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Regulation and Compliance > Federal Regulation > SEC

SEC OKs New Rules for In-House Proceedings

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— Editor’s note: This article originally appeared on our sister site

In courts across the country, the Securities and Exchange Commission has argued and filed hundreds of pages of briefs in defense of the constitutionality of its in-house proceedings.

Against the backdrop of that litigation, the commission approved changes to its administrative proceedings Wednesday without a peep — holding no discussion on rules that will give individuals and companies more time to prepare for hearings and depositions in certain matters.

The SEC proposed the new rules in September. SEC Chairwoman Mary Jo White characterized the package of changes then as an effort to “modernize our rules of practice for administrative proceedings, including provisions for additional time and prescribed discovery for the parties.”

In September, the SEC proposed giving defendants up to eight months to prepare for hearings before the agency’s in-house judges, a change that would have doubled the current prehearing period of four months. But in an apparent response to commenters who pressed for more time, the final rules approved Wednesday give up to 10 months of preparation.

“It’s certainly not everything that the defense wanted, but I think it will be viewed as a step in the right direction,” said Joel Green, a partner in the Washington office of Wilmer Cutler Pickering Hale and Dorr. “The concern from the defense bar throughout this dialogue has been that the SEC was or could be perceived as pursuing a home court advantage. This reflects a recognition of the concern.”

Green noted that it remains to be seen how much preparation time the administrative law judges will provide within the new maximum prehearing period of 10 months.

“It’s a maximum of 10 months, but really, in practice, if you’re getting a shorter period than that, then it’s still putting tremendous pressure on the defense.”

For particularly complex proceedings, the new rule will also open up depositions as a discovery tool. Under the current rules, the SEC or a defendant can request an administrative law judge’s permission to take a deposition only if a witness will be unable to testify at the hearing. But the new rules will allow each side to take three depositions in cases involving a single defendant and five depositions in cases with more than one defendant.

“In a situation where you have the staff taking on-the-record testimony for potentially dozens of witnesses, or as many witnesses as they see fit … three depositions isn’t necessarily an adequate counterweight to that,” Green said. “Among the changes they’re making, three three depositions seems like a minimalist change.”

The new rules are set to take effect 60 days after their publication in the Federal Register.

Since the passage of the Dodd-Frank financial reform law, which gave the SEC increased power to bring cases before the agency’s in-house judges, defense lawyers have criticized the proceedings as inherently unfair. Critics also have faulted the administrative proceedings for providing little discovery and no jury — two hallmarks of federal district court.

In court, the SEC has faced numerous lawsuits that contest the constitutionality of the agency’s administrative proceedings. The lawsuits have alleged that the administrative judges should be appointed by the president or the SEC, rather than through a bureaucratic process.

The SEC has fended off those challenges so far — at least on jurisdictional grounds.

The U.S. Court of Appeals for the Second Circuit ruled on June 1, for instance, that New York financier Lynn Tilton could not challenge the constitutionality of the administrative judges until the agency completes its fraud case against her.

In mid-June, the Eleventh Circuit also ruled that the court doesn’t have jurisdiction to hear a dispute before it’s brought before the commission.


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