SEC Proposes to Revamp In-House Forum Procedures

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By Rob Tricchinelli

Sept. 24 — The Securities and Exchange Commission proposed significant changes Sept. 24 to its in-house court system, as the agency faces litigation on multiple fronts attacking both the fairness and the constitutionality of the forum.

The proposal would allow for depositions to be taken in administrative proceedings and would provide for a longer amount of time between deadlines and hearings in individual cases.

A separate proposal would also require administrative parties to make their filings electronically. “The Commission believes that electronic submissions will enhance the transparency of administrative proceedings by providing a quicker way for the Commission to make records available to the public,” the proposing release said.

Suits

The SEC is facing several lawsuits in federal court challenging the constitutionality of its in-house forum and questioning its fairness as a venue compared to federal court.

The SEC's proposal addresses some of the fairness concerns. Defendants in some cases, as well as such groups as the U.S. Chamber of Commerce, have cited the lack of depositions and shorter time frame as an unfair strategic disadvantage for defendants when compared to federal court.

“Today’s announcement is a welcome first step for those who have pushed the SEC to reform its administrative proceeding to ensure full, fair, and impartial adjudication,” Tom Quaadman, chairman of the Chamber's Center for Capital Markets Competitiveness, said in a news release. “We are pleased to see the SEC taking proactive steps in reforming its practice, and the proposed amendments are consistent with our recommendations to clarify and strengthen the enforcement process.”

The Chamber in July made 28 recommendations to the SEC for changing its enforcement regime, including consistent standards for choosing a forum.

Justin Weddle, a partner at Brown Rudnick LLP in New York, said, “for so many facing or having gone through a defective administrative proceeding, this may be too little, too late.”

Brown Rudnick represented NBA owner Mark Cuban in an insider trading case brought by the SEC, and a jury cleared Cuban in October 2013. Cuban has filed an amicus brief in one circuit-court challenge to the in-house forum.

Constitutional 

The agency's proposals don't address the constitutional issues brought up in other lawsuits.

Those concerns, raised by such administrative defendants as “diva of distressed” Lynn Tilton and Patriarch Partners LLC, as well as former Standard & Poor's executive Barbara Duka, center on the hiring and retention of administrative law judges.

Several of the defendants claim the appointment of the agency's judges is unconstitutional because they weren't appointed by the president or SEC commissioners. 

In deciding an administrative appeal earlier in September, the commissioners themselves said that the Appointments Clause and equal protection complaints don't apply to the agency's in-house judges.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com.

For the timing and deposition proposal, visit http://www.sec.gov/rules/proposed/2015/34-75976.pdf

For the electronic filing proposal, visit http://www.sec.gov/rules/proposed/2015/34-75977.pdf