Over the past year, the U.S. Securities and Exchange Commission (SEC) has faced an increasing barrage of challenges, including against its recent practice of bringing more enforcement actions against entities and individuals in its own administrative court rather than in federal court. The challenges to the administrative proceedings range from whether the appointment and use of the SEC’s own administrative law judges (ALJ) violates the Appointments Clause of Article II of the U.S. Constitution to whether the proceedings themselves fail to afford respondents the same due process rights as afforded by federal courts. Those challenges have been met with limited success. See Hill v. SEC, No. 1:15-CV-1801-LMM (N.D. Ga. June 8, 2015) (preliminarily enjoining SEC administrative proceeding based upon Appointments Clause challenge); Gray Fin. Group, Inc. v. SEC, No. 1:15-cv-00492-LMM (N.D. Ga. Aug. 4, 2015) (same); Duka v. SEC, No. 15 Civ. 357 (S.D.N.Y. Aug. 12, 2015) (same).
As a result of this public scrutiny, and perhaps to stave off further due process challenges, on September 24, 2015, the SEC issued proposed amendments to the rules governing such proceedings, which amendments are currently open for public comment through December 4, 2015. These proposed amendments, many of which attempt to mimic federal court rules, would, among other things: (a) afford respondents additional time to prepare and present their defenses; (b) provide for enhanced discovery, even permitting the SEC and respondents to take depositions and subpoena documents; and (c) revise and clarify the process for appealing an ALJ’s initial decision. While these amendments merit some attention, they will not fix all problems with the administrative courts, and have not ended the challenges to the SEC’s authority.
To add fuel to the fire, an article published by Cornell Law Review is now questioning the accuracy of the SEC’s publicly-reported enforcement activity statistics. Apparently, over a fifteen-year period, the article found that the SEC’s own statistics are “deeply flawed,” do not measure what they purport to measure, are unreliable due to favorable manipulation on the part of the SEC, and are invalid. See Urska Velikonja, Reporting Agency Performance: Behind the SEC’s Enforcement Statistics, Cornell L. Rev., Vol. 101, 2016. For example, the SEC allegedly double and triple counted many of its reported cases and overstated fines actually collected. Perhaps these reporting issues are the result of the SEC being under heavy public pressure, especially from Congress, to demonstrate its increased enforcement efforts. Whatever the cause, the irony is all too much for an agency whose recent focus has been on scrutinizing companies’ financial reporting under its “Broken Windows” policy. What impact this all will have on individuals and entities dealing with the SEC is uncertain, but it is certain that change is coming to the SEC, at least to its administrative proceedings.