The SEC and Administrative Proceedings (Part 1)

Peter Henning wrote an interesting piece over at DealBook on the SEC's use of administrative proceedings in place of actions in federal district court.  See The S.E.C.’s Use of the ‘Rocket Docket’ Is Challenged.  These hearings occur not before an Article III judge but are heard by an administrative law judge who is employed at the Commission.   

Peter noted a number of differences between administrative proceedings and proceedings in federal court. Administrative proceedings have shorter time fuses (anywhere from 120 days to 300 days), allow for less discovery (he stated that discovery is "largely limit[ed to] the evidence to whatever the agency gathered during its investigation"), and "there is no neutral judge involved."  The article also noted a number of parties that were challenging the SEC's use of administrative proceedings.  

The article provided a catalyst for discussing the use of administrative proceedings.  A list of these proceedings can be found here.  Administrative practices are subject to the SEC’s rules of practice, which can be found here.

A number of the criticisms listed in Peter's piece are really simply acknowledgements of differences between administrative and court proceedings that could just as easily have been praised.  Thus, the title to the piece refers to the SEC’s “rocket docket.”  Administrative proceedings in general must be completed no later than 300 days after filing.  See Rule 360.  While this can, in some cases, create an uncomfortable time crunch, it is, for the most part a matter that ensures parties that SEC allegations will not remain unaddressed for protracted periods of time.  

As for the reduction in discovery, parties still can subpoena documents (see Rule 232) and in at least some cases depose witnesses.  See Rule 233 (requiring a motion for approval of depositions)  Nonetheless, the proceedings do provide for less discovery.  The trade off is a reduction in costs.  It is not uncommon for court proceedings to be criticized because of the high cost of discovery.     

As for the concern over the absence of a “neutral” decision maker (the administrative law judges are employees of the Commission), the issue is structural and longstanding.  Administrative law judges are typically hired and paid by the agency where they are making decisions.  Nonetheless, steps have been taken to ensure that they can make decisions in a manner that is independent of the agency.  As the Manual for Administrative Law Judges provides: 

  • To insure independent exercise of these functions, the ALJ's appointment is absolute. The ALJ is not subject to most of the managerial controls which can be applied to other employees of a federal agency. For example, ALJs are not subject to performance appraisals, and compensation is established by the Office of Personnel Management, independent of agency recommendations. Furthermore, the agency can take disciplinary   Id. at 2-3.  

It is true that appeals from the ALJ go directly to the Commission, creating a situation where the Commission staff is arguing positions before the agency that approved the case in the first instance.  Nonetheless, the safety valve for concerns over this structure is the right of appeal to the US Court of Appeals (usually the well versed and knowledgeable DC Circuit, a court that has not been particularly deferential to SEC decisions). Ultimately, any decision made by the Commission, therefore, will be examined by an Article III Court for error.

J Robert Brown Jr.