SEC Issues Guidance on Approach to Forum Selection in Contested Actions
The SEC’s Division of Enforcement has issued guidelines explaining the factors it will consider in determining whether to bring enforcement actions as administrative or judicial proceedings. The SEC recently has been criticized for its increased use of administrative proceedings to resolve novel applications of the securities laws. In the newly issued guidance, the Division identified a non-exhaustive list of four factors that the Division may consider in determining the proper forum for an enforcement action, but the Division also made clear that the circumstances of each particular case will ultimately govern where the case is brought. The Division reiterated its view that it may prefer administrative hearings as the venue for resolving novel or complex applications of the federal securities laws.
On Friday, May 8, 2015, the Division issued guidance entitled “Division of Enforcement Approach to Forum Selection in Contested Actions.” The guidance was foreshadowed by a February 2015 speech by SEC Commissioner Michael Piwowar, in which Commissioner Piwowar stated:
To avoid the perception that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.
Commissioner Piwowar’s remarks addressed criticism that the Commission has become overly reliant on in-house administrative proceedings to adjudicate significant enforcement actions. This criticism was highlighted in November 2014 when Judge Jed Rakoff of the Southern District of New York delivered a much publicized speech entitled “Is the S.E.C. Becoming a Law Unto Itself?” Among other things, Judge Rakoff noted that the SEC is far more likely to prevail in internal administrative proceedings (where, according to Judge Rakoff, the SEC had a success rate of 100% in 2014 compared to a 61% success rate in federal court proceedings during the same period), and he questioned whether the increased use of administrative proceedings would have a deleterious effect on the development of the securities laws.
The newly issued guidance disclaims any “rigid formula” dictating the choice of forum. Instead, the Division has identified a non-exhaustive list of four factors to consider in fulfilling its stated objective of selecting “the forum that will best utilize the Commission’s limited resources to carry out its mission.” In considering these factors, the Division emphasized that each case must be considered in context and that, in any particular case, certain factors may merit more weight than others.
The Division identified the following four factors:
- The availability of the desired claims, legal theories, and forms of relief in each forum: The Division’s choice of forum will be influenced by both the claims it is pursuing and the relief it is seeking. For instance, charges of failure to supervise or causing another person’s violation can only be pursued administratively, whereas control person liability can only be pursued in district court. Similarly, injunctive relief (such as a temporary restraining order or an asset freeze order) is only available in district court.
- Whether any charged party is a registered entity or an individual associated with a registered entity: The Division also suggested that it may be more likely to select an administrative forum if its target is a registered entity or an individual associated with a registered entity. The Division explained that administrative law judges have developed “extensive knowledge and experience” concerning registered entities and that certain forms of relief applicable to registered entities (such as associational bars and suspensions) are available only in an administrative forum.
- The cost-, resource-, and time-effectiveness of litigation in each forum: The Division also observed that administrative proceedings tend to be resolved more quickly than contested federal court actions. This may counsel in favor of pursuing administrative enforcement in situations where there is concern over fading recollections or where there is a desire for prompt, public airing of the facts and circumstances at issue in a given enforcement action. Additionally, the Division noted that the costs and benefits of the pre-trial discovery available in each forum would be weighed, including the obligation of the Division to produce all non-privileged documents from its case file, as well as Brady and Jencks materials, in an administrative proceeding; the availability of depositions in a district court action; and the possibility that witness testimony critical to a fair resolution may be compelled in one forum and not the other.
- Fair, consistent, and effective resolution of securities law issues and matters: Finally, the Division noted that administrative law judges have developed extensive knowledge and experience concerning the federal securities laws and securities industry practices and products. In a statement that runs squarely into recent criticism of the SEC’s use of administrative proceedings, the Division said that if a matter is likely to raise unsettled or complex legal issues under the securities laws or the Commission’s rules, it may be preferable for that matter to be resolved by an administrative law judge with review by the Commission (and subject to federal appellate review). Conversely, where application of state law or specialized areas of federal law other than securities law seem likely to be implicated, federal court may be the more appropriate forum.
In light of the Division’s qualifications that the above factors are non-exhaustive and that the particular circumstances of each case will govern, the clarity provided by the Division’s guidance is necessarily limited. Nevertheless, the guidance sets forth useful information for individuals and entities facing SEC enforcement actions, and their counsel, as to the factors that will guide the Division’s forum decisions. It is also noteworthy that the SEC continues to assert its right—and even suggests a preference—to pursue novel securities law questions in administrative proceedings rather than in federal court actions. In this respect, the guidance may exacerbate the criticism voiced by Judge Rakoff and others that the SEC should expose novel applications of the securities laws to de novo judicial review rather than handle them through administrative proceedings.