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Changes to SEC In-House Court Don’t Address Systemic Concerns (Perspective)

July 18, 2016, 8:43 PM

Editor’s Note: The author is a securities and shareholder litigation partner at a large law firm.

Last week, the Securities and Exchange Commission voted to adopt a discrete set of amendments to the rules of practice governing enforcement cases brought before the SEC’s own in-house Administrative law judges (ALJ) instead of in federal court.

The amendments provide that defendants in enforcement proceedings may take depositions (generally three to five, less than the number allowed in typical federal court case), receive extra time to prepare (but not more than 10 months), and get limited rights to pre-trial dispositive motions or object to evidence. First proposed in September 2015, the amendments were widely criticized by the business and legal community.

Although the amendments improve procedural rights for defendants in SEC enforcement actions brought before ALJs, they do not address the criticism that the ALJ system itself is flawed.

Given the SEC’s significant resources for bringing enforcement actions, some have questioned whether the ALJ system ought to exist for enforcement proceedings. The Enforcement Division is talented and well-resourced, with “program costs” of $540 million in 2015 (up $62 million from 2014). The Division often spends years investigating a case before bringing it, with no hard-wired limit on the number of subpoenas it serves or witnesses it puts under oath before choosing whether to bring a case. And the Enforcement Division of course enjoys broad discretion to only try the cases they want to try (which is tempered even further by the Wells Notice process). Critics of having enforcement proceedings tried before ALJs have suggested that these advantages would not be lost by requiring the SEC to bring enforcement actions accusing defendants of fraud and other potentially reputation-damaging misconduct in the federal courts.

These criticisms of the amendments adopted by the SEC could be rendered moot if Congress takes legislative action. Were Congress to change the Exchange Act — the SEC’s organic statute — the SEC would be required to act in accordance with those changes, which could include requirements that some or all enforcement actions be brought in a federal court.

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