Congress authorized the Securities and Exchange Commission (“SEC” or “Commission”) to bring civil actions to enforce violations of the Securities Exchange Act of 1934 (the “Exchange Act”), and the regulations promulgated thereunder. The Commission is empowered to bring such actions in either federal district court or in an administrative proceeding before the Commission. An SEC administrative enforcement action culminates in a final order of the Commission, which in turn is reviewable exclusively by the appropriate federal court of appeals.
In one recent court case, a respondent in a SEC proceeding attempted to bring a “sister action,” in federal court at the same time. The respondent was actually attempting to challenge the constitutionality of the administrative proceeding. (Hill v. SEC, et al, Eleventh Circuit, 2016). The issue was whether the respondent in an SEC administrative enforcement action could bypass the Securities Exchange Act of 1934 by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.
The appeals court held that the district court lacked jurisdiction over the respondents’ collateral attacks. The court found that it was fairly discernible from the review scheme provided in the statute that Congress intend the respondent’s claims to be resolved first in the administrative forum, not the district court, and the if necessary, on appeal to the appropriate federal court of appeals. The court reasoned that the Commission could rule that the appellant/respondent did not violate securities laws, in which case the constitutional question would become moot.
The court discerned that the general intent of Congress was to channel all objections to a final Commission order, inducing challenges to the constitutionality of the SEC’s administrative law judge or the administrative proceeding itself, into the administrative forum and to preclude parallel federal district court litigation. The court found that the respondents’ constitutional challenges were not outside the type of claims that Congress intended to be reviewed within the statutory scheme.
Interestedly, the court never addressed the challenge of whether an SEC administrative proceeding is constitutional, by only that any objections to the proceeding itself, including constitutional objections, are to be brought within the proceeding. Whether the SEC proceedings are constitutional appears to be a decision for another day.
SEC proceedings do differ from proceedings in Federal Court, mostly involving discovery issues as more fully described below.
How SEC Administrative Proceeding differ from proceedings in federal court
SEC administrative actions differ from cases brought in federal district court in several respects. The administrative action begins when the Commission serves the respondent with an Order Instituting Proceedings (“OIP”). The Commission then presides over the action, but it typically delegates review to an Administrative Law Judge (“ALJ”). Unlike an action brought in federal court, in a proceeding before the Commission the Federal Rules of Civil Procedure and Evidence do not apply, and the respondent does not enjoy the right to a jury trial. Instead, the SEC’s Rules of Practice govern administrative proceedings. Among other differences, the Rules of Practice provide for more limited discovery. For example, the Rules of Practice allow the taking of depositions at the Commission’s discretion, only upon a finding that the prospective witnesses will be unavailable to testify at the hearing. The Rules of Practice also do not provide for routine document production, instead requiring parties to request that the ALJ issue subpoenas. Administrative actions proceed relatively quickly along fixed timelines set by the rules.
When the Commission delegates review to an ALJ, the ALJ holds an evidentiary hearing and then renders an initial decision with factual findings and conclusions of law. Either party may appeal the initial decision to the Commission. The Commission’s review authority is broad. It may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, an initial decision by a hearing officer and may make any findings or conclusions that in its judgment are proper and on the basis of the record. Conversely, if there is no appeal to the Commission, and the Commission declines to exercise its right to review on its own, the ALJ’s initial decision becomes the final decision of the Commission for all purposes.
Regardless of whether the initial decision is appealed, the administrative process culminates in a final order of the Commission. The process of obtaining judicial review begins with the filing of a petition in the court of appeals that triggers the court’s jurisdiction. Upon the filing of the record in the court of appeals, the court’s jurisdiction becomes exclusive. Although other provisions of the Exchange Act provide limited district court jurisdiction over some types of securities related claims, the Act contains no express authorization for district court review of a final Commission order.
Feel free to connect with me on LinkedIn if not already connected; or contact me for additional discussion at firstname.lastname@example.org. Open to networking, referrals and new opportunities.