SEC Seeks to 'Modernize' Its Internal Courts through Proposed Rule Amendments
With its internal administrative courts under continuous scrutiny by both the courts and the defense bar, the Securities and Exchange Commission (the "SEC") voted to propose amendments to the current rules governing its administrative proceedings.
SEC Chair Mary Jo White stated that "[t]he proposed amendments seek to modernize our rules of practice for administrative proceedings, including provisions for additional time and prescribed discovery for the parties."1
The SEC will take comments for 60 days from the date the proposed amendments are published in the Federal Register, but the proposed changes will not become effective until the SEC votes to approve any final rules.
Perhaps of most interest to the defense bar, the proposed amendments seek to permit parties to take depositions as part of the discovery process, something that parties may currently do only if the witness is unavailable for hearing. The proposed amendment would permit three depositions per side in single- respondent proceedings and, collectively, five depositions per side in multiple- respondent cases.
In addition, the proposed amendments seek to lighten the burden of the so- called "300-day rule" by extending the deadline for the filing of an administrative law judge's initial decision from the time that the post-hearing or dispositive motion briefing is complete rather than the date of service of the Order Instituting Proceedings ("OIP"). For some, this could mean as many as 120 days after completion of the post-hearing briefing. The proposed amendments also provide for a longer period of time before which the hearing must begin—in some instances, up to eight months after service of the OIP. The amendments also create a procedure for extending the initial decision deadline for an additional 30 days.
Certain of the other proposed amendments attempt to bring the somewhat lax evidentiary standards applicable to administrative proceedings more in line with the Federal Rules of Evidence, including (i) exempting from disclosure draft expert reports and communications between a party's attorney and the party's expert witness and (ii) clarifying that hearsay may be admitted if it is relative and material and bears satisfactory indicia of reliability such that its use is fair.
The proposed amendments also seek to simplify the appeals process, proposing to eliminate the requirement that the petitioner set forth all the specific findings and conclusions of the initial decision and to eliminate the provision stating that if an exception is not listed, it may be deemed waived. Instead, the proposed amendments provide that the petitioner is required to set forth only a summary statement of the issues limited to three pages.
While the proposed amendments are a step in the right direction, many within the defense bar are wondering whether the proposals are really enough to "level the playing field" for clients who are forced to defend against claims brought in the SEC's in-house courts.
Indeed, a five-deposition limit in complex cases is still not sufficient, in particular when those five must be spread among multiple respondents, while the SEC still has the benefit of testimony it took during its investigation—in addition to five depositions of its own. Moreover, while the proposed amendments nearly double the length of time preceding the hearing deadline, some question whether even eight months is sufficient to adequately prepare for trial. Also, the proposed amendments are still not in line with the Federal Rules of Evidence, although they have come closer.
Perhaps most notably, the proposed amendments do not propose any changes to address the perceived constitutional flaws with the SEC's in-house tribunals. It remains to be seen whether the SEC will ever be forced to address the constitutional challenges in-house proceedings face, but these proposed amendments are, at the very least, a positive step forward.
1 See September 24, 2015 SEC Press Release, available at http://www.sec.gov/news/pressrelease/2015-209.html