Having it Both Ways: Does the SEC’s Enforcement Division Guidance on Forum Selection Do Anything More Than Foreshadow Increased Use of Administrative Proceedings?

Securities Litigation and Enforcement   |   May 27, 2015


Earlier this month, the SEC’s Enforcement Division issued its “Approach to Forum Selection in Contested Actions.” This guidance comes at a time of heightened criticism regarding the SEC’s increasing reliance on administrative enforcement proceedings over federal court actions. Unfortunately, the guidance provides little meaningful information and instead appears to reflect the Enforcement Division’s desire to lay the groundwork for the continued, expanded use of such proceedings.

When the Enforcement Division recommends that the Commission institute a contested enforcement action, the Division also includes a recommendation as to where that action should be brought—either in a civil action filed in federal district court or in an administrative proceeding before an administrative law judge (ALJ). Historically, the SEC’s ability to proceed before an ALJ was generally limited to actions against registered entities and associated individuals, such as broker-dealers and investment advisers. But the passage of the Dodd-Frank Act in 2010 granted the SEC further authority to bring enforcement actions in administrative proceedings.

In an administrative proceeding, the SEC enjoys certain advantages. There is no jury, the Federal Rules of Evidence are inapplicable, and, rather than an Article III judge, an ALJ presides over the proceeding. Notably, the ALJ is an SEC employee. A decision by an ALJ is appealable to the Commission itself—the same body that authorized the action in the first place. Although the Commission’s review is in turn subject to federal appellate court review, applicable case law makes that review deferential to the Commission.

Discovery for defendants in administrative proceedings is more limited than in a civil action in federal court, and the administrative proceeding generally must conclude within 300 days. In other words, the Enforcement Division has as much time as needed to obtain documents and take testimony before it brings charges in any given investigation, subject only to any applicable statute of limitations. By contrast, the defendant faces this expedited process that may make it difficult to adequately prepare a defense.

Perhaps unsurprisingly, after Dodd-Frank, the SEC has increased its use of administrative proceedings for adjudication of its enforcement actions. For the most recent fiscal year, the number of administrative proceedings brought by the SEC rose 10 percent over the prior fiscal year.

The rise in administrative proceedings has prompted a wave of criticism. One critic has been U.S. District Judge Jed Rakoff, who observed that the SEC won approximately 60 percent of its trials in federal court in the most recent fiscal year, as compared to 100 percent of its administrative proceedings in that same period. Other critics of the SEC’s expanded use of administrative proceedings are many of the defendants themselves, some of whom have filed actions in federal court attacking the SEC’s decision in each of their respective cases to litigate before an ALJ. Those challenges have included claims that administrative proceedings violate the Due Process and Equal Protection Clauses. Even Commissioner Michael Piwowar of the SEC stated earlier this year, “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.”

On May 8, 2015, the Enforcement Division issued such guidance in the form of the following four factors:

  • “The availability of the desired claims, legal theories, and forms of relief in each forum”
    This factor focuses on whether the nature of the claims, theories, and forms of relief dictate one forum over another. One such example is a charge of failure to supervise, which, as the guidance states, generally must be brought in an administrative proceeding.
  • “Whether any charged party is a registered entity or an individual associated with a registered entity”
    This factor reflects the fact that some charges and remedies from registered entities and associated individuals are available only in an administrative proceeding, such as where the SEC seeks associational bars and suspensions.
  • “The cost-, resource-, and time-effectiveness of litigation in each forum”
    This factor looks at the most “efficient and effective use of the [SEC’s] limited resources,” and notes that hearings usually take place more quickly in administrative proceedings than in federal court actions.
  • “Fair, consistent, and effective resolution of securities law issues and matters”
    In listing this factor, the guidance states that ALJs and the Commission itself “develop extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products.”

Although this guidance appears to have been an attempt to provide transparency in the Enforcement Division’s forum selection decision-making, it offers little in the way of meaningful principles. For example, it is not particularly revealing to learn that the Enforcement Division’s recommendation may be affected by laws or regulations dictating that one forum be used because of the claims, legal theories, or relief at issue in that case. Moreover, the guidance itself contains a number of caveats, including that the factors listed are not exhaustive and that some factors may not be relevant in each case. Finally, one might read the guidance as a justification for continued and expanded use of administrative proceedings, particularly in light of the guidance touting the knowledge and experience of its ALJs and the Commission.

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