InvestmentNews Editorials

Heading to court, but which one?

Increasing transparency would go a long way in deflecting criticism that the SEC steers cases to its owns judges

Mar 1, 2015 @ 12:01 am

The controversy over the SEC's increased use of in-house administrative law judges to try civil enforcement cases is not going away.

In the past couple of weeks, Gray Financial Group Inc. filed a lawsuit against the Securities and Exchange Commission seeking to block an administrative action being brought against it. The Atlanta-based firm claims the use of administrative judges violates the U.S. Constitution.

At around the same time, SEC Commissioner Michael Piwowar called on the agency to issue guidelines for determining which cases are brought in administrative proceedings and which in federal courts.

The SEC acknowledges that it is using administrative judges more than in the past, largely because the Dodd-Frank law expanded the circumstances under which it could use those judges.


Defense lawyers have complained that administrative proceedings are inherently unfair because the rules of discovery and other court procedures are more restrictive in such settings than in federal district court.

To prove their claim, the lawyers point to the SEC's greater success rate in the administrative arena.

According to an analysis by The Wall Street Journal, the SEC won all six administrative hearings that came to a verdict in the 12 months ended Sept. 30, versus 11 out of 18 federal court cases over the same period.

Of course, a winning record in and of itself doesn't prove anything, and the SEC's use of administrative judges has been upheld by the courts. The agency claims extensive procedural protections are in place for defendants, and that the forum provides benefits to defendants, not the least of which is adjudicating cases in a more timely fashion.

But legalities aside, a bigger issue is at play. It is vital that the public have confidence in all judicial forums, and if there is a perception that individuals and companies are not getting a fair shake in SEC administrative proceedings, the agency should be concerned.

Mr. Piwowar recognizes the importance of public perception, and his recommendation for boosting confidence in the SEC by establishing guidelines for when a case will go to an administrative judge and when it will go to federal court is a good one.

Right now, the SEC makes these decisions on a case-by-case basis. Bringing transparency to the process should go a long way in deflecting criticism that the agency is steering cases to its owns judges just to increase its winning record.


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