SEC Attempts To Stick a Thumb in the Dike with New Guidelines for Use of Administrative Court

One day following the Wall Street Journal’s blockbuster article about the SEC’s increased use of administrative enforcement actions, the SEC tried to quell the growing concern that the administrative actions are being used unfairly to gain an edge over enforcement targets.  The Division of Enforcement published an unusual document that purports to explain its “Approach to Forum Selection in Contested Actions.”  It’s hard to figure out exactly what this is supposed to be.  It certainly is not an administrative decision that comports with the requirements of the Administrative Procedure Act.  And it doesn’t really provide any concrete guidance on when the Division will choose one forum or another.  I guess it is intended to show the world that the choice of forum is not totally a matter of caprice, but the numerous and vague factors referred to, and the caveats saying they may not be referred to when the SEC chooses not to do so, are fully consistent with capricious decision-making.  There was no caprice, however, in releasing this late on a Friday, so that it would garner minimal attention.

The full release is here, and is quoted in its entirety below:

Division of Enforcement Approach to Forum Selection in Contested Actions

The Commission generally is authorized to bring its enforcement actions in either of two forums – a civil action in federal district court or a Commission administrative proceeding (and/or cease‐and‐desist proceeding) before an Administrative Law Judge – though it has authority to proceed on certain charges or remedies in only one of those forums. The Division seeks to further the Commission’s mission to protect investors and the integrity of the markets through strong, effective, and fair enforcement of the federal securities laws. When recommending a contested enforcement action to the Commission, the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission. The Division’s forum recommendations are in all cases subject to review and approval by the Commission.

There is no rigid formula dictating the choice of forum. The Division considers a number
of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case. Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case. Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum.
While the list of potentially relevant considerations set out below is not (and could not
be) exhaustive, the Division may in its discretion consider any or all of the factors in assessing whether to recommend that a contested case be brought in the administrative forum or in federal district court.

  • The availability of the desired claims, legal theories, and forms of relief in each
    forum: Certain claims, theories, and relief are only available in one forum.

    • For example, charges of failure to supervise or causing another person’s
      violation can only be pursued in the administrative forum; liability as a
      controlling person or as a relief defendant can only be pursued in district
      court actions.
    • In situations where there is a need for emergency proceedings or relief –
      where the alleged violative conduct is ongoing and/or there is a risk that
      proceeds of the alleged wrongdoing will be dissipated or moved offshore or
      evidence will be destroyed – only a federal district court can issue the
      necessary emergency relief to protect investors, such as a temporary
      restraining order, asset freeze, and/or a document preservation order.
  • Whether any charged party is a registered entity or an individual associated with a
    registered entity: Registered entities and associated persons have long been subject
    to the Commission’s regulatory oversight, which has long included Commission
    administrative proceedings. Although the Commission also may bring actions
    against them in district court, certain charges and forms of relief applicable to
    registered entities and associated individuals are available only in the administrative
    forum. For example, associational bars and suspensions can only be imposed in an
    administrative proceeding. 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. In
    addition, as described below, Administrative Law Judges and the Commission
    develop extensive knowledge and experience concerning issues that frequently arise
    in matters involving registered entities or associated persons.
  • The cost‐, resource‐, and time‐effectiveness of litigation in each forum: This factor
    incorporates consideration of the efficient and effective use of the Commission’s
    limited resources.

    • In general, hearings are held more quickly in contested administrative actions
      than in contested federal court actions. This may allow the Division to use
      the Commission’s limited resources more effectively.

      • When a matter involves older conduct, this may allow for the presentation of testimony from witnesses who have a fresher recollection of relevant events.
      • This also may permit a more timely public airing, based on evidence offered by all parties to the proceeding, of the facts and circumstances of the conduct and practices at issue in a matter.
    • The ability to seek and obtain relief in a single proceeding may enable the Commission to use its limited resources more efficiently. This may be possible in district court, for example, when the Division is recommending charges against multiple parties, including relief defendants – claims against relief defendants can only be pursued in district court. This also may be possible in the administrative forum, for example, in the regulated entity/associated person context described above or in situations where we are recommending charges against multiple parties and there may be no single district court that is a permissible venue for an action against each of the parties.
    • There may be potential efficiencies if the case can be decided on, or the
      disputed issues narrowed by, a motion for summary judgment in federal
      court (which generally addresses a broad range of claims and issues) or a
      motion for summary disposition in the administrative forum (which generally
      requires leave from the Administrative Law Judge to file and typically
      addresses a narrower range of claims and issues). For example, district
      courts more frequently address and resolve elements of claims (such as
      whether a statement is false or whether an instrument is a “security”) on
      summary judgment.
    • The additional time and types of pre‐trial discovery available in federal court
      may entail both costs and benefits, which should be weighed under the facts
      and circumstances of a case. Although pre‐trial discovery procedures exist in
      both administrative proceedings and district court actions, the mechanisms
      of discovery are different. For example, in administrative proceedings, the
      Division must produce to respondents all non‐privileged documents from its
      case file and the Division has Brady and Jencks obligations, requirements that
      do not exist in civil district court litigation. On the other hand, depositions
      are available in district court but generally not in administrative proceedings.
      It also is appropriate to consider whether witness testimony that is critical to
      fair resolution of the matter may be compelled in one forum but not
  • Fair, consistent, and effective resolution of securities law issues and matters.
    o 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.

    • 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,
      consideration should be given to whether, in light of the Commission’s
      expertise concerning those matters, obtaining a Commission decision on
      such issues, subject to appellate review in the federal courts, may facilitate
      development of the law.
    • Conversely, where application of state law or other specialized areas of
      federal law is integral to the matter, district court may be appropriate.
    • If similar charges are being or have been brought against similarly situated
      parties (e.g., registered entities or associated persons) in the same or closelyrelated
      contested matters, it may be preferable to recommend charges
      against similarly situated parties in the same forum.

Anyone who can figure out the utility of this gobbledy-gook is a better person than I.  If these guidelines are intended to provide some form of predictability on what forum will be used, they are a dismal failure.  If they are intended to cabin the SEC’s discretion to choose between available forums, they are a dismal failure.  If they try to protect the rights of respondents to be treated fairly, they are a dismal failure.  If they seek to explain why some targets are allowed to have juries and others not, they are a dismal failure.

In fact, it is hard to see what they accomplish other than to give the SEC and the Division a “talking point” for the press, the Congress, and whoever else might be paying attention, that the SEC really is motivated to try to do the right thing, and not by a pernicious desire to win at any cost.  Pardon this cynic for being a disbeliever.  In reality, this is a transparent effort to avoid increased scrutiny of questionable prosecutorial practices and quiet the talk of SEC “Star Chambers.”  They would do better if they tried to equate functionality between the administrative courts and federal courts (through real discovery, subpoena power, rules of evidence, adequate time to prepare a defense, and the like), and developed hard guidelines that assured that major cases against non-regulated persons could be tried to juries.

Straight Arrow

May 8, 2015

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