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Implications for Fund Managers of the Supreme Court’s Ruling in Kokesh v. SEC

The U.S. Supreme Court’s unanimous ruling in Kokesh v. SEC on June 5, 2017, has established that the SEC’s efforts to win disgorgement of money and assets in enforcement cases are subject to a five-year statute of limitations. Crucial to the Court’s reasoning is the argument that disgorgement is punitive in nature rather than simply a remedy to help maintain the smooth and stable functioning of the financial markets. The ruling in Kokesh is of monumental significance for firms in the financial services sector that have struggled to track down witnesses and documents in order to mount a defense in cases winding their way through courts for years. Although the Supreme Court’s decision may bring relief to many, it would be a mistake to assume that the ruling will result in a more permissive and lenient regulatory environment. On the contrary, the SEC may end up pushing much harder to settle enforcement actions on an expedited schedule, within the statute of limitations. More respondents may end up in administrative proceedings, having to make their cases on the SEC’s “home turf.” Even more seriously, it is uncertain at this point what the stance of insurance carriers will be with respect to disgorgement payments that have been covered by their policies until now. This article analyzes the Supreme Court’s decision, along with insights from industry practitioners with expertise in SEC enforcement matters. For analysis of another recent Supreme Court ruling, see “Supreme Court’s Ruling in Salman v. U.S. Affirms the Importance of a Tipper’s ‘Personal Benefit’ for Insider Trading, but Also Creates Uncertainty” (Feb. 9, 2017).

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