last week and over the weekend, the WannaCry attack roiled industries throughout the world by exploiting a soft spot in the Microsoft Windows operating system that had been exposed through a hack of documents from the National Security Agency.  This ransomware attack infiltrates your computer systems, encrypts your files, and then demands payment of $300 in bitcoin (an untraceable online currency) for the return of your files.

Given the kinds of information that firms store on their systems, particularly sensitive customer personal and financial information, all firms should review the OCIE’s alert (available here) and the alert published by the United States Department of Homeland Security (available here).

Posted in Cybersecurity and Data Privacy, Uncategorized | Tagged , , ,

SEC Chair and DOL Secretary Both Confirmed: Who Will Take Lead on Fiduciary Duty Rule?

On April 27, 2017, the Senate confirmed Alexander Acosta as the new Secretary of Labor, and on May 2nd, the Senate confirmed Jay Clayton as SEC Chairman. With Trump’s nominees for the respective positions now in place, some insiders expect to see a unified approach on a fiduciary standard rule.

After all, the Dodd-Frank Act of 2010 gave the SEC – not the DOL – the authority to promulgate rules to provide a fiduciary standard of conduct for broker-dealers. But, when the SEC failed to act on this authority, the DOL stepped in and enacted its own Fiduciary Duty Rule for retirement investors.

Currently, that DOL Fiduciary Duty Rule is scheduled to go into effect on June 9, 2017.

Will it still?

The same day he was approved by the Senate as DOL Secretary, Acosta received a letter signed by 124 Congressional Republicans urging him to further delay implementation of the Fiduciary Duty Rule and eventually kill it. The letter called the issue an “urgent need” and echoed the concerns of financial industry groups who warn of the Rule’s negative impact on the retirement industry.

And on the SEC side, then-acting SEC Chair Michael Piwowar blasted the DOL Rule back on March 2, and suggested that the SEC should be taking the lead on the development of a standard of conduct. “I think it is a terrible, horrible, no good, very bad rule,” Piwowar said at the Investment Adviser Compliance Conference in Washington. “For me, that rule was never about investor protection. It was about enabling trial lawyers to increase profits.”

Piwowar followed up on April 21:

“We have an opportunity, with a changeover in administration now, for the SEC to reassert its role in this space,” Piwowar said at a Mutual Fund Directors Forum Conference in Washington. “That’s something that I look forward to having discussions [about] with the new chairman.”

Piwowar suggested “taking a step back” and perhaps using the 2008 results of the RAND study that the SEC commissioned as a starting point for the renewed discussion. The RAND study found that retail investors generally had difficulty understanding the distinctions between investment advisers and broker-dealers, including their duties of care, the titles they use, the services they offer, and the fees they pay for those services.

Some industry insiders urge that the DOL should step aside and defer to the SEC – as the SEC has over 80 years of experience on the subject and began the rule-making process back in 2007 by commissioning the RAND Study.

So, what will Acosta and Clayton do? The text of the DOL’s Delay Rule, which was issued on April 7, suggested very strongly that the DOL intended to allow the extended June 9, 2017 applicability date for the Fiduciary Duty Rule to go forward. Our blog post analyzing the Delay Rule is here.

And yet some insiders expect Acosta to assert his new role by further delaying the Rule or even taking steps to rescind it.

Ultimately, given how unpredictable the process has been to date, financial institutions and advisers would be wise to prepare for the DOL Rule to go forward as scheduled on June 9. Given that the DOL has explicitly said it expects firms to “implement procedures to ensure that they are meeting their fiduciary obligations” as of June 9, it would be risky to assume that, whatever they ultimately do, the new DOL Secretary or DOL Chair will act quickly enough to prevent those “fiduciary obligations” from taking effect on June 9.

Posted in Department of Labor (DOL), Fiduciary Duty Rule, SEC, Uncategorized | 1 Comment

DOL Issues Rule Delaying Applicability Date of Fiduciary Duty Rule for 60 Days, Until June 9, 2017

On Friday, April 7, 2017, the DOL published its final rule delaying the applicability date of the Fiduciary Duty Rule for 60 days, from April 10, 2017 until June 9, 2017. The full text of the final rule (the Delay Rule), 82 Fed. Reg. 16902, is here.

The Delay Rule has five important parts:

  • The applicability date of the Fiduciary Duty Rule is delayed for 60 days until June 9, 2017 – meaning that the application of a fiduciary standard to persons who make recommendations to retirement investors takes effect on June 9;
  • The applicability date of the Best Interest Contract Exemption (the BICE) and the Principal Transactions Exemption is delayed for 60 days until June 9, 2017;
  • Fiduciaries relying on the BICE and the Principal Transactions Exemption are required to adhere only to the “best interest” standard and the other Impartial Conduct Standards of those exemptions during the transition period from June 9, 2017 through January 1, 2018 – meaning that the other conditions in the BICE and the Principal Transactions Exemption, such as requirements to make specific written disclosures and representations of fiduciary compliance in investor communications, are not required until January 1, 2018;
  • The applicability of amendments to PTE 84-24 is also delayed until January 1, 2018 (thereby allowing indexed and variable annuity transactions to proceed under PTE 84-24 until January 1, 2018, rather than the more strenuous BICE), except that the Impartial Conduct Standards will become applicable on June 9, 2017; and
  • The applicability dates of the amendments to other previous granted PTEs are extended for 60 days until June 9, 2017.

The DOL states the Delay Rule is necessary to enable the DOL to perform the analysis required by Trump’s February 3 Presidential Memorandum on Fiduciary Duty Rule, which instructed the DOL to analyze:

  • Whether the Fiduciary Duty Rule may harm investors’ ability to access retirement savings offerings, products, information or advice;
  • Whether the applicability or implementation of the Fiduciary Duty Rule will cause disruption in the financial services industry that will adversely affect retirees; and
  • Whether the Fiduciary Duty Rule is likely to result in an increase in litigation and consumers’ costs to access the retirement market.

The Presidential Memorandum instructs that, if the DOL answers any of the above questions in the affirmative, then the DOL is required to propose a rule (for notice and comment) “rescinding or revising the [Fiduciary Duty] Rule, as appropriate and as consistent with law.”

Our blog post discussing Trump’s February 3 Memorandum is here.

So, will the DOL act again before June 9, either to push the applicability date out farther, or to revise or rescind the Fiduciary Duty Rule in light of the analysis performed in accordance with Trump’s Memorandum?

The full text of the Delay Rule makes that sound unlikely.

Rather, the DOL states several times that it expects to have its analysis required by the Presidential Memorandum completed by January 1, 2018:

“Based on its review and evaluation of the public comments, the Department has concluded that some delay in full implementation of the Fiduciary Rule and PTEs is necessary to conduct a careful and thoughtful process pursuant to the Presidential Memorandum.” Delay Rule at 16905.

“At the same time, however, the Department has concluded that it would be inappropriate to broadly delay application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors.” Delay Rule at 16905.

“[Full compliance] is not required until January 1, 2018, by which time the Department intends to complete the examination and analysis directed by the Presidential Memorandum. In this way, the Fiduciary Rule (i.e., the new fiduciary definition itself) will become applicable after the 60-day delay, and the BIC Exemption and the Principal Transactions Exemption will be available as of that date but these exemptions will only require fiduciaries to adhere to the Impartial Conduct Standards for covered transactions until January 1, 2018, when the remaining conditions will apply unless revised or withdrawn. Delay Rule at 16905.

“In the Department’s view, this approach gives the Department an appropriate amount of time to reconsider the regulatory burdens and costs of the Fiduciary Rule and PTEs, calls for advisers and financial institutions to comply with basic standards for fair conduct during that time, and does not foreclose the Department from considering and making changes with respect to the Rule and PTEs based on new evidence or analyses developed pursuant to the President’s Memorandum.” Delay Rule at 16906.

This means that it appears very likely that the June 9, 2017 applicability date will go forward.

So, firms and financial advisers should expect that, on June 9, 2017, the following provisions will go into effect:

  • They will be fiduciaries to the extent they give investment advice to retirement investors; and
  • They will be subject to the Impartial Conduct Standards, which require that firms and advisers:
    • Provide advice that is in the retirement investors’ best interest (i.e., recommendations that are prudent and loyal);
    • Charge no more than reasonable compensation; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

The DOL makes clear that it expects firms, during the transition period from June 9, 2017 to January 1, 2018, to “implement procedures to ensure that they are meeting their fiduciary obligations, such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts [of] interest do not cause violations of the Impartial Conduct Standards, and maintaining sufficient records to corroborate that they are adhering to Impartial Conduct Standards.” Delay Rule at p. 16910.

What happens after that is anyone’s guess. As the DOL states: “[B]etween now and January 1, 2018, the Department will perform the examination required by the President. Following the completion of the examination, some or all of the Rule and PTEs may be revised or rescinded, including the provisions scheduled to become applicable on June 9, 2017.Delay Rule at 16906.

Posted in Uncategorized | 2 Comments