At the 2015 SEC Speaks PLI Conference, Commissioner Michael Piwowar devoted part of his address to the SEC’s decision to make increased use of administrative proceedings in its enforcement actions. He advocated that “In order to ensure that the Commission does not engage in arbitrary or capricious conduct in enforcement matters, the Commission should formulate and adhere to a consistent set of guidelines when conducting our enforcement proceedings.” Here is what he said on the subject (footnotes omitted):
Our enforcement program could also benefit from a look through the lens of fairness. In order to ensure that the Commission does not engage in arbitrary or capricious conduct in enforcement matters, the Commission should formulate and adhere to a consistent set of guidelines when conducting our enforcement proceedings.
Commission staff has recently indicated that they will recommend instituting more enforcement matters, including insider trading cases, through administrative proceedings rather than going through the federal district courts. Announcement of this plan to increase the use of administrative proceedings in insider trading cases followed the Commission’s loss in two insider trading cases in federal district courts. Regardless of whether these circumstances are linked, this change has the appearance of the Commission looking to improve its chances of success by moving cases to its in-house administrative system.
Even prior to the staff announcement, more cases were being brought in administrative proceedings as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act). Prior to the Dodd-Frank Act, the Commission only had the authority to seek monetary penalties in administrative proceedings against regulated entities and would have needed to file an action in federal court to obtain a monetary penalty against any other person.
In administrative proceedings, there is no jury and cases are presented to administrative law judges that are employees of the Commission. In addition, discovery available to defendants is more limited. The Commission has an extremely high success rate when litigating through administrative proceedings. One Article III federal judge has stated that in fiscal year 2014 the SEC won 61 percent of federal court trials but was successful in 100 percent of its administrative proceedings. 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.
The lack of any standards governing the SEC’s determination when to use the administrative process instead of the federal courts to pursue enforcement actions is one of the grounds used to challenge the constitutionality of those proceedings. It is argued that according the SEC unfettered discretion over when to allow an enforcement target the right to a jury trial violates the Seventh Amendment and the equal protection clause of the Constitution, and also results in arbitrary and capricious agency decision-making. Commissioner Piwowar’s suggestion does not vitiate the fundamental problem of denying key substantive and procedural rights to SEC enforcement targets by circumventing the federal courts, but it represents at least a small step in the direction of limiting unbridled power in the decision whether to strip an enforcement defendant of those rights.
The full speech is available here: Remarks at the “SEC Speaks” Conference 2015: A Fair, Orderly, and Efficient SEC.
February 23, 2015
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