What the proposed rules do not address, critics say, is a process that favors the SEC to the point that many respondents simply choose to settle. Critics complained in their comment letters that the proposed timeframe for discovery, up to eight months depending on the case, is still unrealistic for defendants, while a limit on the number of depositions or pages for petitions seeking review give an unfair head start to agency officials, who have already developed their case.
“There is a stark asymmetry between the time and tools that the SEC has to prepare its case and that which is afforded respondents,” attorneys with Skadden, Arps, Slate, Meagher & Flom LLP in New York, said in their comment letter. The SEC's proposed changes “do little to correct the imbalance,” said the firm, which represents Patriarch Partners LLC and its CEO, Lynn Tilton, in an ongoing administrative proceeding.
One particular sore point is that adverse initial decisions by administrative law judges must be appealed to the commission, which authorized the original complaint. “The Kafka-esque quality of an appeal to the body that authorized the prosecution cannot be denied,” Mr. Grundfest told the House panel.
Critics are finding some sympathetic ears in Congress. The December hearing before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises touched often on legislation sponsored by subcommittee Chairman Scott Garrett, R-N.J., that would allow respondents in administrative proceedings to require the SEC to instead bring a civil action through the courts, and calls for “clear and convincing evidence” of violations before proceedings begin.
“In recent years, the agency has transformed into a veritable judge, jury and executioner with its blatant overuse of their in-house courts,” Mr. Garrett said when introducing the bill in October.
Consumer advocacy group Public Citizen, which generally supports individuals' legal protections in federal court, opposes Mr. Garrett's bill for sending the wrong message. “Congress should be looking for ways to strengthen the powers of law enforcement authorities rather than weakening them,” it told the subcommittee in a Dec. 2 letter.
Tom Quaadman, senior vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said his group, which has made reform of the SEC's administrative proceedings a top priority, is “cautiously optimistic” that the Garrett bill will come up for a vote early next year. “Congress is moving pretty quickly on this. The commission is going to have do something sooner rather than later,” he said in an interview.
According to the Securities Enforcement Empirical Database, a joint project of New York University's Pollack Center for Law & Business and Chicago economic consulting firm Cornerstone Research that tracks SEC enforcement actions against public companies, “the data is saying there is increased use of the administrative proceedings venue,” said Cornerstone principal Sara Gilley, who focuses on securities and white collar litigation. The venue also leads to more settlements, Ms. Gilley noted. Of the 33 enforcement actions filed against public company defendants so far in 2015, 96% of the cases handled by in-house judges were filed and settled the same day, compared to 38% that the SEC pursued through a civil action in court.
“The SEC is an enforcement agency. They should consider their role within the judicial system and prosecute cases in a way that is fair,” said Deborah Meshulam, a partner in the Washington office of law firm DLA Piper LLP. “It is not simply winning and losing when lawyers represent the government. There is also an obligation to the integrity of the system.”