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SEC Addresses Criticism By Publishing Forum-Selection Guidelines

Author: Dan Brecher|May 27, 2015

The SEC addresses criticism for its use of administrative proceedings as a means to secure more favorable rulings.  In response to the criticism, the agency recently published  forum-selection guidelines on its approach to forum selection in contested actions.

SEC Addresses Criticism By Publishing Forum-Selection Guidelines

The SEC addresses criticism for its use of administrative proceedings as a means to secure more favorable rulings.  In response to the criticism, the agency recently published  forum-selection guidelines on its approach to forum selection in contested actions.

As previously discussed on the Scarinci Hollenbeck Business Law Blog, the Dodd-Frank Wall Street Reform and Consumer Protection Act expands the SEC’s authority to bring enforcement actions via administrative proceedings and allows the agency to impose a range of civil penalties against any entity.

The SEC’s election to bring its more significant cases as administrative proceedings has spurred criticism and lawsuits, which all suggest that the agency is using administrative proceedings to secure an unfair home-court advantage. The benefits are significant; cases are decided by judges appointed by the SEC rather than by juries, discovery is limited, the Federal Rules of Evidence do not apply, cases proceed quickly, and all appeals go before the Commission.

In February, SEC Commissioner Michael Piwowar called on the agency to draft the guidelines during his remarks at the annual SEC Speaks conference in Washington, D.C. He stated:

To avoid the perception that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.

This month, the SEC published “Division of Enforcement Approach to Forum Selection in Contested Actions,” While the guidelines emphasize that “the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission,” it also explains that the Division “may in its discretion consider any or all” of the following factors:

  • The availability of the desired claims, legal theories, and forms of relief in each forum: The SEC notes that certain claims, such as charges of failure to supervise, may only be pursued via administrative proceedings. Meanwhile, the federal courts must issue emergency orders, such as temporary restraining orders, asset freezes, and/or document preservation orders.
  • Whether any charged party is a registered entity or an individual associated with a registered entity: The SEC highlights that although the agency can pursue actions against registered persons and entities in federal court, certain charges and forms of relief applicable, such as suspensions, are available only in the administrative forum. Accordingly, “When seeking such remedies, it is often a more efficient and effective use of limited agency resources to seek those remedies directly in an administrative proceeding rather than first commencing a district court action, seeking and obtaining a district court injunction, and then instituting a separate administrative proceeding seeking the remedies based on the injunction.”
  • The cost‐, resource‐, and time‐effectiveness of litigation in each forum: The SEC highlights the advantages and disadvantages of each forum. For instance, it maintains that because hearings are held more quickly in contested administrative actions than in contested federal court actions, the Division can use the SEC’s limited resources more effectively in the administrative forum. In cases involving multiple parties, the guidelines state that federal court can be advantageous in allowing the Division to obtain relief in a single proceeding. With regard to the expanded discovery in federal court, the guidelines state that it may entail both costs and benefits.
  • Fair, consistent, and effective resolution of securities law issues and matters: The SEC’s guidance emphasizes that Administrative Law Judges, who adjudicate securities law cases, and the Commission develop extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products. Accordingly, administrative proceedings may be more appropriate “if a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules.” Conversely, where application of state law or other specialized areas of federal law is integral to the matter, the guidelines suggest that district court may be appropriate.

The SEC’s guidelines are unlikely to end the debate over its expanded use of administrative proceedings. However, they do signal that the agency is aware of the criticism and is willing to take steps to improve transparency.

SEC Addresses Criticism By Publishing Forum-Selection Guidelines

Author: Dan Brecher

As previously discussed on the Scarinci Hollenbeck Business Law Blog, the Dodd-Frank Wall Street Reform and Consumer Protection Act expands the SEC’s authority to bring enforcement actions via administrative proceedings and allows the agency to impose a range of civil penalties against any entity.

The SEC’s election to bring its more significant cases as administrative proceedings has spurred criticism and lawsuits, which all suggest that the agency is using administrative proceedings to secure an unfair home-court advantage. The benefits are significant; cases are decided by judges appointed by the SEC rather than by juries, discovery is limited, the Federal Rules of Evidence do not apply, cases proceed quickly, and all appeals go before the Commission.

In February, SEC Commissioner Michael Piwowar called on the agency to draft the guidelines during his remarks at the annual SEC Speaks conference in Washington, D.C. He stated:

To avoid the perception that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.

This month, the SEC published “Division of Enforcement Approach to Forum Selection in Contested Actions,” While the guidelines emphasize that “the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission,” it also explains that the Division “may in its discretion consider any or all” of the following factors:

  • The availability of the desired claims, legal theories, and forms of relief in each forum: The SEC notes that certain claims, such as charges of failure to supervise, may only be pursued via administrative proceedings. Meanwhile, the federal courts must issue emergency orders, such as temporary restraining orders, asset freezes, and/or document preservation orders.
  • Whether any charged party is a registered entity or an individual associated with a registered entity: The SEC highlights that although the agency can pursue actions against registered persons and entities in federal court, certain charges and forms of relief applicable, such as suspensions, are available only in the administrative forum. Accordingly, “When seeking such remedies, it is often a more efficient and effective use of limited agency resources to seek those remedies directly in an administrative proceeding rather than first commencing a district court action, seeking and obtaining a district court injunction, and then instituting a separate administrative proceeding seeking the remedies based on the injunction.”
  • The cost‐, resource‐, and time‐effectiveness of litigation in each forum: The SEC highlights the advantages and disadvantages of each forum. For instance, it maintains that because hearings are held more quickly in contested administrative actions than in contested federal court actions, the Division can use the SEC’s limited resources more effectively in the administrative forum. In cases involving multiple parties, the guidelines state that federal court can be advantageous in allowing the Division to obtain relief in a single proceeding. With regard to the expanded discovery in federal court, the guidelines state that it may entail both costs and benefits.
  • Fair, consistent, and effective resolution of securities law issues and matters: The SEC’s guidance emphasizes that Administrative Law Judges, who adjudicate securities law cases, and the Commission develop extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products. Accordingly, administrative proceedings may be more appropriate “if a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules.” Conversely, where application of state law or other specialized areas of federal law is integral to the matter, the guidelines suggest that district court may be appropriate.

The SEC’s guidelines are unlikely to end the debate over its expanded use of administrative proceedings. However, they do signal that the agency is aware of the criticism and is willing to take steps to improve transparency.

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