Recently, the U.S. Court of Appeals for the Second Circuit issued its decision in SEC v. Fowler, 6 F.4th 255 (2d Cir. 2021), rejecting an argument that a federal district court lacked subject matter jurisdiction over a Securities and Exchange Commission (“SEC” or “Commission”) enforcement action that relied on a tolling agreement. The decision largely eliminates any lingering uncertainty that may have remained as to whether certain tolling agreements with the SEC may be vulnerable to a jurisdictional challenge based on the statute of limitations.

Background: Time Limits for SEC Enforcement Actions

In an action seeking to enforce violations of the federal securities laws, the SEC is empowered to seek relief under several legal theories. How long the Commission has to commence the enforcement action depends, in part, on the relief it seeks.

Earlier this year, Congress amended the Securities Exchange Act of 1934, clarifying the time the Commission has to bring claims seeking disgorgement and equitable remedies (the “January 2021 Amendments”).1 For equitable remedies (e.g., injunctions, bars, suspensions, and cease-and-desist orders), the SEC may bring the claim “not later than 10 years after the latest date on which a violation that gives rise to the claim occurs.”2 Similarly, for actions pursuing disgorgement for scienter-based claims, the Commission has “not later than 10 years after the latest date of the violation that gives rise to the action or proceeding.”3 For other disgorgement actions, the time limit is five years.4

The January 2021 Amendments, however, did not address the time limit for actions seeking penalties, which remains governed by 28 U.S.C. § 2462 – the default statute of limitations for all government enforcement actions where no other statute of limitations applies. Section 2462 provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.”

The Supreme Court has held that, for the Commission, claims are not tolled by the time it may take the agency to discover the underlying conduct.5 Accordingly, the Commission’s Enforcement Division often asks parties under investigation to execute written agreements designed to extend the time the Commission has to commence an action. In recent years, Enforcement Division leadership has noted that the staff are “keenly focused” on matters where the Commission may face expiring statutes of limitations.6

The Second Circuit’s Fowler Decision

SEC v. Fowler marks the first time the Second Circuit has directly addressed a defendant’s challenge to his own agreement to extend the SEC’s time limit to commence an enforcement action, based on the following text from 28 U.S.C. § 2462: “an action . . . shall not be entertained unless commenced within five years from the date when the claim first accrued.”

Fowler arises from a Commission investigation that began in 2014, concerning a registered representative’s allegedly unsuitable trading strategies in several customer accounts.7 In January 2017, the SEC sued the registered representative, Donald Fowler, in district court, alleging a scheme of conduct that began in March 2011. Thus, ordinarily, the five-year limitations period would have expired in March 2016. During the investigation, however, Fowler and the SEC staff executed two tolling agreements, memorializing their intent to toll the limitations period through February 28, 2017.

After losing at trial, Fowler appealed on several grounds, including that “the relevant five-year statute of limitations for SEC enforcement actions, 28 U.S.C. § 2462, is jurisdictional and could not be tolled by agreement between the parties.”8 In short, Fowler contended that because section 2462 provides that such actions “shall not be entertained” more than five years after the relevant claim first accrues, Congress had divested the district court’s authority to hear the enforcement action – i.e., regardless of any tolling agreement he may have entered.9 In particular, Fowler cited a 1948 change in the relevant statute of limitations, which previously stated that “[n]o suit or prosecution . . . shall be maintained” beyond the five year period, rather than, as the statute currently reads, providing that such action “shall not be entertained.”10

The Second Circuit rejected Fowler’s argument, holding that “§ 2462 is a nonjurisdictional statute of limitations, that the parties’ tolling agreement was enforceable, and that the District Court had the authority to hear [Fowler’s] case.”11 The court held Fowler’s argument to a “high bar,” observing that filing deadlines ordinarily “‘should not be described as jurisdictional’ absent a ‘clear indication that Congress wanted the rule to be jurisdictional.’”12 The court was unpersuaded that Congress’s 1948 revision to the statute signaled its intent to add a jurisdictional element to the filing deadline, relying in part on a 1947 House Committee report calling the revision “[c]hanges . . . in phraseology’ only.”13

Implications for SEC Enforcement Investigations

When the Enforcement Division asks a party under investigation to execute a tolling agreement, it typically relies on a standard agreement that includes broad language designed to reach any type of sanction or relief, including, penalties and disgorgement. Fowler, which addressed and turned on language in 28 U.S.C. § 2462, remains relevant only to the tolling of claims seeking penalties. The decision did not address any arguments as to the permissibility of agreements with the SEC to toll claims governed by the new January 2021 limitations provisions for disgorgement and equitable remedies. Still, in practice, the Enforcement Division pursues penalty and non-penalty claims in the same proceedings, meaning Fowler will likely inform (and embolden) the Enforcement Division’s decision to request tolling agreements, which allow for lengthier proceedings and create increased exposure to penalties.