SEC Adopts Amendments to Rules Governing Its Administrative Proceedings

SEC announced that it will adopt certain amendments to its rules of practice governing administrative proceedings. Faced with criticism from practitioners and the media regarding a perceived “home field advantage” in administrative proceedings, as well as various constitutional challenges to the ALJ process, the SEC has now approved amendments “intended to update the rules and introduce additional flexibility into administrative proceedings.”

The final amendments appear substantially similar to the rules proposed last September, with a handful of additions, apparently in response to comment letters. The primary differences are summarized below:

• Extension of Timeline. The proposal expands the deadlines for administrative proceedings, in part by expanding the “prehearing period” — the time between service of the initial order instituting proceedings and the hearing on the merits before the ALJ. Although the initial proposal would have extended the prehearing period from 4 months up to 8 months for complex matters, the final rules appear to have increased that time frame up to 10 months. Even so, 10 months is an extremely short time to prepare for a complex trial, especially where the SEC has already had years to investigate, subpoena documents, and take testimony, and has generated a record of potentially millions of pages of documentary evidence.

• Other proposed rules expanding the deadlines appear as initially proposed: rather than a strict 300-day deadline from the service of the order, the deadline for the ALJ’s initial decision would run from the time that post-hearing briefing is completed, with an extension for up to 30 days. By our count, the new rules could expand the initial decision timeline in complex cases from the current 10-month deadline up to approximately 17 months from service of the order.

• Expansion of Discovery. The SEC agreed to incrementally expand the availability of depositions in administrative proceedings. It had initially proposed to allow each side in complex cases the right to notice three depositions per side in single-respondent cases and five depositions per side in multi-respondent cases. However, the final rule also adds a provision permitting each side to request an additional two depositions “under an expedited procedure.”

• Motions for Summary Disposition. The SEC will amend Rule 250, regarding motions for summary disposition, to further specify three types of dispositive motions that can be filed at different states and to set standards governing each type of motion. This amendment does not appear to have been contemplated in the initial proposed rules.

The other provisions appear substantially similar to those initially proposed, including (i) requiring a respondent to disclose “reliance” defenses (such as reliance on counsel or other professionals), (ii) excluding certain hearsay or other irrelevant or unreliable evidence, and (iii) requiring certain disclosures regarding expert witnesses and reports.

The SEC received comments that generally asserted that the proposed amendments were a step in the right direction, but woefully inadequate. The SEC appears to have inched slightly more toward expanding deposition rights and prehearing deadlines.  Although stopping well short of allowing a full discovery process, the Commission has taken some steps to blunt criticisms that its process is unfair to respondents.  But given the huge differences that still exist between a civil trial and an administrative proceeding (such as the rights to a jury trial and to full discovery), we do not expect that these changes will satisfy the critics of SEC administrative proceedings.

Those critics have launched a barrage of lawsuits in recent years, raising various constitutional issues to the procedural process itself, not just to its application in a particular matter. Many of those cases have been dismissed for jurisdictional reasons:  the Courts of Appeals for the Second, Seventh, Eleventh, and District of Columbia Circuits have held that the constitutional arguments can be raised only on appeal, after the administrative process has concluded.  The appellate courts have therefore not yet grappled with the underlying constitutional issues.

However, the D.C. Circuit is currently considering the substantive issues in an appeal from a Commission order. We shall see whether the SEC’s rule changes have any impact on the court’s consideration of the constitutional issues in that case and in subsequent cases (although the rule changes obviously could not have affected now-concluded proceedings).