On July 13, 2016, the U.S. Securities and Exchange Commission (SEC) announced that it had formally adopted amendments to the rules of practice governing its administrative proceedings.1 The SEC proposed the amendments last September after facing criticism from attorneys who raised concerns about inadequate due process rights and bias in the agency's in-house tribunal. Last year, a study by the Wall Street Journal found that the SEC enjoys a "home-court advantage" when bringing cases in front of its administrative law judges (ALJs) rather than in federal courts.2 According to the Wall Street Journal's analysis, from October 2010 to March 2015, the SEC won approximately 90% of the time in administrative proceedings compared to 69% of the time in federal court.3
The amendments begin to address these concerns and involve a number of changes, including the following:
- Expansion of Timeline: Under Amended Rule 360, the prehearing period—the time between the start of a proceeding and a hearing before the ALJ—has increased from the current four-month limit to a maximum of ten months for complex matters. A maximum of ten months is now allowed for cases designated as 120-day proceedings, a maximum of six months is allowed for 75-day proceedings and a maximum of four months is allowed for 30-day proceedings. The expanded period will provide defendants with more time to prepare their cases.
- Increased Discovery Rights: Under Amended Rule 233, parties in 120-day proceedings are now allowed to take three depositions per side in single-respondent cases and five depositions per side in multi-respondent cases. Each side also has the right to request two additional depositions under an "expedited procedure."
- Requirement of Disclosing Reliance Defense: Amended Rule 220 requires respondents to disclose in their answer to an order instituting proceedings whether they will be asserting a reliance defense and "whether they relied on the advice of counsel, accountants, auditors, or other professionals regarding any claim, alleged violation, or remedy sought." Importantly, the failure to assert a reliance defense in an answer may be deemed a waiver, and the respondent may not be allowed to assert the defense later in the proceeding.
- Motions for Summary Disposition: Amended Rule 250 provides that three specific types of dispositive motions may be filed at different stages of a proceeding and clarifies the procedures governing them. A motion for a ruling on the pleadings may be brought by either party no later than 14 days after a respondent’s answer has been filed. In 30- or 75-day proceedings, a motion for summary disposition may be brought by either party after a respondent's answer has been filed and documents have been made available to that respondent for inspection. In 120-day proceedings, a motion for summary disposition may be brought only with leave of the hearing officer. A motion for a ruling as a matter of law may be brought by either party after the SEC has presented its case in chief.
- Admissibility of Evidence: Amended Rule 320 provides that irrelevant, immaterial or unreliable evidence is excluded. However, hearsay may be admitted into evidence if it is relevant and bears "satisfactory indicia of reliability."
- Appeals of Initial Decisions: Whereas Rule 410 currently requires petitioners to state the specific findings and conclusions of the initial decision to which exception is taken, Amended Rule 410 requires petitioners only to state a summary of the statement of issues presented for review. Additionally, the amended rule limits the petitions for review to three pages and prohibits the incorporation of pleadings or filings by reference.
SEC Chair Mary Jo White lauded the amendments as adding "flexibility to the timelines of our administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings."4 However, critics argue that the amendments do not go far enough and fail to address one of the biggest flaws of the system: the SEC continues to have the discretion to determine whether a case will be heard in-house or in federal court, where defendants have the right to a jury trial.5
The amended rules of practice are effective 60 days after publication in the Federal Register and will apply to proceedings commenced on or after that date. A copy of the text of the final rule can be found at https://www.sec.gov/rules/final/2016/34-78319.pdf. If you have any questions regarding the topics discussed in this article, please contact your Vedder Price attorney with whom you have worked.