SEC’s ‘administrative proceedings’ enforcements dwarf court cases in 2015

July 9, 2015

Firms facing enforcement actions by the Securities Exchange Commission have growing reason to worry should such actions take the form of “administrative proceedings” rather than court cases, a tool that critics say limits options for those in the agency’s crosshairs. In first half of 2015, the securities regulator has shown no signs of dampening its increasing reliance on administrative proceedings.

According to public data on the SEC’s site, there have been 447 administrative proceedings through June 23rd of this year, compared with 123 court cases, representing 78 percent of all enforcement actions. The result is in line with the same percentage in 2014, and up from 62 percent in 2013. In 2010, the year the Dodd-Frank reform act was passed, only 56 percent of enforcement actions were filed as administrative proceedings.

Regarding the numbers for 2015 so far, Marc Fagel, a partner at the law firm Gibson Dunn, cautioned that the raw data might be overstating the case, as they would include routine SEC actions filed administratively (such as actions suspending trading in companies whose filings are not current, or “follow-on” proceedings sanctioning securities brokers or advisers found liable for securities law violations), as well as many settled cases which are instituted administratively rather than through a court action.

Still, the trend is alive and well with little sign of letting up.

“There is absolutely no question that the SEC has been bringing a much larger number of litigated actions as administrative proceedings in recent years, a strategy that the SEC leadership has embraced,” said Fagel, who has written extensively on the issue. “This poses serious challenges for parties to enforcement actions, given the differences between the administrative forum and federal court. Among other things, there is limited or no discovery, no right to a jury, and a more difficult path to appeal.”

When asked about recent trends in enforcement actions, an SEC spokesperson declined comment.

Contentious debate

Whether those on the receiving end of administrative proceedings – or “in-house courts” as they are sometimes called — get less than equal treatment compared with judicial court proceedings has grown increasingly contentious, with the SEC defending the practice as more streamlined and efficient.

In a speech late last year, Andrew Ceresney, the SEC’s enforcement chief, said the changes afforded to the SEC under Dodd-Frank had now allowed them to use this option more assertively.

“All we are doing now is simply making use of the administrative forum in cases where we previously could only obtain penalties in federal district court,” Ceresney told a meeting of the American Bankers Association in November 2014.

He added that administrative actions produced prompt decisions, unlike court proceedings which could drag on indefinitely, and had the added benefit of so-called “specialized fact-finders.”

“The (administrative law judges) are focused on hearing and deciding cases year after year,” he said. “They develop expert knowledge in securities laws and the types of entities, instruments and practices that frequently appear in our cases.”

“Administrative creep”

Not all share Ceresney’s perception of benefits of such in-house proceedings, not least U.S. District Court Judge Jed S. Rakoff of the Southern District of New York. Late last year Rakoff, an influential jurist on securities matters, criticized what he saw as the widening breadth of the SEC’s enforcement powers.

“While a claim to greater efficiency by any federal bureaucracy suggests a certain chutzpah, it is hard to find a better example of what is sometimes disparagingly called ‘administrative creep’ than this expansion of the S.E.C.’s internal enforcement power,” Rakoff said in a speech to the Practising Law Institute .

“. . . there is no jury, and the matter is decided by an administrative law judge appointed and paid by the S.E.C. It is hardly surprising in these circumstances that the S.E.C. won 100 percent of its internal administrative hearings in the fiscal year ending September 30, 2014, whereas it won only 61% of its trials in federal court during the same period,” said Rakoff.

In an unusual move that perhaps reflects the growing criticism of such practices, the SEC earlier this month held a hearing to consider whether administrative proceedings violated the U.S. Constitution. Before a standing room-only audience, trial lawyers for the SEC sought to convince the regulator’s commissioners of the legality of such proceedings.

While the use of administrative proceedings has allowed the agency to increase the number of enforcement actions it has brought in recent years – a fact the SEC is not shy of proclaiming at the end of each fiscal year – some argue that one needs to dig below the headline numbers to understand whether fraud and other forms of wrongdoing is actually on the rise.

“I think you have to be a bit careful in just looking at the top line numbers,” said a partner at a New York law firm. “In some areas, such as financial fraud, there are ongoing investigations and it’s not very clear whether the rising number of cases represents a true increase in misconduct.”

(This article was produced by Thomson Reuters Regulatory Intelligence. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @RiskMgment)

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