Many Key Issues Still Left Unaddressed in the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice

By Patterson, Joseph Quincy | Notre Dame Law Review, April 2016 | Go to article overview

Many Key Issues Still Left Unaddressed in the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice


Patterson, Joseph Quincy, Notre Dame Law Review


"By bringing more cases in its own backyard, the agency is not only increasing its chances of winning but giving itself greater control over the future evolution of legal doctrine."

--Joseph Grundfest, former SEC Commissioner (1)

INTRODUCTION

Towards the end of 2013, the Securities and Exchange Commission (SEC) lost three high-profile insider-trading cases in federal district court. (2) Shortly after, the SEC instituted a new policy in which it "signaled its intention to bring as administrative actions certain kinds of enforcement actions that historically it has more often brought in the federal courts." (3) This policy included bringing complicated insider-trading cases before Administrative Law Judges (ALJs) (4) rather than before a district court. (5) The SEC claims that the change was due to "recent statutory changes," (6) resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act. (7) By adding section 929 P(a) to the previously enacted statutes, Congress authorized the SEC to seek civil monetary penalties against "any persons or entities" regardless of whether they are regulated by the SEC. (8) The timing has caused some legal experts to question whether the reason had more to do with giving the SEC a home-court advantage. (9) For instance, on May 7, 2015, the Wall Street Journal published an article, in which it criticized the SEC for its ninety-percent success rate before an ALJ as compared to a sixty-nine-percent success rate before a federal district court. (10) By bringing cases in administrative proceedings rather than federal district courts, the defendant loses many procedural rights that are guaranteed in federal district court, such as a right to a jury, full discovery rights under federal law, and the Federal Rules of Evidence. (11) This change in policy has many of the defendants who won a decision against the SEC before a jury to "doubt [they] would have been able to develop the facts that convinced the jury to find in [their] favor." (12) Additionally, this change in policy by the SEC has led to an increase in the number of appeals questioning whether the procedures used by the SEC violate the defendants' right to due process (13) and whether the SEC properly appointed the ALJs according to Article II, section 2 of the United States Constitution, which states that "Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments." (14)

These constitutional questions and the seeming home-court advantage awarded to the SEC when it brings cases before ALJs rather than before federal district courts have led to much criticism. (15) For example, over the past few months, Jean Eaglesham has written multiple articles in the Wall Street Journal about the SEC's use of "in-house judges" and its high success rate. (16) This negative publicity has some lawyers concerned that the general public will begin to question the fairness of all administrative proceedings. (17) Additionally, the SEC's change in policy has many former SEC Commissioners, enforcement chiefs, and ALJs criticizing the expanded use of administrative proceedings. (18) Some federal judges, including Supreme Court Justice Antonin Scalia, have also echoed these concerns that ALJs are "in effect creating] (and uncreat[ing]) new crimes at will." (19)

As criticism continues to mount against the expanded use of internal administrative actions, the SEC has drastically decreased its use of administrative proceedings. (20) One reason for this could be the recent decision in Hill v. SEC, where the Federal District Court in the Northern District of Georgia ruled that Hill, the defendant, "ha[d] proved a substantial likelihood of success on the merits of his claim that the SEC ha[d] violated the Appointments Clause ... [and] the Court f[ound] a preliminary injunction [was] appropriate to enjoin the SEC administrative proceeding. …

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