Recent Data Suggests that the SEC May Be Curbing Its Use of Administrative Proceedings as Forums For Enforcement Actions
 

After experiencing criticism and receiving unfavorable judicial rulings in 2015, recent data suggests that the SEC may be bringing fewer contested actions as administrative proceedings. 

Commentators, academics, and journalists, in addition to defendants and their counsel, protested in 2015 that the SEC’s use of administrative proceedings (“APs”) to litigate enforcement actions was unfair, and possibly unconstitutional, because the procedures governing APs offer less protection than what is afforded to defendants in federal court proceedings and because the Administrative Law Judges (“ALJs”) adjudicating APs are employed by the Commission.

This criticism gained traction with courts in the District of Georgia and the Southern District of New York, which enjoined APs on constitutional grounds.  For example, in Hill v. SEC and Gray Financial Group, Inc. v. SEC, Judge Leigh Martin May of the Northern District of Georgia preliminarily enjoined the two APs, holding that the SEC’s hiring of ALJs violated the Appointments Clause of the Constitution because ALJs meet the Article II criteria that require appointment by the President, the federal courts, or the heads of federal departments. Hill v. SEC, No. 15-cv-1801-LMM (N.D. Ga. June 8, 2015); Gray Financial Group, Inc., et al. v. SEC, No. 15-cv-00492 (N.D. Ga. Aug. 4, 2015). Similarly, in the Southern District of New York, Judge Richard Berman preliminarily enjoined an AP as “likely unconstitutional” on the same grounds. Duka v. SEC, No. 15 Civ. 357 (RMB) (SN) (S.D.N.Y. Aug. 12, 2015).

SEC officials have defended the Commission’s use of APs by emphasizing that the overwhelming majority of APs were filed as settled actions.  A Cornerstone Research report published in May 16 suggests that indeed the SEC largely uses APs for settled actions. In addition, the Cornerstone data showed that the SEC’s use of APs to litigate contested enforcement actions had fallen each of the last four years, even though the SEC continues to file more APs than ever before.  For example, the SEC filed 51 APs in FY 2012, 11 of which were contested actions.  Conversely, while the SEC brought 49 APs in the first half of FY 2016—nearly double its rate in 2012—only one of those actions was contested.  This slowdown in the use of APs to litigate enforcement actions suggests that criticism of the Commission in 2015 may be having an effect on the SEC’s choice of forums.