Under Pressure, the SEC Proposes Updates for a More Flexible Administrative Court

Over the past couple weeks we’ve been discussing the Department of Justice’s enhanced focus on prosecuting individuals. The Securities and Exchange Commission has been focused on this matter as well, which I’ve discussed in earlier posts. This is again a hot topic because the SEC has got itself into a bit of hot water over the way it goes after individuals in its administrative court.

Administrative law judges (ALJ) serve as the in-house team for the SEC, ruling on many of the day-to-day cases. Under the Dodd-Frank Wall Street Reform Act, these administrative law courts can impose broad monetary penalties upon individuals.

What is the controversy over the SEC choosing to bring cases in front of ALJs instead of federal courts? Accordingly to an analysis by The Wall Street Journal published in May 2015, the SEC won 90 percent of its cases against individual defendants in the administrative court from 2010 to 2015.

Compare this impressive result to the fact that the SEC only won 69 percent of the time when in federal court where defendants have access to more time, more evidence and a jury.

No one is saying that there is any lack of integrity on the part of individual ALJs. However, it’s hard not to wonder about the difference in the SEC’s track record when it goes up in front of its own judges versus federal court judges.

For example, one insider trading case brought by the SEC was stopped in its tracks by a federal court judge in Atlanta who deemed the ALJ selection process for a case against alleged insider trader Charles Hill Jr. unconstitutional. The SEC is appealing this ruling.

Possibly responding to concerns about its practices, on September 24, 2015 the SEC announced it would make changes to its administrative law proceedings (the “Rules of Practice”). The amendments to the rules would update:

  • The timing of proceedings to include extensions to when a hearing occurs;
  • The discovery process, to expand to witness depositions; and
  • The submission of filings, and redacting personal and sensitive information.

As this article points out, the current version of the SEC’s Rules of Practice came before Dodd-Frank, and do not “adequately address certain fairness issues that arise in more complex securities enforcement cases.”

The proposed updates would address some of the biggest criticisms of the administrative proceedings including that they move too fast and don’t allow defendants adequate discovery in their defense.

On the timing piece, the proposed amendments would modify Rule 360 of the Rules of Practice to:

  • “Divorce the deadline for the completion of an initial decision from other stages of the proceeding.”
  • “Provide a range of time during which the hearing must begin.”
  • “Create a procedure for extending the initial decision deadline by up to thirty days.”

Some are still skeptical. The piece (linked to previously) points out that the rules “will still require that the most complex administrative proceedings be decided within a 14-month schedule,” and that “given the size of the SEC’s investigative files and the sophistication of many securities fraud cases, it is doubtful that the proposed rules go far enough to ensure respondents adequate time to review the SEC’s investigative files and prepare for the administrative hearing.”

Another important part of this announcement is a proposed amendment to Rule 233, which relates to depositions in the administrative courts. The SEC’s proposed amendments to the rule outline the current and planned situation:

Rule 233 currently permits parties to take depositions by oral examination only if a witness will be unable to attend or testify at a hearing. The proposed amendment would allow respondents and the Division to file notices to take depositions.

For the layperson, the idea that depositions were not generally allowed to be taken for ALJ proceedings seems odd. Even with the proposed rules, the number of depositions will be limited in a way that it is not in federal court.

Specifically, the proposed rules say:

If a proceeding involves a single respondent, the proposed amendment would allow the respondent and the Division to each file notices to depose three persons (i.e., a maximum of three depositions per side) in proceedings designated in the proposal as 120-day cases (known as 300-day cases under current Rule 360). If a proceeding involves multiple respondents, the proposed amendment would allow respondents to collectively file notices to depose five persons and the Division to file notices to depose five persons in proceedings designated in the proposal as 120-day cases (i.e., a maximum of five depositions per side). Under the amendment, parties also could request that the hearing officer issue a subpoena for documents in conjunction with the deposition.

The extended timelines are meant to assist in the discovery process, but still guard the SEC from what reports say it wants to avoid: the type of discovery found in federal courts which can drag out for months or years.

Between the time when The WSJ published its analysis of the SEC’s track record of success with ALJs in May and leading up to the recent announcement in September, WSJ took note that the agency had been sending fewer and fewer cases to the administrative courts.

In the past month the SEC has seen both wins and losses in federal courts challenging its administrative law judges while the agency awaits comments on its proposed rules on or before December 4.

Until then, and even after, it will remain the case that the SEC has tremendous discretion in terms of when it will take a case to administrative court. In any case, being pursued by the SEC is a very serious matter.

Indeed, one of the primary purposes of D&O insurance and indemnification agreements is to provide defense when an individual finds him or herself in the SEC’s crosshairs.


The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email:



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