United States: SEC Proposes To Amend Rules Governing Administrative Proceedings

Last Updated: October 2 2015
Article by Molly White and Louis D. Greenstein

On September 24, 2015, the Securities and Exchange Commission (SEC) issued a press release announcing proposed amendments to its Rules of Practice governing administrative proceedings. The announcement comes at a critical time, when the SEC's use of administrative proceedings has come under increasing fire. The proposed rules attempt to address aspects of the administrative process that are most often criticized: the lack of discovery and the compressed hearing schedule. The proposed rules also seek to modernize the administrative process by requiring electronic filing, which the SEC hopes will increase transparency into the administrative process.

In recent years, the SEC's administrative process has been under heightened scrutiny. With the passage of Dodd-Frank in 2010, Congress gave the SEC the ability to seek monetary penalties in administrative proceedings, and to seek those penalties against "any person," not just registered entities and individuals. Since that time, the SEC has been bringing more and more of its contested enforcement actions as administrative proceedings, instead of filing them in federal district court.

While the SEC has heralded the efficiency of the administrative process as the reason for its increased reliance on that process, it just so happens that the SEC also enjoys a much higher success rate in the administrative process. In fact, in the past three years, the SEC has won 96 percent of the administrative proceedings that it prosecuted, but only 67 percent of its federal court actions. As a result, the defense bar often accuses the SEC of forum shopping, by bringing cases as administrative proceedings before biased administrative law judges instead of weathering more even-handed scrutiny in federal court.

In an effort to make its forum selection process more transparent, on March 8, 2015, the SEC published guidance on the four factors that it weighs when deciding the forum in which to file a contested action. But publication of the factors did little to silence critics, in part because the list of factors was not exhaustive and they were applied so flexibly that they shed little light on the forum-selection process. And some of the factors (like the cost-, resource- and time-effectiveness of the forum) highlighted the unfairness of the expedited administrative process.

The SEC's increasing reliance on the administrative process continues to draw a great deal of criticism. Because the current version of the SEC's Rules of Practice was adopted long before the passage of Dodd-Frank, the rules did not adequately address certain fairness issues that arise in more complex securities enforcement cases. In recent years, respondents have filed district court actions collaterally challenging the constitutionality of SEC administrative proceedings. While the early due process and equal protection challenges did not see much success, some of the recent challenges, which attack the appointment of the SEC's administrative law judges as a violation of the Appointments Clause, have succeeded. As a result, some district court judges have enjoined ongoing administrative proceedings.

With the increased scrutiny and the increased success of constitutional challenges, it is not surprising that the SEC is now taking steps to address some of the public's concerns about the process. And the SEC's proposed rules address two aspects of the administrative process that are most frequently attacked as unfair: (1) the absence of any real opportunity for a respondent to take discovery, and (2) the short period of time a respondent has to prepare for an administrative hearing.

One of the biggest complaints about the fairness of the SEC's administrative process has been the respondents' inability to take discovery. Given that most SEC investigations take years, and given that the Enforcement Division staff has almost unfettered access to information during an investigation, the lack of discovery undermines respondents' ability to defend themselves and calls into question the fairness of the entire proceeding. The proposed rules would permit each side to take up to five depositions in an administrative proceeding involving multiple respondents, and it would allow a party to ask the hearing officer to subpoena documents in connection with a deposition. The proposed rules would also adopt processes related to depositions that are similar to the Federal Rules of Civil Procedure. This is a step in the right direction, but one must question whether it goes far enough to address fairness concerns. After all, the Enforcement Division could still institute an administrative proceeding against 10 respondents, who collectively would be limited to five depositions. That hardly seems like leveling the playing field – particularly not in a complex securities case.

The SEC has also extended the deadline by which an administrative law judge must issue an initial decision. Administrative proceedings are designed to move quickly. The current version of the Rules of Practice requires an administrative law judge to issue an initial decision within 120, 210 or 300 days of the date of service of the order instituting proceedings. That means that within that timeframe the following must occur: A respondent answers the Order Instituting the Proceeding; a respondent reviews the SEC staff's often-voluminous investigative file; any motions for summary disposition are heard; the parties prepare for the administrative hearing; the administrative hearing is held; the parties review the hearing transcript; and the parties submit post-hearing briefs – all before the administrative law judge can issue an initial decision. Even in a 300-day case, this is a tight schedule. The proposed rules would do three things: (1) modify the timing of the initial decision to 30, 75 and 120 days from completion of the post-hearing or dispositive briefing; (2) provide a range of 4 to 8 months within which the administrative hearing must begin (thus doubling the maximum amount of time when a hearing must begin); and (3) create a procedure by which the deadline for the initial decision can be extended by up to 30 days. Although extending process is a welcome change, the rules will still require that the most complex administrative proceedings be decided within a 14-month schedule. Given the size of the SEC's investigative files and the sophistication of many securities fraud cases, it is doubtful that the proposed rules go far enough to ensure respondents adequate time to review the SEC's investigative files and prepare for the administrative hearing.

While the proposed rule changes take a step toward addressing critics' fairness arguments, they do nothing to address the arguments that the appointment of administrative law judges is unconstitutional because it violates the Appointments Clause.

The press release can be found here.

The proposed amendments to the timing of and discovery in the administrative process can be found here.

The proposed amendments to the filing requirements can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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