When does a 180 day deadline not mean that in 180 days time is up? Answer: When the SEC says so and the DC Circuit gives the conclusion Chevron deference. That is the holding of Montford and Company, Inc. v. SEC, No. 14-1126 (Decided July 10, 2015).
The decision centers on the meaning of Exchange Act Section 4E which provides that not “later than 180 days after the date on which Commission staff provides a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.” The Section was added to the Exchange Act as part of Dodd-Frank. Petitioners Montford and Company, a registered investment adviser, and Ernest Montford, its founder, claimed this provision was violated when an enforcement action was brought against them. They learned that 180 days in not 180 days if the SEC says so.
The underlying action is straight forward. Montford advises institutional investors. The firm claims in advertisements that is independent and conflict free. The adviser represents in its Form ADV that it is independent, avoids material misrepresentations in any investment recommendations and would disclose any matter that could reasonably impair its recommendations or make them unbiased.
In 2003 the firm began recommending Stanley Kowalewski, an investment manager specializing in hedge funds. When Mr. Kowalewski told the adviser in 2009 that he was leaving his current employment to launch his own firm, SJK Investment Management LLC, Mr. Montford stated he would try and convince clients to follow. Over a period of months Mr. Montford and his staff provided substantial assistance in transferring clients to the new enterprise. Nine clients transferred their accounts.
In view of the work involved with the transition Mr. Kowalewski agreed to pay the adviser $130,000. None of the clients were told about the payment. Later, when the clients learned about the payment many terminated their relationship.
In March 2011 the Commission issued the firm and Mr. Montford a Wells notice. 187 days later the SEC instituted an administrative proceeding alleging violations of the anti-fraud and reporting sections of the Advisers Act. A motion to dismiss based on Section 4E was denied by the ALJ who concluded that an extension had been granted by the Director of the Division of Enforcement because it was a complex matter. Eventually, the adviser and its principal were found liable and sanctioned. Disgorgement, a penalty and an industry bar were ordered. On appeal the SEC affirmed, concluding that even absent the extension of time from the Director, Section 4E does not require dismissal because it is essentially an internal deadline and not jurisdictional.
The DC Circuit affirmed. The Court concluded that the SEC’s interpretation was reasonable and entitled to deference. When a court reviews an agency construction of its statute there are two questions, according to the Court. The first is whether Congress has directly spoken to the issue. If it has and the answer is clear, the matter ends. If the statute is silent or ambiguous on the point the question for the reviewing court is if the agency conclusion is a permissible construction of the statute.
In this case the Court held that it did “not owe the Commission’s interpretation any less deference because the Commission interprets the scope of its own jurisdiction . . . Nor is it relevant that the Commission’s interpretation is the result of adjudication, rather than notice-and-comment rulemaking.” This is because for “traditional agencies” such as the SEC, adjudication is an appropriate forum in which to exercise lawmaking by interpretation.
Section 4E is ambiguous within the meaning of Chevron, the Court concluded. By not stating a consequence for exceeding the 180 days Congress has not addressed the issue. Viewed in this context, the SEC’s interpretation of the provision as not being jurisdictional or requiring dismissal even absent an extension is reasonable. That conclusion is based on a finding that such deadlines are for internal purposes only. In U.S. v. James Daniel Good Real Property, 510 U.S. 43 (1993) the Court held that when “’a statute does not specify a consequence for noncompliance with statutory timing provisions, the federal courts will not in the ordinary course impose their own coercive sanction.’” Likewise, there is nothing in the text or structure of Section 4E that “overcomes the strong presumption that, when Congress has not stated that an internal deadline shall act as a statute of limitations, courts will not infer such a result,” the Court concluded
While Petitioners are correct that the statute is written in mandatory terms, and argue that its purpose and legislative history all establish that the deadline is to be mandatory, this simply demonstrates that the Section is ambiguous. Petitioners have failed to demonstrate that the SEC’s interpretation is unreasonable.