Discovery Rule Does Not Apply to SEC Enforcement Actions for Civil Penalties Under Investment Advisers Act

Summary: On February 27, 2013, the United States Supreme Court clarified in Gabelli v. Securities & Exchange Commission the time period in which the SEC must bring an enforcement action that seeks civil penalties. The Court held that the five-year statute of limitations begins to tick when the fraud occurs, not when it is discovered, reversing the Second Circuit’s finding that the “discovery rule” delays the running of the statute of limitations until the SEC has discovered or reasonably could have discovered the fraud. While Gabelli specifically addressed violations under the Investment Advisers Act, the opinion suggests that it could have wide-reaching application to other SEC enforcement actions. Most notably, causes of action related to the financial crisis that accrued in 2007 are time-barred absent a tolling agreement or other exception, and the clock is ticking on actions that accrued in 2008.