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From Securities Regulation Daily, July 10, 2015

Agency’s internal-timing directive not jurisdictional

By Mark S. Nelson, J.D.

The SEC reasonably interpreted a Dodd-Frank Act-imposed enforcement deadline to be a non-jurisdictional internal-timing directive, according to the D.C. Circuit. The case involved the appeal of an administrative proceeding in which Montford Associates and its founder, Ernest V. Montford, Sr., were found to have violated the antifraud and reporting provisions of the Investment Advisers Act. The appeals panel also upheld the Commission’s decision to affirm the civil penalties imposed by the administrative law judge (Montford and Company, Inc., d/b/a Montford Associates v. SEC, July 10, 2015, Sentelle, D.).

Deadline not jurisdictional. The question for the court was what, if any, consequences are there if the SEC does not bring an enforcement action within the time set by Exchange Act Section 4E. Montford argued that the SEC initiated its action against him and his firm seven days after the new time limit expired. The SEC argued that the 180-day limit was not jurisdictional, a view credited by the appeals panel.

Exchange Act Section 4E, added by Dodd-Frank Act Section 929U, tells the SEC staff to either file an action (or not) within 180 days after providing a written Wells notice to any person. A Wells notice is typically how the SEC begins an investigation, and it gives the notice’s target a chance to present her side of the matter to SEC staff. The staff must tell the director of the SEC’s enforcement division if they do not intend to file an action.  But the director can then invoke an exception for complex matters to extend the time frame once by giving notice to the SEC’s chair, and then for even longer if the Commission approves.

The court quickly held that Section 4E was ambiguous under Chevron because it does not specify any consequences for the SEC’s missing the deadline. The court also rejected Montford’s arguments about the law’s mandatory text, and his assertion that the deadline is meaningless if the SEC can ignore the extension process. The court noted that other interpretations of the law were not barred just because Montford’s theory could produce a reasonable interpretation of the law.

Under step two of Chevron, the court held that it was reasonable for the Commission to interpret Section 4E as a non-jurisdictional internal-timing directive. The panel said Montford’s arguments on this point showed only that the law was ambiguous. The court also noted the Supreme Court’s decision this past term in Wong counseled that statutory time limits for filings are presumed to be non-jurisdictional. The court declined to rule on whether the SEC’s enforcement director properly extended the deadline.

Disgorgement and penalties. Montford had argued that disgorgement was inappropriate because no causal connection existed between the misconduct (payments by SJK Investment Management LLC to get Montford to urge customers to invest with SJK) and Montford’s failure to disclose the payments. Montford emphasized the logical disconnect: the disclosure violations came later, so they could not have caused the earlier payments.

But the court noted that disgorgement is not an exacting remedy. Specifically, disgorgement need only reasonably approximate profits that are causally linked to a violation. According to the panel, the Commission reasonably found enough of a link to require Montford to disgorge illicit profits.

Lastly, the court upheld the third-tier civil penalties imposed on Montford. The panel reasoned that Montford’s logic argument was no more persuasive in this context than it was regarding the Commission’s disgorgement order. The court also said the Commission properly considered the factors for and against imposing a civil monetary penalty.

The case is No. 14-1126.

Attorneys: Ryan C. Morris (Sidley Austin LLP) for Montford and Company, Inc., d/b/a Montford Associates and Ernest V. Montford, Sr. Theodore J. Weiman for the SEC.

Companies: Montford and Company, Inc., d/b/a Montford Associates; SJK Investment Management LLC

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