May 19, 2015 Practice Points

SEC Considers Issuing Guidance on Use of Administrative Proceedings

There is no current timeline or estimated date by which the guidelines may be issued.

By Laura J. O'Rourke

Upon questioning before a Senate Appropriations subcommittee on Tuesday, May 5, 2015, Securities Exchange Commission (SEC) Chairman Mary Jo White told Senator John Boozman of Arkansas that "clearly questions have been raised" regarding the criteria the SEC uses to bring enforcement actions in administrative proceedings versus filing in the U.S. District Courts, and she acknowledged that "the appearance of fairness is important" with respect to that issue. In defending the commission's right to utilize the administrative forum, Chairman White noted that the forum has been around and in use by the SEC since the 1940s, that the Dodd-Frank Act did in fact expand the penalties that can be issued in such proceedings, and that "for litigated cases," 57 percent of actions are still brought in federal court and not in administrative proceedings. Nonetheless, conceding that there have been challenges to, and criticisms of, the SEC’s increasing use of the administrative forum and the lack of transparency into the criteria for doing so, Chairman White responded that issuance of public guidelines is being considered by her and the other commissioners for the benefit of the public and participants in the process.

With respect to some of the challenges and criticisms levied at the commission for its increased use of the administrative forum (in which the SEC's success right is far better than in cases brought to trial in federal courts), defendants have argued, among other things, that (1) the use of administrative judges that are hired by the very agency that is pursuing the enforcement action is inherently unfair; (2) the limits on discovery prejudice defendants and benefit the SEC, which has full subpoena power and largely unfettered access to documents, witnesses, and information during the investigative phase of an enforcement proceeding; (3) the expedited timing harms defendants, who are forced to marshal their evidence and defenses in a contracted time frame, in what are often highly complex cases, while the SEC may have had months or even years to conduct its investigation before instituting the administrative proceeding; and (4) the inability to try the case to a jury deprives defendants of due process under the Constitution. To date, all such challenges have been unsuccessful, and the commission's issuance of guidelines for bringing administrative actions is unlikely to address or assuage any of these concerns. Rather, such guidance will purportedly lend transparency into the decision-making process regarding the types of cases the SEC will bring in an administrative forum, which the SEC hopes will "avoid the perception that the commission is taking its tougher cases to its in-house judges." There is no current timeline or estimated date by which the guidelines may be issued.

Laura J. O'Rourke, Baker McKenzie, Dallas, TX


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Laura J. O'Rourke – May 19, 2015