SEC Issues Guidance Regarding Administrative Proceedings
On Friday, May 8, 2015, the Securities and Exchange Commission issued guidance to its staff to assist in determining whether to bring enforcement actions in federal district court or as administrative proceedings before an Administrative Law Judge. The administrative proceedings have become highly controversial in recent years, as many defendants in the proceedings have complained that the process is inherently unfair. The guidance consisted of four factors which are to be considered by the staff before bringing any enforcement action:
- The availability of the desired claims, legal theories, and forms of relief in each forum. The guidance notes that certain charges can be pursued in only the administrative forum, while others can be pursued in only federal court. Additionally, only a federal court can issue emergency relief.
- Whether any charged party is a registered entity or an individual associated with a registered entity. The guidance states that certain charges and forms of relief applicable to registered entities are available in only the administrative forum and asserts that it is a more effective use of agency resources to seek those remedies directly in an administrative proceeding.
- The cost-, resource-, and time-effectiveness of litigation in each forum. The guidance asserts that administrative proceedings are faster and therefore more resource-effective. Also discussed are summary judgment rules and discovery procedures that may make one forum more effective than the other in some cases.
- Fair, consistent, and effective resolution of securities law issues and matters. The guidance states that the SEC’s Administrative Law Judges have “extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products” and that, where a contested matter is likely to raise unsettled and complex legal issues, consideration should be given to whether the Commission’s expertise on the matters in question would facilitate development of the law.
Among the concerns raised by defendants in the administrative proceedings are that discovery is limited, depositions are generally not permitted to be taken by defense attorneys, and there are no juries. Perhaps the most significant criticism is that both the judge and the prosecutor are employees of the SEC, and appeals can be taken only directly to the SEC commissioners. According to the Wall Street Journal, the SEC won against 90% of defendants in contested administrative proceedings from October 2010 to March 2015, a significant difference from the SEC’s 69% win rate in federal court over the same period.
Recently, some defendants have filed lawsuits against the SEC, alleging that the administrative proceedings are legally invalid. One private equity executive sued the SEC in federal court, claiming that the ALJ regime violates the U.S. constitution’s Appointments Clause because the administrative law judges are not duly appointed by the SEC Commissioners. Several other defendants in administrative proceedings also have filed federal lawsuits challenging the administrative proceeding regime on constitutional grounds.
It remains to be seen whether the SEC’s new guidance to its staff, as well as the SEC’s recent setbacks in high-profile cases in federal court [see Second Circuit Narrows Definition of Insider Trading], will lead to a proliferation of administrative proceedings in the future. Legal experts and industry players alike are watching carefully to determine how the SEC’s enforcement practices will evolve in this new landscape.