The US Chamber of Commerce is calling on the U.S. Securities and Exchange Commission make reforms to the way it conducts in-house trials. The Chamber wants the regulator to put into place a uniform policy of when such trials should take place, amend its rules to allow for more pretrial discovery, and set up a process that would let defendants challenge the choice of an in-house venue.
Critics believe that the SEC’s administrative trials violate the Constitution because there is limited discovery and no jury. Depositions are not allowed nor are counterclaims. To appeal a ruling by an administrative law judge, the person has to go to the Commission first before it can go to a circuit court of appeals.
The SEC has increased its use of in-house trials, which are presided over by one of its judges, ever since the 2010 Dodd-Frank Act went into effect. The Chamber of Commerce is concerned that this is causing serious issues of fairness. The lobbying group made nearly forty recommendations, including that the SEC revise certain deadlines and update its rules.
The chamber believes that some of the rules that preside over the SEC in-house court are no longer appropriate for certain complex cases, such as those involving insider trading. It wants more streamlining of investigations, modifications to the Wells notice process, less duplicate efforts among regulators, and clarification of the SEC’s policy regarding admission of guilt in enforcement actions.
The Chamber of Commerce is not the only one concerned about the SEC’s use of its in-house court system. Some are worried that in-house trials give the Commission an added advantage.
From October 2010 through March 2015, reports The Wall Street Journal, the regulator won against 90% of defendants in cases presided over by its own judges. With SEC cases that went to federal court, the regulator’s success rate was lower at 69%. There also have been questions of impartiality seeing as administrative law judges are SEC employees. The Journal, in its article, also cites Cornerstone Research, which reported that during the first half of this fiscal year, the Commission sent 82% of its enforcement actions to in-house judges.
The regulator claims it is not using its own judges to win more cases. Responding to the chamber’s report, SEC enforcement chief Andrew Ceresney said that he thinks implementation of the recommendations would “significantly weaken” the agency’s ability to protect investors.
Several cases have been filed in an attempt to challenge when the SEC has decided to bring a case before its own judges. Just last month a federal judge issued a preliminary injunction halting an SEC administrative case, citing constitutional grounds. The regulator accused Georgia real estate developer Charles Hill of insider trading and profiting almost $750,000 from stock transactions in 2011.
Hill responded by alleging that injunctive relief was proper to stop a process what he considered constitutionally infirm. This is the first time a federal court did not take the Commission’s side.
In June, a district court judge rejected financier Lynn Tilton’s legal bid to prevent the SEC from trying her case in front of an in-house judge. Tilton, who runs Patriarch Partners, is accused of bilking investors. The Commission claims she and her firms wrongly collected nearly $200 million of payments and fees.
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U.S. Chamber of Commerce Criticizes SEC’s In-House Court, The Wall Street Journal, July 15, 2015