United States: Leveling The Playing Field Or Protecting Its Turf? SEC Proposes Amendments To Rules Governing Administrative Proceedings

Last Updated: October 9 2015
Article by Michael J. Rivera and Joanna P. Breslow Boyd

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.

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.

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