SEC Proposes Amendments to Administrative Proceedings

By: Nicole Stankewicz and Paul Huey-Burns

Persistence pays.  Defense counsel have objected to the SEC’s increased use of administrative proceedings for several years, even predating Enforcement Division Director Andrew Ceresney’s 2013 speech, in which he expressed his expectation that the Commission would be “bringing more administrative proceedings.”  As due process and other concerns with the Agency’s increased use of administrative proceedings gained traction, including among the federal judiciary, the Commission resisted acknowledging that it had a problem.  The Commission recently took a step toward recognition of the issue and proposed amendments to its rules intended to inject a modicum of fairness into such proceedings.  This is either a sign of hope for future respondents or a slight re-drawing of the bulwark.

By way of background, administrative proceedings as a concept trace back to the SEC’s early days.  Over the ensuing decades, the SEC’s administrative powers expanded steadily.  By the end of its first fifty years of existence, the Commission had “a broad-ranging, quasi-injunctive power that was duplicative of the courts’ power.”  That power continued to expand, culminating in the passage of the Dodd-Frank Act in 2010, which allowed the Commission to impose monetary penalties against any person or entity violating federal securities law, registered or unregistered, even if that violation was unintentional.  In Fiscal Year 2014, the Commission’s success rate before administrative law judges (“ALJs”) was 100% – strikingly better than its 61% success rate in federal court.  In the first half of 2015, the Commission had brought 78% of its enforcement actions via administrative proceedings as opposed to Article III courts.

As the Commission’s use of administrative proceedings has increased, so too has the frustration of the securities defense bar.  Administrative proceedings, which were intended to allow specialist judges to oversee particularly technical matters, lack the formalities and protections of Article III courts.   Respondents in administrative proceedings cannot avail themselves of depositions and discovery and other procedural and evidentiary protections.  U.S. District Court Judge Jed S. Rakoff of the Southern District of New York invoked concerns on the widespread use of administrative proceedings in a speech before the Practising Law Institute in November 2014.  Judge Rakoff cited not only the inherent fairness issues for defendants in administrative proceedings, but also the wider effect on the securities jurisprudence – an area largely governed by judge-made law under the wider provisions of the 1933 and 1934 Acts.

It now appears that the Commission has begun listening to these concerns.  On September 24, 2015, the Commission proposed amendments to its Rules of Practice governing administrative proceedings.  The proposed amendments represent a step towards addressing the inherent fairness issues and widespread criticisms of the SEC’s administrative process.  Among the proposed changes:

  • Extending the time between the initiation of proceedings and a hearing
  • Allowing deposition testimony for three or five people per side depending on the number of respondents
  • Expanding the standard to quash a subpoena to include instances where it would “unduly delay the hearing.”
  • Expanding the standard for inadmissible evidence to include “unreliable” in addition to the existing standards of “irrelevant, immaterial, or unduly repetitious”
  • Allowing an ALJ to stay the proceedings pending the Commission’s consideration of offers of settlement
  • Setting the date of the post-hearing briefing or briefing of dispositive motions as the date from which the clock for issuing an ALJ’s decision begins to run

These changes do not wholly level the playing field between administrative proceedings and federal court.  For example, although the proposed rules amend the standard for inadmissible evidence, they would continue to allow hearsay.  Additionally, even if all of the proposed changes were adopted as written, substantial questions would remain as to how these new rules would work in practice.

For now, perhaps the greater victory is not the proposed changes themselves, but the Commission’s willingness to acknowledge valid criticisms of the process.  These changes are one step towards ensuring that administrative proceedings are not, and should not, simply be a fast track way for the Commission to obtain the remedies it seeks while obviating the protections and formalities of our court system.


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