SEC reveals general outlines of how it decides where to try enforcement cases
But guidance on using in-house judges versus federal court falls short, lawyers say.
The Securities and Exchange Commission Division of Enforcement released guidance last Friday that outlines how it selects venues for trying enforcement claims. But the explanation of how it decides to bring cases before in-house judges rather than try them in federal court falls short of making the process more transparent and fair, lawyers said Monday.
Among the factors considered are the nature of the case, forms of relief sought and how quickly the case can be decided. The guidance, which runs a little more than three pages, also said certain investment adviser and broker actions can only be tried in front of the SEC’s own administrative law judges.
“The division recommends the forum that will best utilize the commission’s limited resources to carry out its mission,” the guidance states. “There is no rigid formula dictating the choice of forum.”
SEC Chairwoman Mary Jo White told a Senate Appropriations subcommittee last Tuesday the agency was considering releasing public guidelines that would make the administrative process “clear and transparent for both the parties and public.”
Critics have said the in-house procedures give the SEC a home-court advantage in enforcement cases. A Wall Street Journal study published last Wednesday found that the SEC won 90% of the cases it brought through administrative proceedings from October 2010 through March 2015.
Richard Marshall, a partner at Ropes & Gray, said the biggest concern about the administrative process is whether it’s fair to defendants.
“The guidance is fairly vague,” Mr. Marshall said. “I don’t think that the standard fully addresses the fairness point. There’s still a substantial element of discretion that these guidelines give staff.”
The guidelines don’t detail whether the agency has to prove in the administrative venue that a defendant is likely to commit violations again, a standard that must be met in federal court, said Dennis Stubblefield, a partner at Shustak & Partners. In the administrative arena, a finding that the enforcement is in the public interest is sufficient, he said.
“I’m disappointed,” said Mr. Stubblefield, a former SEC branch chief enforcement officer in Miami. “They have more work to do. They’re just issuing factors [in the guidance]. They’re not addressing the core process by which they might make the administrative process more fair and transparent.”
Thomas Gorman, a partner at Dorsey and Whitney, agrees that the guidelines do little to clear up doubts about the administrative process.
“While it clearly would be beneficial if the SEC addressed the questions regarding forum selection to reassure the public regarding the fairness of its processes, this memorandum misses the mark,” Mr. Gorman wrote in his blog. “It offers virtually no insight into what can only be viewed as a ‘black box’ process used by the agency to make these critical decisions.”
An SEC representative could not be reached for comment.
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