SEC’s Increased Use Of Administrative Proceedings Draws Criticism And Legal Challenges

The SEC's plan to bring more enforcement actions as administrative proceedings before its own administrative law judges rather than in the federal district courts — even in insider trading cases — has been drawing increasing criticism and legal challenges. Most recently, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York questioned the SEC's use of administrative proceedings in a speech last Wednesday before the Practising Law Institute's Annual Institute on Securities Regulation. Judge Rakoff observed that the SEC's administrative powers, which were originally quite limited, have been expanded considerably by the Sarbanes-Oxley Act of 2002 and especially by Section 929P(a) of the Dodd-Frank Act of 2010, which respectively enabled the SEC to obtain administrative orders barring defendants from serving as officers and directors of registered companies and assessing monetary penalties. While administrative proceedings may be more efficient for the SEC, they are not subject to the Federal Rules of Evidence and Federal Rules of Civil Procedure, there is no jury, and the SEC has a much higher winning percentage in front of its own administrative law judges than in the federal courts. Judge Rakoff noted that under the two primary securities enforcement statutes — Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act — the law has been principally developed by the courts. He said that the judiciary and the public should be concerned because the SEC's increased use of administrative proceedings could hinder the balanced development and interpretation of the securities laws in the future, since courts will tend to give deference to the SEC's interpretation of the law and its own regulations. Judge Rakoff's concerns were echoed later in the conference in comments by former SEC Director of Enforcement William McLucas.

Current SEC Director of Enforcement Andrew Ceresney defended the increased use of administrative proceedings, noting that they offer a more streamlined process that leads to a quicker hearing and result than in court cases. He touted the impartiality and expertise of the SEC's ALJs and denied that the increased use of administrative proceedings was a reaction to SEC court losses, citing a number of recent court victories. He observed that while administrative proceedings do not provide the same degree of discovery as court proceedings, the SEC does turn over its non-privileged...