July 22, 2019

July 19, 2019

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Facing Legal Challenges, SEC Proposes To Reform Administrative Proceedings

As has been widely reported elsewhere, the Securities and Exchange Commission has been facing a spate of challenges to its administrative court.  It should come as no surprise then that the SEC recently announced a number of proposals to the rules of practice in that forum.  I have already submitted a comment letter on the SEC’s proposal to require respondents to submit documents electronically.  In that letter, I challenge the SEC’s premise that it can effectively shift its obligations under the Privacy Act to other parties.

The SEC’s other proposed set of rule changes appears to be generally directed at instilling more procedural fairness in favor of respondents. Thus, the SEC is proposing to expand the timing of hearings in administrative proceedings; allow for discovery depositions; and clarify the rules for admitting hearsay and assertion of affirmative defenses.

Even if these rule changes are adopted, the SEC’s procedures would still be skewed in favor of the agency.  For example, the SEC is proposing to permit depositions.  Under current SEC Rule 233, respondents are entitled to take a deposition of a witness only if the witness will be unable to attend or testify at a hearing.  While this is also true under California’s Administrative Procedure Act (Cal. Gov’t Code § 11511), it is grossly unfair to respondents.  By the time that a proceeding is initiated, the SEC will have conducted an investigation and had the opportunity to subpoena and question witnesses.  Respondents, in contrast, don’t have a mechanism for questioning witnesses before they take the stand.  The SEC’s proposal to allow depositions, however, is miserly.  It would allow a respondent only three depositions (or five when there are multiple respondents).  Securities law cases are complex and limiting respondents to only three depositions is arbitrary.  The SEC also doesn’t explain why the existence of multiple respondents should reduce the number of depositions available to a respondent.

Although these rules may become moot if the SEC’s administrative court is found to be unconstitutional, the SEC surely could do better in improving its profoundly unjust procedures.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...