There’s No Place Like Home: SEC Increasingly Uses Administrative Proceedings

Stung by adverse court rulings in some of its enforcement cases, the SEC is bringing more of those cases in its own forum—an SEC administrative proceeding.

On December 11, Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York issued a decision suggesting that district court judges should defer to administrative agencies in their choice of administrative proceedings (APs) over federal district court actions to enforce the law.1 Less than one week later, on December 15, the U.S. Securities and Exchange Commission (SEC) released a 3-2 Commission Opinion illustrating its intent to use the administrative forum as a vehicle to interpret the securities laws and regulations aggressively and to attempt administratively to overrule lower court precedent that the SEC does not like.2 These opinions have appeared amid an upswing of the SEC's use of APs and public debate over the fairness of the SEC administrative forum.

The SEC's Increasing Use of APs

In the full year prior to September 30, 2014, the SEC's Division of Enforcement (the Division) won all six of its litigated APs but only 11 out of 18 of its federal court trials.3 This contrast in outcomes provides the Division with a powerful incentive to choose APs. Previously, the 2010 Dodd-Frank Act had made that choice easier by expanding the SEC's power to institute internal APs. Dodd-Frank gave the SEC the authority to use the AP mechanism to impose significant financial penalties against nonregistered entities or individuals, whereas previously, the SEC could only seek such penalties against those entities in federal district court actions. The differences between APs and civil actions are considerable. For example, the timeline for an AP is much shorter—only 300 days from institution to an initial decision by the administrative law judge. Additionally, discovery is limited (essentially precluding depositions, except to preserve evidence), the Federal Rules of Evidence do not apply, and there is no right to a jury. Equally important considerations are that the initial fact finder in an AP is an SEC employee, the first level of review of the administrative law judge's decision is done by the same commissioners who voted to bring the enforcement action in the first place, and an AP respondent's first recourse to an Article III court is to a federal court of appeals that is likely, on a number of issues, to defer to the administrative agency.

Just last month, Andrew Ceresney, the director of the Division, stated that the SEC's "use of the administrative forum is eminently proper, appropriate, and fair to respondents."4 Kara Brockmeyer, the chief of the Division's Foreign Corrupt Practices Act Unit, recently offered that "it's fair to say [that bringing cases as APs...