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SEC’s increasing use of administrative law courts

The SEC’s increasing use of administrative law courts for trying cases has raised eyebrows throughout the legal community. In light of recent high-profile acquittals in federal district courts, the SEC has brought more actions before its administrative courts, with a 10% increase in the last year alone. ((Richard Levick, Undue Process: A Golden Opportunity to Curb the SEC, Forbes, Jan. 13, 2015,  Evidence suggests that the choice of forum has made a difference. Most recently, the SEC has won seven out of eight cases in administrative law courts as opposed to seven out of twelve in standard district courts. ((Id.)).

The Dodd-Frank Act granted wider authority to the SEC to bring actions punishable by criminal and civil penalties before administrative law judges (ALJs) appointed by the SEC. ((Gina Chon, SEC Challenged Over Use of In-house Judges, Fin. Times, Feb. 19, 2015, Formerly these cases could only be brought in federal district court with standard procedural safeguards, but administrative courts try cases without a jury, narrow the scope of discovery and the time allowed to prepare a defense, and use relaxed evidentiary rules. ((Id.)).

Targets of enforcement actions have challenged the constitutionality of the SEC’s practices, arguing that the system violates their due process rights and their rights to a jury trial. ((Carlton Forbes, Are Administrative Procceedings brought by the SEC constitutional? Former S&P executive says ‘no’, Lexology (Feb. 20, 2015), Others have brought constitutional actions against the SEC, arguing that the two-tiered system under which both the head of the S.E.C. and the ALJs themselves can be fired only for cause violates the president’s removal power. ((Id.)). The legal issue is unsettled because the cases are still pending, but the practice is bringing considerable heat on the agency, and defendants aren’t the only ones complaining.

Judge Jed Rakoff of the Southern District of New York who has attacked the SEC for not pursuing financial ne’er-do-wells more aggressively is now criticizing the commission for overreaching. ((Id.)). Although defendants may appeal rulings of the SEC’s court to federal appellate courts, those courts are very deferential to the administrative court’s interpretations of law. ((Id.)). This not only hinders the defendant’s chances of winning on appeal but may also adversely affect the full development of the substantive law at issue, which Judge Rakoff noted by stating, “[T]his is unlikely . . . to lead to as balanced, careful, and impartial interpretations as would result from having those cases brought in federal court.” ((Id.)).

Even some within the agency are calling for the practice to be curbed. Addressing the crowd at the annual SEC Speaks conference, SEC Commissioner Michael Piwowar called for guidelines to determine which cases would be brought in administrative courts and which ones would not, in order 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 . . . .” ((Sarah N. Lynch, SEC Official Calls for Guidelines on when Cases are Brought in-house, Rueters, (Feb. 20, 2015), Piwowar went on to say the commission should “apply the same objective that we have for the markets we regulate – that they [be] fair, orderly, and efficient – to ourselves.” (Michael Piwowar, Comm’r, SEC, Address at the Practicing Law Institute’s SEC Speaks Conference (Feb. 20, 2015) (available at  Others in the SEC feel differently. Andrew Ceresney, the Director of the SEC’s Division of Enforcement, has defended the practice, citing the time saved in using ALJs and remarking that defendants may also benefit from the procedural differences. ((Carlton Forbes, Are Administrative Procceedings brought by the SEC unconstitutional? Former S&P executive says ‘no’, Lexology (Feb. 20, 2015),

With the internal doubts, the legal attacks, and a new Republican congress itching to repeal parts of Dodd-Frank, the status of the SEC’s use of administrative law courts is tenuous. Whether the practice is altered could have a substantial impact on the government’s campaign to police financial misconduct.

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Jim Thurman

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