United States: SEC Publishes Final Rules Amending The Rules Of Practice For Administrative Proceedings

On July 13, 2016, the Securities and Exchange Commission ("SEC" or "Commission") voted to adopt amendments to the rules of practice that govern its Administrative Proceedings ("APs").¹ In a press release accompanying publication of the amended rules, SEC Chair Mary Jo White declared, "The amendments to the Commission's rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of our administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings."²

The amended rules are a step in the right direction but do not fully correct the numerous and severe imbalances that exist in the Commission's administrative enforcement process with respect to the availability of various discovery mechanisms, the timeline for trying a case, and more. Every entity or individual that is involved in an SEC enforcement investigation, or that may become a respondent in an SEC Administrative Proceeding, should take certain practical steps to minimize the structural disadvantages it will face and to maximize the benefits conferred by these latest amendments to the rules of practice.

Background

Since 2010, when Dodd-Frank allowed the Commission to impose civil penalties in cease-and-desist proceedings, the SEC has pursued enforcement actions in APs more frequently than in civil actions brought in federal district courts. That practice has spawned widespread criticism. Media outlets have commented on the SEC's disproportionately high success rate when litigating in front of Commission administrative law judges ("ALJs"), as opposed to district court judges.³ And a number of potential respondents have pursued lawsuits challenging the SEC's method for selecting ALJs as a violation of the Appointments Clause of Article II, Section 2, of the United States Constitution.⁴

But perhaps the most common criticism is that the AP process is simply unfair. An AP before the SEC is governed by none of the procedural guarantees embodied by the Federal Rules of Civil Procedure, or even the Federal Rules of Evidence. Respondents are given an unrealistically short time in which to review and digest years' worth of investigative materials produced by the SEC, and, until now, they were not entitled by rule to take any depositions, while the SEC has license to take a virtually unlimited number during the investigatory phase before initiating an enforcement action.⁵ On top of that, the expansive evidentiary rules applicable to APs allow for the introduction of evidence that would never be considered in federal court, up to and including offers of settlement and related communications.⁶

In 2015, two pieces of legislation were developed seeking to correct the growing power imbalance: (i) the Due Process Restoration Act,⁷ which would amend the Securities Exchange Act of 1934 to permit private persons to compel the SEC to seek legal or equitable remedies in a civil action in district court, instead of in an AP; and (ii) the Financial Choice Act,⁸ which would do the same and more. The SEC's amendment of the rules of practice appears to be an effort to respond to these criticisms and to alleviate the concerns about fairness raised by so many. The SEC is implementing incremental change before any legislation can change the game entirely.

Footnotes

1 The amended rules generally become effective 60 days after publication in the Federal Register, but in matters filed between publication and effectiveness, the parties can petition to have the new rules apply.

2 SEC Press Release, "SEC Adopts Amendments to Rules of Practice for Administrative Proceedings," No. 2016-142 (July 13, 2016).

3 See, e.g., Jean Eaglesham, "SEC Wins with In-House Judges," The Wall street Journal (May 6, 2015); Peter J. Henning, "New Criticism Over the S.E.C.'s Use of In-House Judges," The New York Times (July 20, 2015).

4 At present, several Courts of Appeal have held that these pre-enforcement actions by respondents are procedurally inappropriate. Hill v. Secs. & Exch. Comm'n, No. 15-13738 (11th Cir. June 17, 2016); Tilton v. Secs. & Exch. Comm'n, No. 15-2103 (2d Cir. June 1, 2016); Jarkesy v. Secs. & Exch. Comm'n, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. Secs. & Exch. Comm'n, 799 F.3d 765 (7th Cir. 2015), cert. denied, 136 S. Ct. 1500 (2016).

5 For additional background, see Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, July 2015.

6 Contrast with Federal Rule of Evidence 408.

7 See Peter J. Henning, "Reforming the S.E.C.'s Administrative Process," The New York Times (Oct. 26, 2015).

8 See Victoria Finkle, " Republicans Unveil Plan to Revamp Dodd-Frank," The New York Times (June 7, 2016).

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