Facing mounting legal challenges to its use of administrative
proceedings on a wide variety of enforcement matters, last week the
SEC announced proposed amendments to rules governing its
administrative proceedings. The amendments address nearly every
stage of the administrative hearing process, with the most notable
changes proposed for the rules governing pre-hearing discovery, the
duration of proceedings, and electronic filing and service. While
SEC Chair Mary Jo White couched the amendments as designed to
"modernize" administrative proceedings, this move is
widely perceived as an attempt to assuage criticism directed at the
Commission's recent increased use of this forum.
Since the Dodd-Frank Act in 2010 authorized the SEC to pursue more
cases administratively, the Commission has significantly increased
its filing of administrative enforcement actions, in lieu of
litigating in federal court. The proposed amendments address major
criticisms levied by defense counsel, and even some judges, that
such proceedings are unfair to defendants. While these rule changes
(if adopted) could level the playing field somewhat for defendants,
this action arguably aims to shield from legal challenges the
SEC's broad use of administrative proceedings, an ongoing and
professed strategy of the Commission.
The Proposed Amendments
A major criticism of SEC administrative proceedings has been
that they feature significantly less discovery than is available in
federal court. For example, the current SEC Rules of Practice for
administrative proceedings do not permit parties to seek
depositions unless the witness is unable to attend or testify at
the hearing. The proposed amendments would provide for three
depositions per side in matters with one defendant; in cases with
multiple defendants, the defendants would be collectively entitled
to depose five persons, as would the Commission. Other proposed
amendments would modify certain deposition practices to make them
more consistent with the practices required in federal district
court cases (as governed by the Federal Rules of Civil
Procedure).
The expedited timeline for administrative hearings hasbeen
criticized as unfair to defendants. In apparent response to this
concern, the SEC proposedextending the amount of time between the
date of service of the order instituting the proceeding and the
hearing date. For example, under the amended rule, for one type of
proceeding, the hearing must begin between four and eight months
after the order instituting proceedings (the current rule provides
for just four months). The Commission explained that the longer
time allotted before the hearing will provide sufficient time for
the parties to conduct the increased discovery provided for under
the revised rules. Additionally, the amendments would change the
deadline for the administrative law judge to file his or her
decision – the time limit would start on the date the
post-hearing briefing or briefing of dispositive motions has been
completed (rather than start on the date of service of the order
instituting proceedings). Given the frequent delays that occur
during the pre-hearing stage, this change would provide
administrative law judges more time to analyze their cases.
Critics have further alleged that administrative proceedings lack
transparency to the public. The proposed rules would require
parties to file documents through the SEC's website and to
serve documents electronically. Filers would also be required to
redact sensitive personal information, such as Social Security
numbers. Regarding these proposed changes, the SEC stated that it
"recognizes the need to ensure that public administrative
proceeding records are made available to the public as quickly as
possible" and that it "believes that electronic
submissions will enhance the transparency of administrative
proceedings by providing a quicker way for the Commission to make
records available to the public."
The proposed amendments address a broad range of other issues
relating to administrative proceedings. For example, the amendments
would: (i) outline specific information that must be included in
expert witness reports (consistent with the Federal Rules of Civil
Procedure); (ii) provide that a stay pending consideration of an
offer of settlement also stays the timelines of proceedings under
the rules (thereby ensuring that defendants not lose valuable
hearing preparation time while attempting to settle the matter);
and (iii) simplify the appellate petition by requiring a basic
three-page petition that need not assert every possible claim
(which would provide petitioners more time to formulate and
preserve their arguments on appeal).
Court Challenges to SEC Administrative Proceedings
Multiple lawsuits recently have alleged that the SEC's
decision to file an enforcement action administratively (rather
than in federal court) violates the defendant's rights to due
process and equal protection. Moreover, Judge Jed S. Rakoff of the
Southern District of New York vocally criticized this Commission practice,
highlighting the limited discovery, the permitted use of hearsay,
and the fact that the administrative law judge deciding the case is
hired and paid by the SEC.
While most of these lawsuits challenging the SEC have not been
successful,defendants recentlyhave achieved positive rulings. Over
the summer, two federal judges, Judge Leigh Martin May in Atlanta
and Judge Richard M. Berman in Manhattan, issued injunctions on
behalf of defendants.In Hill v. SEC and Duka v. SEC, Judges May and Berman both held
that the SEC's method for appointing administrative law judges
is "likely unconstitutional." In Tilton v. SEC, the Second Circuit recently
placed an administrative proceeding on hold while it heard
arguments challenging the SEC's filing of that administrative
proceeding against the defendant.
With these cases working their way through the courts, the SEC
appears to be readying itself to vigorously defend its broad use of
administrative proceedings by altering the proceedings to operate
more similarly to traditional federal court cases. Only time will
tell whether these and other efforts by the Commission to protect
its administrative proceeding "turf" succeed.
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