SEC to Face More Pressure on Enforcement Forum Choices

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By Rob Tricchinelli

Nov. 30 — Republican lawmakers want to curb the SEC’s authority to bring enforcement actions using in-house tribunals—unless the agency moves first.

Parties sued in the administrative forum could move the case to federal court under legislation (H.R. 5983) approved in September by the House Financial Services Committee.

The SEC has had the power to use in-house tribunals to seek civil penalties against “any person” who violates securities law since the Dodd-Frank Act became law. Before that, the agency could use the forum only in cases against registered investment advisers and broker-dealers, and it had to go to federal court to sue other public companies or go after accounting fraud and insider trading.

The SEC also could move first by changing its own rules of practice. “I suspect [changes] would come from the SEC’s own rulemaking, to stave off any congressional action,” William M. Regan, a New York-based financial services litigation partner at Hogan Lovells LLP, told Bloomberg BNA in an interview.


The agency has already sought to defuse complaints from securities defense attorneys about unfairness in the SEC forum, by changing deadlines and permitting depositions, but lawmakers and lawyers in the defense bar have still been clamoring for more.

“They’re losing in the court of public opinion, as far as the perception that the tribunal isn’t fair,” John F. Sylvia, chair of the securities practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Boston, told Bloomberg BNA in an interview.

A summary of the Republicans’ sweeping legislation cites “constitutional concerns” with the agency’s forum selection and warns that “the SEC must strike the right balance between deterring and punishing securities fraud and protecting shareholders.” The bill, known as the Financial Choice Act, has been guided by committee Chairman Jeb Hensarling (R-Texas) and offers a blueprint for congressional Republicans’ priorities in the next Congress.

Forum Selection

If parties are allowed to choose their venue for fighting the SEC’s charges, keeping the proceedings in the agency’s tribunal could still be a more attractive option for some, lawyers say.

Even though many “will have a better chance in front of a jury,” the decision can hinge on economic ability, John A. Sten, a securities partner at Pierce Atwood LLP in Boston, told Bloomberg BNA in an interview.

“If I have a client with limited resources who wants to get to resolution,” Sten added, “the administrative forum is much better, because it’s faster, it’s less labor intense.”

Parties have many factors to consider, if given the choice.

If the case is highly technical with complex allegations, an administrative law judge can be better, given his or her thorough understanding of securities laws, Jeff Kern of Sheppard, Mullin, Richter & Hampton LLP in New York told Bloomberg BNA in an interview. A sympathetic party or a high-publicity case would be better suited to federal court, he said, as would sets of facts that could bring dismissal or summary judgment motions.

If Hensarling’s bill becomes law, “you will see more defendants availing themselves of federal court, but not as many as you may think,” Kern, whose practice includes securities defense, said.

Sten, a former SEC enforcement official, said it is unlikely that all parties will ever have the full ability to remove a case to federal court because it would “gut the administrative process.” A likelier outcome, he added, is stronger removal rights for parties that aren’t broker-dealers or investment advisers, akin to the law that existed before Dodd-Frank.

Significant Discretion

Hensarling’s legislative effort would also add procedural layers to any case that agency enforcers seek to bring in-house. The commission would make public its enforcement manual, and SEC economists would have to weigh in on civil penalties to ensure they don’t adversely affect shareholders.

Critics of the SEC’s system still face a long road before any changes are made.

“Looking back, regardless of whether you have a Republican or Democratic administration, the enforcement mandate has been expanding,” Sylvia said. “I don’t see there being a wholesale ramping back of their enforcement initiatives,” he added.

“I still think the SEC is likely to retain a significant amount of discretion as to what cases they tend to bring” in the administrative forum, Regan said.

On top of that, the agency has five administrative law judges, meaning SEC enforcers could face scheduling and resource limitations if they attempt to bring even more actions in that forum.

“There are only so many cases they can handle,” Sylvia said.

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

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

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