Insider Trading: The Problem with the Sec's In-House Aljs

By Gauthier, Lucille | Emory Law Journal, January 1, 2017 | Go to article overview

Insider Trading: The Problem with the Sec's In-House Aljs


Gauthier, Lucille, Emory Law Journal


INTRODUCTION

"People generally see what they look for, and hear what they listen for . . . ,"1 Or in the case of the United States Securities and Exchange Commission (SEC), its in-house administrative law judges (ALJs) hear what they have been ordered by the agency to hear. The SEC faces constitutional challenges to its administrative proceedings and ALJs from numerous angles.2 Its administrative proceeding practices have been the focus of both federal appeals3 and media scrutiny.4 Most concerning is the claim that the SEC's ALJs are biased in favor of the agency.5

The appearance of impartiality at the SEC, a financial industry watchdog, is critical.6 The SEC is unable to prosecute criminal charges, though it frequently refers criminal violations to the Department of Justice or appropriate state authorities.7 The agency is permitted to seek sanctions such as cease-and-desist orders, bars from the securities industry, disgorgement, civil penalties, and suspension or revocation of registered securities or the registration of a broker, dealer, investment company, investment adviser, or financial statistical rating organizations.8 The impact of SEC enforcement is therefore immense and felt nationwide.9 In the 2016 fiscal year alone, SEC ALJs issued 170 decisions in administrative proceedings, resulting in orders for $12.4 million in disgorgement and $14.5 million in civil penalties.10 From 2013 through 2016, the SEC charged more than 3,300 companies and 2,700 individuals in administrative and federal court proceedings, and obtained over $13.4 billion in sanctions.11

The current challenges to the SEC's administrative proceedings include issues with the Appointments Clause,12 the Seventh Amendment,13 Equal Protection,14 and Procedural Due Process.15 However, this Comment focuses solely on one challenge: the potential bias of the SEC's in-house ALJs.16 While the Supreme Court has declined to hear cases challenging the validity of ALJs under the Appointments Clause,17 the more disturbing claim is the possibility of a biased trier of fact.18 The SEC has been the center of media attention,19 but that does not exclude other agencies from scrutiny. While this Comment concentrates on the bias allegations at the SEC, all agencies bringing cases in administrative proceedings in front of in-house ALJs could face a similar problem.

Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in 2010,20 the SEC increased the number of cases it brought in administrative proceedings.21 In the 2014 fiscal year, the SEC brought four out of five enforcement actions in administrative proceedings rather than in federal courts.22 Further, the SEC boasted a 90% win rate in administrative proceedings, and only a 69% win rate in federal court, from October 2010 through March 2015.23 Several commentators have questioned the independence of the SEC's ALJs given the significantly higher success rate in administrative proceedings.24

While other agencies may also have biased ALJs,25 public scrutiny has focused on the SEC.26 All federal agencies use the same ALJ hiring process,27 but only the SEC ALJs receive public scrutiny.28 This Comment argues that SEC ALJs are still biased, despite a neutral hiring process. This Comment further argues that this systemic bias should be removed by restructuring the ALJ program to function as a neutral pool of available ALJs employed by the Office of Personnel Management (OPM) instead of by particular agencies.

Additionally, the agency's leadership remains up in the air.29 Ordinarily, five commissioners, appointed by the President of the United States and confirmed by the Senate, lead the SEC.30 To prevent the appearance of political bias, "no more than three [commissioners may belong to the same political party."31 Currently, only three of the five seats are filled, with one commissioner's term having expired in June 2017.32 The last SEC Chair, Mary Jo White, stepped down from her position at the conclusion of President Obama's second term. …

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