Jurisdiction and tolling agreements with the SEC: Watching the Fowler Case through Canadian eyes
Regulatory investigations can be time consuming. Uncertainty surrounding ultimate outcomes is disruptive to the personal and business decision-making of those affected. Limitation periods in which proceedings must be commenced, if at all, are designed by legislatures to balance the need for investigators to pursue a complete examination of the facts and consider the potential resulting legal consequences, and the need for some degree of certainty for targets of an investigation.
A forthcoming U.S. appeals court decision may have implications on the use of tolling agreements by the United States Securities and Exchange Commission (“SEC”) to suspend the time limits for commencing an enforcement-related civil claim. The SEC commenced civil proceedings against the defendant Donald Fowler in 2017 in respect of an investigation that began in 2014. Even though the defendant signed two tolling agreements that tolled the applicable limitation period, he has taken the position on appeal that the Court’s jurisdiction to hear the case is ousted by the relevant limitation period legislation. The SEC disagrees.
What is a tolling agreement?
A tolling agreement is an agreement between the parties that suspends limitation periods or time-bars that could prohibit a potential proceeding. As we have previously written, tolling agreements in this context imply that the party under investigation agrees not to a assert a statute of limitations defence for a specified time period. This is a commonly used tool by the SEC which allows the agency to extend the five year statutory limitations period applicable in the U.S. and conduct its investigations accordingly. In Canada and specifically Ontario, tolling agreements are not used as widely in the enforcement context. However, as described below, they are commonly used in the context of private disputes as a mechanism which can ultimately lead to the resolution of such disputes.
The defendant, Donald Fowler was a former broker charged with excessive trading to generate commissions at his clients’ expense. The SEC began their investigation in early 2014. During the course of the investigation, Fowler signed two tolling agreements that tolled the applicable limitation period from March 2016 until February 2017. The action was filed by the SEC in January 2017. The Manhattan district court ruled in the SEC’s favour and ordered Fowler to disgorge $132,076 USD in commissions and fees, in addition to a civil penalty of $15,000 USD for each of the thirteen customers Fowler defrauded (for a total of $1,950,000 USD).
On appeal to U.S. Court of Appeals for the Second Circuit, Fowler has challenged the Court’s jurisdiction to hear a case that would be time-barred but for the existence of a tolling agreement. Namely, as will be described in further detail below, the appellant has brought forth the argument that Congress intended the provision of the relevant legislation to be jurisdictional, and therefore an enforcement action should not be entertained unless it is within five-years. If the plaintiff’s argument is accepted, this finding would render tolling agreements with the SEC that extend the applicable limitation period unenforceable in federal court. The SEC defended the use of tolling agreements in its filing [PDF] and asked the court to reject the argument that tolling agreements are in breach of 28 U.S. Code §2462. The parties await oral argument before the Second Circuit.
The novel jurisdictional argument noted above relates to the wording of the limitations provision in 28 U.S. Code §2462. Fowler argues that the wording of the provision is such that Congress intended to place jurisdictional limits on parties’ ability to contract out of limitation periods. The provision reads as follows:
“Except as otherwise provided by Act of Congress, 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 if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.” [emphasis added]
Fowler argued that the language specifies when an action or proceeding may be entertained, i.e. within five-years. As the plaintiff argues, this is distinct from limitations period legislation in other jurisdictions which generally focus on the obligations of the plaintiff. Fowler argues therefore that the statute acts as a jurisdictional time limit that strips the court’s ability to hear actions beyond this period even when a tolling agreement is entered into.
The SEC has argued in response that the Court has ruled twice that the parties failed to clear the high bar required in order to prove that this section is jurisdictional, and that even if it were the provision would not bar this action. More specifically, that the provision is not jurisdictional and therefore can be tolled, and in any event 28 U.S. Code §2462 would not bar this action because it does not apply to the Commission’s claims for injunctive relief or bar claims for monetary relief for misconduct Fowler engaged in on or after January 9, 2020.
Limitations periods and tolling agreements under the Securities Act
As we have previously written, while Canadian securities regulators sometimes request tolling agreements, particularly in circumstances where a limitation period is approaching and settlement discussions are ongoing, such agreements are far less commonly used by the regulator in Canada than in the U.S.
Under the Ontario Securities Act, there is generally a limitation period of six-years for Staff to bring enforcement proceedings. The legislation does not explicitly permit tolling agreements, and their impact in regulatory matters under the Securities Act is not clear without such a provision. Notably, tolling agreements are more familiar in private civil disputes, even under the Securities Act. For civil liability in private disputes under the Securities Act, no action can be commenced more than the earlier of (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, (ii) or three years after the date of that transaction.
Exclusive jurisdiction as an exception to limitation periods in Ontario in the private dispute context
Like the issues raised in the Fowler case, the discussion about jurisdiction as it pertains to limitation periods in the civil context is occurring north of the border as well. Generally in Ontario, limitation periods for civil suits are governed by the Ontario Limitations Act, which creates a limitation period of two years (rather than five in the U.S. and six under the Securities Act) from the time of discoverability. Under the Limitations Act, agreements to suspend or extend the limitation period, i.e. tolling agreements, are also permitted. There is no prescribed length of time for how long a limitation can be extended, however tolling agreements do require both a clear and unambiguous request and affirmative acceptance as recently held in PQ Licensing S.A. v. LPQ Central Canada Inc., 2018 ONCA 331.
What is notable for this comparison is that the “appropriate means” doctrine provides for some limited exceptions to the two year limitation period, essentially tolling a claim even where an agreement is not entered. Namely, under section 5(1)(a)(iv) the running of the clock can be postponed when the plaintiff is not yet aware that a legal proceeding would be an appropriate means to remedy the loss:
“…that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and”
One of the examples that has emerged from case law where the appropriate means doctrine would apply, is in the context of the exclusive jurisdiction of another venue to provide the remedy sought by the plaintiff. For example, in Har Jo Management Services v. York (Regional Municipality), 2018 ONCA 469 the Ontario Court of Appeal held that another forum had exclusive jurisdiction over the claim based on the facts, and that the limitation clock would only begin to run once there were facts to support the Superior Court’s jurisdiction. This mirrors the discussion arising in the U.S. as a result of the Fowler case in the Ontario civil context.
It will be interesting to follow the Fowler proceedings, and generally the discussion relating to the interplay of jurisdiction, tolling agreements and limitations periods. In the Fowler case, the trend toward skepticism about the broad powers of the SEC in U.S. courts is likely to weigh into the decision. If successful, this case could limit the SEC’s use of tolling agreements, which have generally been seen as beneficial to both sides of an enforcement action since the SEC has more time to build its case and the individual being investigated can cooperate in the hopes it will be dropped.