SEC administrative proceedings

On July 13, 2016, the SEC announced its adoption of several amendments that update the SEC’s rules of practice governing its administrative proceedings.  The final amended rules are available here.

As SEC Chair Mary Jo White stated in the SEC’s announcement, “[t]he amendments to [the SEC’s] rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of [the SEC’s] administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings.”  For example, under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75, or 120 days from completion of post-hearing or dispositive motions.  Further, amended Rule 360 extends the length of the pre-hearing period from four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases.

Continue Reading SEC Adopts Amendments Updating its Rules of Practice for Administrative Proceedings

By Chip Phinney and Geoff Friedman

As we have discussed before, the SEC’s increased use of in-house administrative proceedings in enforcement actions involving allegations of fraud has been a subject of considerable debate. Commentators have questioned the fairness of proceedings where the SEC gains an automatic home field advantage by bringing claims before its own administrative law judges (ALJs), with appeals being heard by the SEC’s own commissioners. But a determined defense can still defeat the SEC by ensuring that it plays by the rules, as demonstrated by a decision issued last week by the U.S. Court of Appeals for First Circuit in a case where Mintz Levin attorneys Jack Sylvia, Andy Nathanson, Jess Sergi, McKenzie Webster, and Geoff Friedman represented one of the petitioners.

The First Circuit vindicated two former employees of State Street Global Advisors (SSgA) who had been targeted by the SEC for alleged securities violations during the 2007 subprime mortgage crisis. Despite applying the highly deferential “substantial evidence” standard of review for agency factfinding, the First Circuit concluded that the SEC abused its discretion in holding Mintz Levin’s client, former SSgA Vice President James Hopkins, liable under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The First Circuit also vacated the Commission’s order holding Mr. Hopkins’ co-defendant, SSgA CIO John Flannery, liable under Section 17(a)(3) of the Securities Act.
Continue Reading First Circuit Overturns SEC Commissioners’ Sanctions Order

As we discussed in a post last November, the SEC’s increasing use of enforcement proceedings before its own administrative law judges (ALJs), rather than before federal court judges, has spawned a number of constitutional challenges in the federal courts.  Most of these challenges have failed, but on Monday a federal judge in Georgia issued a preliminary injunction to stay an SEC administrative proceeding on constitutional grounds. Continue Reading Federal Court Rules That SEC Administrative Proceeding Is “Likely Unconstitutional”

The SEC’s plan to bring more enforcement actions as administrative proceedings before its own administrative law judges rather than in the federal district courtseven in insider trading cases — has been drawing increasing criticism and legal challenges.  Most recently, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York questioned  the SEC’s use of administrative proceedings in a speech last Wednesday before the Practising Law Institute’s Annual Institute on Securities Regulation.  Judge Rakoff observed that the SEC’s administrative powers, which were originally quite limited, have been expanded considerably by the Sarbanes-Oxley Act of 2002 and especially by Section 929P(a) of the Dodd-Frank Act of 2010, which respectively enabled the SEC to obtain administrative orders barring defendants from serving as officers and directors of registered companies and assessing monetary penalties.  While administrative proceedings may be more efficient for the SEC, they are not subject to the Federal Rules of Evidence and Federal Rules of Civil Procedure, there is no jury, and the SEC has a much higher winning percentage in front of its own administrative law judges than in the federal courts.  Judge Rakoff noted that under the two primary securities enforcement statutes — Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act — the law has been principally developed by the courts.  He said that the judiciary and the public should be concerned because the SEC’s increased use of administrative proceedings could hinder the balanced development and interpretation of the securities laws in the future, since courts will tend to give deference to the SEC’s interpretation of the law and its own regulations. Judge Rakoff’s concerns were echoed later in the conference in comments by former SEC Director of Enforcement William McLucas. Continue Reading SEC’s Increased Use of Administrative Proceedings Draws Criticism and Legal Challenges

By rule, the SEC is required to issue a report on the Commission’s administrative proceedings caseload every six months.  On October 29, 2014, the SEC issued its most recent report covering the six month period from April 1, 2014 through September 30, 2014.  This report also included the statistics from the two prior six-month periods for comparison purposes.

Here are three of the more notable statistics from the report:

1)  Newly filed proceedings initiated before the SEC’s Administrative Law Judges increased by 44% over the prior six month period.  Although, the total  number of new matters was roughly on par with those filed in the same six-month period from 2013 (139 for 2014 and 121 for 2013).

2)  The median age of the proceedings at the time when the Adminstrative Law Judge issues an initial decision decreased from 52 days in the prior six month period to 40 days in the most recent six month period.  This represents a marked improvement on the 186.5 day median for the same six-month period in 2013.

3)  While the Administrative Law Judges have improved on the time it take to issue an initial decision, the time it takes the Commission to review ALJ decisions has remained relatively constant, and relatively long.  The median age of the proceedings at the time when the Commission completes its review was 524 days in the last six-month period.   This compares to 600 days for the prior six-month period, and 539 days for the same six-month period from 2013.

Recently the New England Chapter of the National Association of Corporate Directors presented a distinguished panel of current and former securities regulators discussing enforcement and governance issues facing boards of directors today. Massachusetts Secretary of State William Francis Galvin; Paul Levenson, director of the SEC’s Boston Regional Office; and George Canellos, former co-director of the SEC’s Division of Enforcement and former director of the SEC’s New York Regional Office spoke with moderator Thomas Dougherty of Skadden, Arps, Slate, Meagher & Flom LLP. Here are some highlights from the discussion.

Enforcement priorities and concerns. The regulators are concerned about: the constant pressure on public issuers to hit earnings targets and its impact on corporate accounting and disclosure; the financial services industry’s management practices and its disclosures and advertising to investors, especially individuals; corporate internal controls, disclosure controls, and risk management; fraudulent investment schemes targeting affinity groups; and insider trading.

FCPA. To avoid problems under the Foreign Corrupt Practices Act, overseas operations should prioritize separation between business development functions and incentives on the one hand, and legal compliance functions and incentives on the other hand.

Insider trading. The panelists noted the increased use of expert networks in the investment community and they were skeptical about whether investors’ warnings to experts, that they did not want to hear material non-public information, actually prevented disclosure of inside information.

Reg. FD. Companies need to be careful about matching what they are saying to individuals or small groups of investors with their broader communications with the investing public, including social media. When there is a violation of Reg. FD, companies should be proactive about dealing with the issue instead of waiting for an outside source to raise it.

Cybersecurity. The SEC is focusing on corporate governance concerning cybersecurity issues, companies’ recognition and control of cybersecurity risk factors, and their disclosures when there is a breach.

SEC administrative proceedings. The Dodd-Frank Act gave the SEC increased power to bring administrative proceedings for securities violations, and given the costs of bringing cases to trial in the federal district courts, the SEC will likely continue to bring more cases before the agency’s administrative law judges.

Corporate governance. When sitting at the top of very large, complex corporations, consisting of disparate entities with different histories, cultures, and strategies, directors should ask themselves whether they are confident that the standards that they personally adhere to are being followed throughout the organization.

More details about the program and panelists’ remarks can be found here on the NACD New England website.