The SEC responded formally to the Third Circuit Court of Appeals’ ruling last week, which weakened its authority to take back money gained through violating securities laws. This decision diminished the SEC’s power to demand disgorgement, a key part of retrieving illegally obtained funds from violators.
The SEC disagreed with the Third Circuit’s judgment, claiming it was a misinterpretation of the Supreme Court’s Liu v. SEC decision passed in 2020, which set out rules for returning finances to investors damaged by any wrongdoing. They asserted that if this interpretation were followed, it would limit their capacity to recover money for those injured due to unethical activities.
The Securities and Exchange Commission clarified that disgorgement of profits earned through the violation of securities regulations is a crucial factor in preventing fraud, as if they cannot require violators to compensate for all their ill-gotten gains, then it may incentivize unlawful behavior.
The Third Circuit Court of Appeals issued a decision limiting the SEC’s ability to compel disgorgement. Under this ruling, the SEC can only pursue disgorged funds if they can be traced back to a wrongdoer and used to compensate victims. Those who believed the SEC had inadequately defined the requirements for requesting disgorgement applauded the decision.
The SEC is worried that this decision could weaken its ability to safeguard investors and maintain fairness in the stock market. Additionally, it appears to conflict with Congress’s original plan and shift established regulations.
The outcome of the disagreement between the U.S. Securities and Exchange Commission (SEC) and the Third Circuit Court of Appeals will have a big impact on the SEC’s power to put rules in place. It is not clear how exactly this argument will be resolved or if any new legislation will be established as a way of dealing with it.
The legal dispute is ongoing, and attorneys and stock market watchers are carefully considering the SEC’s statements to see their implications on the outcome. This particular interpretation of penalty rights could be a turning point in how future securities regulations are enforced and might grant the SEC more authority to penalize wrongdoers.