Business Litigation Report - August 2016

Circuit Courts Align to Shield SEC Administrative Proceedings from Collateral Constitutional Attack -

In response to the financial crisis of the late 2000s, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. Previously the SEC could pursue civil penalties only against non-regulated entities and individuals in actions filed in federal district court. Dodd-Frank expanded the remedies available to the SEC in administrative proceedings. See Pub.L. No. 111-203, § 929P, 124 Stat. 1376, 1862-65. The intent was clear—make the SEC’s authority in administrative proceedings “coextensive with its authority to seek penalties in Federal court.” H.R. Rep. No. 111-687, at 78 (2010). Likely as a result of its increased success in administrative proceedings, the SEC has recently and dramatically increased the use of such proceedings. See Jean Eaglesham, SEC Wins with In-House Judges, Wall St. J., May 6, 2015. (From October 2010 through March 2015, the SEC prevailed in 90% of administrative proceedings while during the same time period its success rate in federal court was 69%. Whereas in 2012 55% of enforcement actions were filed administratively, in 2014 this rose to 78%.) These results have prompted numerous respondents in SEC administrative proceedings to file collateral Constitutional challenges in federal district court.

Overview of SEC Administrative Proceedings. The SEC may take one of two routes to enforce the federal securities laws in a civil proceeding. It can bring a civil action in federal district court or it can commence an administrative enforcement proceeding. See, e.g., 15 U.S.C. §§ 78u(d), 78u-2, 78u-3. Administrative actions commence when the SEC serves the respondent with an Order Instituting Proceedings (“OIP”). SEC administrative proceedings differ from federal district court actions in several important respects: the Federal Rules of Civil Procedure and Evidence do not apply in an administrative proceeding, nor does the respondent have the right to a jury trial. Instead, administrative proceedings are governed by the SEC’s Rules of Practice, 17 C.F.R. § 201.100 et seq., which severely constrain typical federal court discovery. For example, under the Rules of Practice, depositions occur at the Commission’s discretion, only after a finding that the witnesses will be unavailable to testify at the administrative hearing. Id. §§ 201.233(b), 201.234(a). Additionally, the Rules of Practice do not provide for typical document discovery, instead requiring the parties to request that the Administrative Law Judge (“ALJ”), whom the SEC typically designates to preside over an evidentiary hearing and render an initial decision, issue subpoenas. See id. §§ 201.360(a)(1), (b), 201.232. Administrative actions proceed relatively quickly and along a timeline set by the rules. See id. § 201.360(a)(2).