SEC’s Home Court or Federal District Court?

Dodd-Frank gave the Securities and Exchange Commission broader powers to bring its enforcement actions in its own administrative court, instead of federal district court. Dodd-Frank changed that with its Section 929P. The SEC may now impose a civil penalty in an administrative proceeding against any person or company.

The SEC recently released its “Division of Enforcement Approach to Forum Selection in Contested Actions” (.pdf) in what I think was an attempt to create greater transparency in the decision-making process.

There is no rigid formula dictating the choice of forum. The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case. Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case. Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum.

At just over three pages, you couldn’t expect much and it met that low bar.

At least one SEC Commissioner thought the SEC should have written guidelines. I assume that was part of the reason for releasing these guidelines.

The guidelines start off solid with the acknowledgment that certain claims and relief require a particular forum. If the SEC is looking for a temporary restraining order or asset freeze, it needs the powers of federal district court and has to bring the case in that forum. For registered entities or individuals, the SEC needs its administrative courts to impose a bar or suspension.

Then the guidelines wander into the messy and ill-defined areas of the efficient use of the SEC resources.

Towards the end, I found one section troubling.

If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, consideration should be given to whether … obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law.

I don’t like the idea of the SEC developing law in its home court. Based on this statement, the SEC may be deciding to use its administrative courts as an incubator to create novel cases and areas of enforcement.

SEC developed the law of insider trading. There is no act of Congress that makes it specifically illegal. The SEC deemed it a fraud and developed the legal theory. The federal district court has recently handed the SEC a big set-back with the Newman insider trading case.

In federal district court, the judge will decide the law and the jury will determine if there is a violation. Obviously, a jury will be less sophisticated than an SEC administrative law judge in understanding the facts and the implications. The concept is to add a reasonable person standard to the process.

The guidelines seem to give the SEC the ability to take the ball back into its own court if it does not like what the federal district courts are doing. Of course that is subject to appellate review, after appealing to the Commission. That may cause the defendant in the SEC’s cross-hairs to spend more time and money appealling the decision.

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