The Impact of Kokesh On FINRA Remedies

Kokesh v. SEC, 137 S.Ct. 1635 (June 5, 2017) held that the statute of limitations in Section 2462 of Title 28 applies to requests for disgorgement by the Commission. Those payments constitute a penalty within the meaning of the Section, according to the Court. Specifically, the Court held that “penalty” under the statute is a form of punishment that is pecuniary, imposed by the State for a crime or offence against its laws. In reaching that conclusion the Court rejected the SEC’s claim that the remedy is remedial and not punitive or a penalty.

One question following Kokesh is if the concept of “penalty” on which the case turned is applicable to questions of whether sanctions imposed in other securities actions are penal and excessive rather than remedial. That question was considered recently in Saad v. SEC, No. 15-1430 (D.C. Cir. Decided Oct. 13, 2017).

Saad arose from a FINRA proceeding against former registered representative John Saad. Mr. Saad was charged with misappropriating firm funds tied to submitting false travel reimbursement requests. While Mr. Saad offered mitigating evidence, claiming he was under significant personal and professional stress at the time, FINRA permanently barred him from the industry. The Commission reviewed the proceedings and affirmed. The D.C. Circuit affirmed in part but remanded for further consideration of the mitigating evidence and the permanent bar.

In reviewing the Commission’s decision for a second time the circuit court largely affirmed. First, the court concluded that the Commission properly reviewed the mitigating evidence in the record. Second, the SEC also considered the question of whether the life-time bar was appropriate. On this point the SEC found that “a permanent bar was the appropriate remedy in Saad’s case because it ‘serves important deterrent objectives and reaffirms long-standing FINRA policy that such dishonest by members or their associated persons will not be tolerated.’” (internal citations omitted). The circuit court did not comment on this finding. Rather, the court remanded questions about the appropriateness of the life-time bar for the Commission to address in view of the “relevance – if any – of the Supreme Court’s recent decision in Kokesh . . .”

Circuit Judge Kavanaugh concurred. In a separate opinion the Judge began by noting that the panel is compelled to apply established circuit law. In considering FINRA sanctions, however, the SEC must determine if they are “excessive or oppressive” within the meaning of Section 78s(e)(2) of Title 15 of the U.S. Code.

While the SEC may still uphold orders such as the one here, in view of Kokesh “FINRA and the SEC will no longer be able to simply waive the “remedial card’ and thereby evade meaningful judicial review of harsh sanctions . . . Rather FINRA and the SEC will have to reasonably explain in each individual case why an expulsion or suspension serves the purpose of punishment and is not excessive or oppressive.”

Circuit Judge Millett in a “dubitante regarding . . .” the question of excessive penalties concluded that “binding circuit precedent – indeed, the law of the case – has established that the Commission may approve expulsion not as a penalty but as a means of protecting investors.” Other circuits agree, according to the Judge.

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Under the panel’s directive, the Commission will decide the impact of Kokesh in the first instance on the question of a life-time bar and determine if it is a penalty rather than remedial and whether it is excessive or oppressive within the meaning of the statute.