Home Court Advantage: SEC’s Reliance on Administrative Procedures Drawing Criticism

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) has gained greater authority to bring enforcement actions via administrative proceedings. However, the SEC’s increased use of the proceedings is drawing intense criticism and has even spurred lawsuits. Prior to Dodd-Frank, the SEC could only use administrative procedures to pursue enforcements actions against regulated entities, such as investment advisers and brokerage firms. In addition, its remedies were limited to cease-and-desist orders rather than monetary sanctions. Under the financial reform law, the agency can now impose a range of civil penalties against any entity.

It is not surprising that the SEC has elected to capitalize on its new Dodd-Frank authority. Administrative proceedings provide a distinct home court advantage — cases are decided by judges appointed by the SEC rather than juries, discovery is limited, the Federal Rules of Evidence do not apply, cases proceed quickly, and all appeals go before the Commission.

The agency’s track record is also much better, winning all of its contested administrative hearings over the past fiscal year. By comparison, its success at trial in federal court is 61 percent. (For a discussion of several high-profile federal court losses, click here.)

As the SEC has expanded its use of administrative proceedings to prosecute new violations, such as insider trading, criticism is growing. Most recently, U.S. District Court Judge Jed S. Rakoff questioned the practice in a speech at the Practising Law Institute’s Annual Institute on Securities Regulation. Rakoff specifically raised concerns that if the SEC chose to bring its more significant cases as administrative proceedings, “the law in such cases would effectively be made, not by neutral federal courts, but by SEC administrative judges.“

Meanwhile, the SEC has defended its strategy. “The administrative proceeding forum is a very fair forum… There are extensive procedural protections,” current SEC Director of Enforcement Andrew Ceresney recently stated. “It’s not like we’re always victorious.”

Ultimately, the courts may decide the issues. The SEC is currently subject to several lawsuits that challenge its use of administrative proceedings.

The plaintiffs allege that the proceedings violate the due process and equal protection guarantees under the U.S. Constitution by eliminating the right to a jury trial and imposing tight deadlines. They also contend that the proceedings violate the President’s removal powers under Article II of the Constitution because both SEC administrative judges and commissioners can only be removed for good cause. Existing federal precedent suggests that only one level of tenure is permitted. The suits also raise ethical concerns that one agency is allowed to be prosecutor, judge, jury and executioner.

If you have questions about this post or would like to discuss SEC compliance, please contact me or the Scarinci Hollenbeck attorney with whom you work.