United States: Administrative Proceedings Vs. Federal Court: The SEC Provides Limited Transparency Into Its Choice Of Forum

For the past two years, the SEC has come under heavy fire, both inside and outside the Commission, for its increasing use of its own administrative proceedings, rather than federal courts, as the preferred forum for bringing its enforcement actions. On May 6, the Wall Street Journal published an article entitled "SEC Wins With In-House Judges," reporting that, since 2010, the SEC has won 90% of its cases brought before its own administrative law judges but has won only 69% of its cases brought in federal court. http://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803?tesla=y. Two days later, the SEC's Division of Enforcement made public its "approach" to selecting a forum, which was intended to outline the facts and circumstances it considers in determining whether to bring a litigated enforcement action in federal district court or in its own administrative proceedings. http://www.sec.gov/divisions/enforce/enforcement-approach-forum-selection-contested-actions.pdf. The guidance, however, ultimately provides the Division with virtually complete discretion in choosing the playing field that will be most advantageous to its case and to its view of the "proper development of the law." 1

Historically, the SEC has been relatively consistent in the litigated cases it brought in its administrative proceedings and in federal court. While there have always been exceptions, litigated cases involving registered entities such as broker-dealers and investment advisers were generally brought in administrative proceedings, while cases involving non-industry individuals and entities were brought in federal district court. The latter cases often involved insider trading, the FCPA, offering fraud, and public company financial reporting. However, with the passage of the Dodd-Frank Act in 2010, Congress gave the SEC increased remedies in administrative proceedings, the most important being civil money penalties against unregistered individuals and entities. Armed with its new authority, the SEC has ramped up its use of administrative proceedings to pursue litigated cases against individuals and entities that had not previously been at risk of being brought into the SEC's home court.

The SEC's use of administrative proceedings has not gone unchallenged. Respondents in several administrative actions have brought suit against the agency, arguing that the administrative process is unconstitutional and deprives the SEC's targets of substantial due process rights. Judge Rakoff of the Southern District of New York has expressed his doubts about the appropriateness of the expanded use of administrative proceedings, stating that he worried about the balanced growth of the securities laws if those laws are interpreted in a "non-judicial" forum. Andrew Ceresney, the Director of the Division of Enforcement, has mounted a spirited defense of the use of administrative proceedings, arguing that they are fair and unbiased, and that the federal securities laws should, indeed, be interpreted by the experts at the SEC.

As part of that defense, the Division has now publicized its approach when considering forum. The guidance itemizes four factors the Division considers in deciding whether the SEC will litigate in federal court or administratively. The first two factors do not appear to raise any real controversy, while the second two factors are likely to continue the debate on whether the SEC is acting fairly in pursuing its enforcement agenda.

The first factor the Division considers is which forum has the authority to litigate the specific charges alleged in the case. For example, failure to supervise and "causing" cases can only be brought in administrative proceedings, whereas "control person" and relief defendant cases can only be brought in federal court. In addition, cases where emergency relief such as TROs and asset freezes are sought can also only be brought in federal court. Thus, the Division contends that the claims it brings often dictate the playing field.

The second factor is whether any party is a registered entity or individual associated with a registered entity. If so, the Division states that it is often more efficient and effective, and, therefore, more appropriate, to bring an enforcement action in the administrative forum. By doing so, the SEC can use its specialized experience concerning common industry issues and obtain full relief, including industry bars and monetary penalties.

The third factor, and one that is often cited by the Division in defense of increased use of administrative proceedings, is whether one forum or the other allows the Commission to save its limited resources and obtain a quick resolution of the matter. Here, the Division cites the fact that hearings are held more quickly in an administrative proceeding than in federal court, allowing for a "fresher recollection of relevant events" by witnesses and a "more timely public airing" of the facts. The Division also notes that summary judgment motions are available in federal court, while they are not generally available in administrative proceedings. Finally, the Division notes that pre-trial discovery in federal court is somewhat broader than in administrative proceedings, including the ability to take depositions; though no Brady or Jencks rights are available to defendants in federal court.

Many believe that this third factor is one that the SEC fails to view fairly. Specifically, although hearings in administrative proceedings are often conducted more quickly than in federal court, a respondent in such a proceeding will often wait years until a court can review the facts and legal theories advanced by the SEC's enforcement program. Moreover, that quick hearing requires the defense to put together its case in a matter of a few short months, while the Division has in most cases had years to investigate the matter and compile its evidence. In addition, while the SEC is required to provide its non-privileged files to respondents in administrative proceedings, that "pre-trial discovery" provides nowhere near the information or protections provided by the Federal Rules of Civil Procedure. As a result, the defense often believes it is at a severe disadvantage in litigating in an administrative proceeding, where the matter is decided by an SEC-employed administrative law judge, and is appealed to the very Commission that authorized the enforcement action in the first place.

The fourth factor considered by the Division is whether a "fair, consistent, and effective resolution of securities law issues and matters" is more likely to be found in the administrative forum or in federal court. Under this consideration, the Division believes that the "extensive knowledge and experience concerning the federal securities laws" held by administrative law judges and the Commission weighs in favor of an administrative proceeding when complex issues arise. Federal courts, according to the Division, are more appropriate for the application of state law or "specialized areas of federal law" other than, presumably, securities law. By bringing complex securities matters in the administrative forum, according to the Division, the Commission "may facilitate development of the law."

Many have argued, and likely will continue to argue, that the Division has this issue backwards. Although the Commission undoubtedly does have expertise in the securities markets and in the application of some of the more arcane and technical regulations of those markets, the interpretation and development of the law has been, and should continue to be, within the purview of federal courts. Indeed, Judge Rakoff has expressed his concern that the "broad anti-fraud provisions, critical to the transparency of the securities markets, that have historically been construed and elaborated by the federal courts," would be interpreted by SEC-employed administrative law judges rather than federal judges. It is difficult to argue, for example, that an administrative law judge or the Commission itself, rather than the federal courts, is better able to understand matters involving insider trading, financial reporting, or the FCPA.

Despite its best arguments, and now its attempt to provide some transparency into its decisions, the Division is likely to continue to be scrutinized for its ever-increasing use of administrative proceedings against non-regulated entities. And with the open-ended nature of the guidance, there is little to prevent the Division from choosing whatever forum it finds most advantageous.


1 The guidance does not apply to settled enforcement actions.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions