Background and SEC Action:
On July 13, 2016, the U.S. Securities and Exchange Commission (SEC) adopted several amendments to its Rules of Practice regarding administrative proceedings. The amendments address, among other things, the timing of proceedings and the prehearing period, discovery (expanding the discovery process and the use of depositions), dispositive motions, admissibility of evidence, expert disclosures and reports, and contents of an answer. [SEC Release No. 34-78319; File No. S7-18-15].
In September 2015, the SEC requested comments on the proposed amendments. In response to the proposal, they received 13 comment letters that generally supported their efforts to update the rules, expand the discovery process, and adjust the timetables in administrative proceedings. The amended rules will become effective 60 days after publication in the Federal Register and will apply to any and all proceedings initiated on or after the effective date of the final rule. For proceedings instituted on or after the date of the amendment but prior to the effective date, the parties can elect to have the new rules apply.
Major Topics Addressed by the Amendments to the Rules of Practice:
Initial decision of hearing officer and timing of hearing (Rule 360): Under the amended Rule 360, orders instituting proceedings designate the time period for preparation of the initial decision as 30, 75, or 120 days from the completion of post-hearing or dispositive motion briefing or a finding of a default. The amendment also extends the length of the prehearing period. The new period extends to a maximum of ten months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases. The previous maximum was four months.
Depositions upon oral examination (Rule 233): There are no depositions provided for in 30-day or 75-day cases. However, under the amended Rule 233, parties in 120-day proceedings are permitted the right to notice three depositions per side in single-respondent cases and five depositions per side in multi-respondent cases. Parties are permitted to request an additional two depositions under an expedited procedure on a showing of “compelling” circumstances. The existing practice of allowing deposition testimony of unavailable witnesses, which do not count against the discovery depositions, is retained.
Prior Sworn Statements (Rule 235): The amended rule clarifies that sworn statements can include investigative testimony, declarations, and depositions. However, the rule also provides that there will be a presumption that live testimony should be favored by the Administrative Law Judge.
Disclosure by Division (Rule 230): The amended rule expressly declines to require the SEC’s Division of Enforcement (Division) to disclose individuals that were interviewed or otherwise produce summaries of any such interviews, and also expressly declines to prohibit the use of Wells Submissions or white papers by the Division.
Answer to allegations (Rule 220): Under amended Rule 220, a respondent is required to disclose in its answer to an order instituting proceedings whether the respondent is asserting any “reliance” defense and whether the respondent relied on the advice of counsel, accountants, auditors, or other professionals in connection with any claim, violation alleged, or remedy sought.
Dispositive motions (Rule 250): Amended Rule 250 provides three opportunities for dispositive motions, whether of the whole case or just of partial claims or defenses, at various stages: (1) a motion for a ruling on the pleadings like a Rule 12(b)(6) or 12(c) motion to dismiss; (2) as under the previous rules, a motion for summary disposition, with permission in a 120-day case, but now without permission in a 30-day or 75-day case; and (3) a motion for a ruling at the hearing after the Division’s case-in-chief.
Evidence (Rule 320): Under the amended Rule 320, evidence is excluded if it is irrelevant, immaterial, unduly repetitious, or unreliable. The amended rule also clarifies that hearsay may be admitted if it is relevant, material, and bears sufficient indicia or reliability so that its use is considered “fair.”
Experts (Rule 222): Under the amended Rule 222 (Prehearing Submissions), each party who intends to call an expert witness must submit a statement of the expert’s qualifications with prior testimony limited to four years and publications to ten years. The amended rule also provides that if the witness is retained to provide expert testimony in the case, an expert report must be filed that includes, among other things: (1) a complete statement of all opinions; (2) underlying reasons; (3) facts or data considered; (4) supporting exhibits; and (5) the expert’s compensation. The amended rule provides that draft reports, as well as the majority of communications with experts, will be protected.
Petitions for Review (Rule 410): Under the amended Rule 410, the petition for review now only needs to contain a summary statement of issues presented for review. In turn, petitions for review are now limited to three pages.
Other issues address by amendments: The amendments also address various items such as the procedures for the service of the order instituting proceedings in foreign jurisdiction and procedures governing appeals to the SEC.
Implications and Applications:
The SEC might have made these changes in order to blunt recent criticism concerning the lack of due process in their increased use of Administrative Proceedings to enforce the securities laws. But, if that is their purpose, the changes are woefully inadequate. Expanding deposition rights and prehearing deadlines are not a substitute for full and fair discovery, as is available in federal court proceedings. In that regard, the SEC’s amendments also will not thwart the looming, and pending, due process constitutional challenges to its authority. Due process requires more than these amendments.