SEC Proposes to Modify Rules Regarding The Use of Its In-House Judges in Enforcement Cases

The Securities and Exchange Commission has issued proposals that would amend its rules governing its use of administrative law judges in enforcement proceedings. The proposed amendments come in the wake of criticism and lawsuits contending that having in-house judges preside over SEC cases gives the regulator an unfair advantage over defendants and violates the constitution because of the way the judges are appointed.

According to The Wall Street Journal, from October 2010 through March 2015, the SEC won 90% of its cases that were presided over by an in-house judge. It won just 69% of cases in federal court during that same time period. Every fiscal year since October 2004, the SEC has emerged victorious against at least four out of five defendants in cases that went before its judges.

Billionaire Mark Cuban, who was previously found not liable in the SEC’s insider trading case against him, recently said in a court brief that if his case had been heard by an SEC judge instead of in federal district court, he would have not benefited from certain protections and the outcome would have been very different for him. Cuban filed the brief in support of real estate developer Charles Hill, who also has been accused of insider trading. Hill is seeking to have his case transferred from the SEC’s in-house court to federal court.

Already a federal judge has ruled that the use of an in-house judge in the Commission’s case against Hill was “likely unconstitutional” and a federal judge stayed the case in June pending further review. The SEC is appealing.

Three primary changes to the Commission’s Rules of Practice that have been proposed, including, the

· Modification of the timing of administrative proceedings. such as giving more time before a hearing takes place in certain cases. Currently, defendants have four months to get ready for trial. The modified rules would give them eight months.

· Letting parties take witness depositions during discovery.

· Making parties in administrative proceedings turn in filings, which they would share with one another electronically.

Also, the SEC is proposing procedures related to the proposed expansion practice, the simplification of the requirements for pursuing Commission review of an initial decision, and greater transparency regarding the regulator’s timing related to its decisions when there are appeals.

According to The Journal the new rules would provide defendants with more of the legal protections that they would get if the case had gone to federal court instead of the SEC’s administrative proceedings. Among those who have expressed concern about the current use of in-House judges are ex-SEC officials, federal judges, and business groups.

Still, there are those who believe the proposed amendments are not enough. For one, they don’t address the concern that the SEC’s process of appointing its judges is not in line with the Constitution. More than one federal judge has called the agency’s appointment system “likely unconstitutional. The SEC disputes this contention.

Meantime, lawsuits from defendants questioning the constitutionality of the regulator’s judges remain pending. Also, there are concerns about the fact that the Commission both approves the enforcement action and hears any appeals made against the decisions rendered by in-house judges.

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SEC Proposes to Amend Rules Governing Administrative Proceedings, SEC, September 24, 2015