National Defense Authorization Act Passed Over President Trump’s Veto Expands SEC’s Disgorgement Authority And Reforms Anti-Money Laundering Laws
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  • National Defense Authorization Act Passed Over President Trump’s Veto Expands SEC’s Disgorgement Authority And Reforms Anti-Money Laundering Laws
    On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) was approved by Congress, over the objections of President Trump who vetoed the bill a week before.  In addition to authorizing appropriations for defense related activities, the NDAA brings two significant changes relevant to regulatory enforcement.  First, the NDAA amends the Securities Exchange Act of 1934 (the “Exchange Act”), providing the U.S. Securities and Exchange Commission (“SEC”) with explicit statutory authority to seek disgorgement for civil actions and expanding the statute of limitation for securing this relief.  Second, the NDAA includes the Corporate Transparency Act (“CTA”), which significantly expands the beneficial ownership disclosure requirements for U.S. entities.

    The NDAA’s amendments to the Exchange Act represent a long sought-after victory for the SEC, which has endured repeated setbacks at the Supreme Court in recent years regarding its disgorgement authority.  In Kokesh v. SEC, the Supreme Court found that the SEC’s use of a disgorgement remedy constituted a penalty rather than “equitable relief” for statute of limitations purposes and was therefore subject to a five-year statute of limitations under 28 U.S.C. § 2462.  581 U.S. ___ (2017).  Three years later, in Liu v. SEC, the Supreme Court clarified its holding in Kokesh and held that to the extent disgorgement awards could ever be upheld as a form of “equitable relief” allowable under 15 U.S.C. § 78u(d)(5), the disgorgement amount may not exceed a wrongdoer’s net profits and must be awarded to victims, rather than the U.S. Treasury.  591 U.S. ___ (2020).  The Court in Liu also noted that the calculation of “net profits” must be reduced for legitimate business expenses.

    Section 6501 of the NDAA effectively annuls the Court’s holdings and provides the SEC, for the first time, with the explicit statutory authority to seek disgorgement in federal court of “any unjust enrichment” by those who violate U.S. securities laws.  The amendment also doubles the statute of limitations from five to ten years for disgorgement claims brought for scienter-based violations. 
    The amendments to the Exchange Act will strengthen the SEC’s ability to seek disgorgement in federal courts.  While even before the amendments the SEC could rely on its own in-house proceedings to seek broader disgorgement remedies, such efforts were subject to significant uncertainty and legal challenge.  Now, the SEC will undoubtedly be emboldened to return to its prior practice of seeking broad disgorgement in federal court actions. 

    In addition to expanding the SEC’s disgorgement authority, the NDAA incorporates the CTA.  The CTA requires U.S. registered corporations, LLCs, and similar entities, to report information about their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  FinCEN’s beneficial ownership registry will collect the personal information of individuals that own at least a 25% equity stake or exercise substantial control over the reporting company.  The CTA is intended, in part, to close loopholes that allow for the anonymous movement of money through the banking system, limiting the ability of individuals to disguise illicit transactions behind anonymous shell companies. 
    The information reported to FinCEN will be confidential, and FinCEN will be permitted to disclose such information in limited circumstances only, such as pursuant to a request from a federal agency or a financial institution subject to customer due diligence requirements.  In the latter instance, FinCEN must obtain the consent of the reporting company before disclosing the information.  
    This is not the government’s first attempt at incorporating beneficial ownership information into the anti-money laundering (“AML”) regime.  In 2016, FinCEN issued the customer due diligence (“CDD”) rule, which requires certain financial institutions to obtain beneficial ownership information for particular types of customers as part of those institutions’ AML programs.  Considering this, Congress directed FinCEN to “bring the [CDD] rule into conformance with” the CTA and “reduce any burdens on financial institutions and legal entity customers that are, in light of the [CTA], unnecessary or duplicative.”

    The CTA is, in part, a recognition that the companies themselves, as opposed to the financial institutions serving them, are best positioned to provide information regarding their ownership, and may in time lessen certain burdens on financial institutions.  But in the interim, it will still place substantial burdens on those financial institutions as they adjust to the new paradigm.