Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News November 2, 2015 Issue

House Bill Would Effectively Reduce Number of Administrative Proceedings

Critics of the SEC’s increased use of administrative proceedings to try advisers and other targets of SEC enforcement have a new weapon and a new battleground. A bill introduced in the U.S. House of Representatives would, if passed, enable those charged by the agency to terminate an administrative proceeding within 20 days, leaving the SEC with no recourse save a civil court proceeding.

The bill, the Due Process Restoration Act of 2015 (H.R. 3798), was introduced October 22 by Rep. Scott Garrett (R-NJ), chair of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.

In addition to allowing those charged by the SEC to terminate planned administrative proceedings, the bill would also raise the standard of proof needed for those administrative hearings that move forward. Under the bill, the SEC would have to place "clear and convincing evidence" before an administrative law judge. That’s a higher bar than the "preponderance of evidence" standard required in civil court.

The result of these two changes – allowing respondents to terminate a planned hearing, and raising the evidence bar – would likely be a greatly reduced number of administrative hearings. The SEC could still bring those cases to an ALJ that respondents did not challenge and for which the agency felt it had enough evidence, but other enforcement actions would need to be taken to civil court.

Proponents and opponents of the bill should not get overly excited at this point, however, as the bill is still in committee, and, according to, which keeps tabs on all Congressional action, the bill currently has an 18 percent chance of getting past committee, and only a 4 percent chance of being enacted. Further no other legislators have yet chosen to co-sponsor the bill with Garrett.

"Strong enforcement of the securities laws is an essential part of the SEC’s mission to protect investors and maintain a fair and efficient marketplace, but in recent years the agency has transformed into a veritable judge, jury, and executioner with its blatant overuse of their in-house courts," Garrett said in a statement. "Every American has the constitutional right to defend themselves before a fair and impartial court, and the Due Process Restoration Act will go a long way towards protecting the rights of the innocent while maintaining the ability of the SEC to punish wrongdoers."


"The proposal is foolish, and I would hope that the great majority of honest investment advisers would be troubled by a proposal that simply makes it harder to get bad apples out of the business," said Georgetown University law professor Donald Langevoort. "The ‘clear and convincing’ standard is a way of saying that it isn’t enough to prove that someone has likely violated the law—that person gets to stay in business, unless the Commission expends the resources (and the attendant delays) associated with going to court."

University of North Carolina School of Law professor Thomas Lee Hazen also criticized the bill, which he described as "totally out of line with the law and any other agency" that conducts administrative hearings. "I’ve never heard of an agency giving the defendant a choice between an administrative proceeding and civil court."

"It’s a ploy by the defense bar to ruin what is a very good and responsible agency," Hazen said.

Others had different opinions. "The bill is a good step in the direction of restoring the Constitutional right to a jury in the context of administrative proceedings," said Zaccaro Morgan partner Nicolas Morgan, a defense attorney. "The proposed bill would restore a defendant’s ability to opt into federal court, thus restoring the ability to have a jury decide whether the law has been violated."

Administrative proceedings vs. civil court

Administrative proceedings, which are actions filed with an SEC administrative law judge as opposed to litigation in federal district court, have been used by the agency, as well as other federal agencies, for many years. What changed to make their use by the SEC more controversial in recent years was the passage of the Dodd-Frank Act, which allowed the agency to use the proceedings to seek civil money penalties against unregistered advisers. Prior to Dodd-Frank, they could seek such penalties only against regulated entities, and would have had to go to federal court to obtain a monetary penalty against any entity that was not regulated.

Why is the use of administrative proceeding in contention? Administrative proceedings have been criticized by defense attorneys as providing the SEC with a home-court advantage. Such proceedings provide no jury, and, defense attorneys argue, provide them with less time than the prosecution to prepare, and with limited opportunities for depositions.

The SEC has since, by its own admission, increased its use of administrative proceedings. "Commission staff has recently indicated that they will recommend instituting more enforcement matters, including insider trading cases, through administrative proceedings rather than going through the federal district courts," said SEC commissioner Michael Piwowar in a noted February 2014 speech (ACA Insight, 3/9/15) in which he called for guidelines on the use of administrative proceedings.

The SEC, in fact, on September 24 issued proposed guidelines (ACA Insight, 9/28/15) that address some of the criticisms raised by defense counsel and others. Under the new guidelines, defense attorneys would be permitted to depose witnesses as part of the discovery process. The agency would also adjust the timing of proceedings, including by sometimes extending the time before a hearing occurs.

These changes, currently in the middle of a 60-day review period, did not satisfy all the critics. Fundamental objections listed by defense attorneys remain, such as the absence of a jury, that ALJs are SEC employees, that appeals from ALJ decisions are heard by the SEC itself (although Hazen noted that an SEC decision supporting an ALJ can be further appealed to civil court), and that the increased number of depositions, while an improvement, is still limited.

The SEC, of course, has another point of view. "For settled matters, we often, but not always, choose to file in an administration forum, largely because of efficiency," said Division of Enforcement director Andrew Ceresney in a November 2014 speech (ACA Insight, 12/8/14). "The filing quickly ends the matter on a settled basis, among parties that have agreed to a settlement, and there is no need to have implementation of the parties’ agreement subject to the competing demands of busy district court dockets."

In addition, Ceresney noted that administrative hearings have other benefits for respondents, including prompt decisions and ALJ expertise.

Finally, the SEC noted, in its commentary to the proposed guidelines, that going to civil court rather than an administrative proceeding would significantly increase the cost of defense for respondents. "We preliminarily estimate that potentially lengthening the overall administrative proceedings timeline by up to four months to allow more time for discovery may result in additional costs to respondents in a single matter of up to $462,400," it said. Such costs may incentivize respondents to seek settlements.

Under the proposed House bill, the decision of whether to go to court or stick with an administrative hearing will be left to the person charged, not to the SEC.