Lawmakers, Others Question SEC's In-House Court

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By Rob Tricchinelli

Dec. 2 — The Securities and Exchange Commission's in-house court system faced stern criticism from both lawmakers and witnesses Dec. 2, as a House subcommittee considered a bill that would give SEC defendants more options and ratchet up the burden of proof on the agency.

The SEC has a “crisis of confidence” in its administrative forum, Joseph Grundfest, a former SEC commissioner and current law professor at Stanford, said during a hearing of the House Financial Services Capital Markets subcommittee.

The subcommittee met to consider a slate of bills, including H.R. 3798, which would permit parties sued administratively to move their case into federal court if the SEC's complaint seeks a monetary penalty or a cease and desist order. 

The bill, sponsored by subcommittee Chairman Scott Garrett (R-N.J.), would also increase the agency's burden of proof for in-house cases by requiring the SEC to show “clear and convincing evidence” of liability.

Changes to Forum

“In recent years, the SEC has transformed itself into a veritable judge, jury and executioner as it has brought more and more enforcement cases before its in-house tribunal, where they are heard by administrative law judges, who are themselves employees of the SEC,” Garrett said during the hearing.

In response to criticism about the fairness of the forum, the SEC proposed in September to allow depositions to be taken in administrative proceedings and to provide a longer time period between deadlines and hearings in individual cases (186 SLD 186, 9/25/15).

The public comment period on the SEC's proposals ends Dec. 4.

Business groups have said the SEC's changes don't go far enough to promote fairness. Tom Quaadman, the vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, called the proposal a “crawl in the right direction.”

Rep. Keith Ellison (D-Minn.) warned that Garrett's bill would introduce its own unfairness by allowing defendants to forum-shop in order to improve their chances of winning.

Other Bills

The subcommittee also debated H.R. 3784, which would require the SEC to create an office of the small business advocate and a small business capital formation advisory committee.

The panel further considered three yet-unnumbered bills that would require the agency to formally respond to the recommendations of its annual government-business forum on capital formation; extend “emerging growth company” exemptions to companies with low revenue after five years of being registered with the SEC; and broaden general solicitation to include securities being sold to “angel investor groups.”

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

For H.R. 3798, visit

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