Supreme Court Review of SEC Disgorgement: Impact on D&O Insurance

Executive Summary

The U.S. Supreme Court’s decision to hear Sripetch v. SEC marks a significant moment in securities enforcement law, focusing on the scope of the Securities and Exchange Commission’s (SEC) authority to seek disgorgement, essentially the recovery of ill-gotten gains, from alleged securities law violators. The central question is whether the SEC must prove that investors suffered pecuniary harm to justify disgorgement or if disgorgement can be ordered without such a showing. This issue has created a split among federal appellate courts, notably between the Second Circuit, which requires proof of investor harm, and the First and Ninth Circuits, which do not.

For insurance professionals, particularly those involved in underwriting and managing directors and officers (D&O) liability policies, this case carries important implications. The Court’s ruling could reshape the financial exposure of corporate executives and boards faced with SEC enforcement actions. It may affect the frequency and magnitude of disgorgement awards, which in turn influence claims patterns and underwriting risk assessments. Understanding this evolving legal landscape is critical for insurers, agents, and risk managers tasked with protecting insureds against securities-related regulatory actions.

Key Insights

• Circuit Split on Investor Harm Requirement The differing views between circuits create legal uncertainty. The Second Circuit requires the SEC to prove that investors experienced actual financial loss before disgorgement is awarded. Meanwhile, the First and Ninth Circuits allow disgorgement without this requirement. This divergence affects how aggressively the SEC can pursue disgorgement depending on the jurisdiction.
• Narrow but Significant Legal Issue The Supreme Court’s review is focused narrowly on the statutory interpretation of disgorgement under 15 U.S.C. §78(u)(d)(5) and (7). The ruling is unlikely to alter the SEC’s authority to seek disgorgement when investor harm is clear but will clarify the boundaries of disgorgement when harm is not established.
• Impact on Enforcement Actions in Key Markets California and New York are major hubs for securities enforcement. The outcome could substantially impact enforcement in these jurisdictions, where significant corporate and investment activity occurs. The potential for millions or billions of dollars in disgorgement awards hinges on how the Court resolves this issue.
• Mutual Agreement on Supreme Court Review Notably, both the SEC and the defendant agreed the Supreme Court should decide the issue, underscoring the importance of legal clarity for enforcement agencies and defendants alike. This rare concurrence signals that both sides anticipate meaningful consequences from the Court’s ruling.
• Timeline and Anticipated Outcomes Oral arguments and a decision are expected by June 2026, providing the insurance industry time to monitor developments and prepare for changes in enforcement risk profiles and coverage considerations.

Insurance Industry Applications

• D&O Policy Underwriting and Pricing Disgorgement claims can significantly increase the financial exposure of insured directors and officers. If the Supreme Court rules that the SEC can seek disgorgement without proving investor harm, insurers may face a rise in claims frequency and severity in certain jurisdictions. Underwriters should consider jurisdictional risk and the evolving legal standards when evaluating D&O applications and setting premiums.
• Claims Management and Litigation Strategy Claims professionals should be aware that disgorgement orders may become more common or less predictable depending on the Court’s ruling. This may affect settlement strategies, reserving practices, and litigation budgeting for SEC enforcement actions involving insureds.
• Risk Mitigation Advisory for Insureds Insurance agents and brokers should advise corporate clients and executives on the potential increased risk of disgorgement awards. Enhanced compliance programs and proactive governance measures may reduce the likelihood of enforcement actions leading to disgorgement.
• Policy Language and Coverage Analysis Insurers may revisit policy language relating to loss definitions and coverage triggers concerning disgorgement. Clarifications on whether disgorgement payments without investor harm qualify as covered loss could become a focus of coverage disputes and underwriting guidelines.
• Geographic Risk Assessment Given the circuit split, D&O insurers should closely monitor where corporate activities and securities enforcement actions arise. Differing legal standards in jurisdictions like California and New York could lead to significant disparities in claims experience, informing territorial underwriting decisions.

Conclusion and Recommendations

The Supreme Court’s impending decision in Sripetch v. SEC promises to resolve a critical legal ambiguity impacting SEC enforcement and, by extension, the exposure of insured directors and officers. Insurance professionals must stay informed about the case’s progress and potential ramifications. Proactive steps include incorporating jurisdictional risk into underwriting models, educating insureds on governance best practices to mitigate enforcement risk, and reviewing policy forms to address potential coverage gaps related to disgorgement.

Risk managers and brokers should also prepare to advise clients on the evolving regulatory environment and its implications for corporate liability. While the ruling’s immediate effect may be limited to a specific statutory question, its influence on the scale and nature of SEC enforcement remedies could be far-reaching, especially in markets with high securities activity.

For further details on the case and its legal context, see the original analysis at The D&O Diary: Supreme Court Agrees to Consider SEC’s Disgorgement Remedy Rights.

Original Source: https://www.dandodiary.com/2026/01/articles/securities-enforcement/supreme-court-agrees-to-consider-secs-disgorgement-remedy-rights/