SEC Proposes Changes to its Controversial In-House Administrative Proceedings

Proposals seek to enhance procedures, but do not address issues of bias and unconstitutionality

Responding to heavy criticism, the SEC on September 24, 2015 proposed several amendments to expand the timing and amount of discovery available in its controversial in-house administrative proceedings.  These amendments provide several benefits for respondents (i.e. defendants), including doubling the time before a hearing in some cases, authorizing 3-5 depositions per side, restricting the use of hearsay, and streamlining the process for appealing an initial decision to the Commission.  But they do not address industry concerns that in-house proceedings (i) are inherently biased, because they are decided by the SEC itself, which decides to bring each case; and (ii) violate the constitution’s appointments clause because they are initially decided judges who were not appointed by the Commission itself.

The most important amendments proposed by the SEC to its administrative proceedings are as follows:

  1. Doubling the Maximum Time From the Beginning of a Case to Hearing in Complex Cases From Four to Eight Months:  In cases involving significant disputed issues, the SEC proposes expanding the maximum time between the beginning of a case to the final hearing to eight months.  The prior maximum was just four months, and put respondents at a significant disadvantage to the SEC’s Division of Enforcement, which usually takes years to build a case before a proceeding begins. [1]
  2. Providing for 3-5 Depositions Per Side in Complex Cases:  In a major departure from prior procedures, the SEC is proposing three depositions per side in a case involving one respondent, and five depositions per side in a case involving more than one respondent.  This is in addition to any depositions of a witness who is unavailable for trial.  Previously, the SEC did not allow any depositions in administrative proceedings, except for where a witness was unavailable for trial.[2]  The depositions would be governed by rules similar to the Federal Rules of Civil Procedures, with the exception that they will involve six hours of testimony – instead of seven as in federal court.[3]
  3. Limitations on the Use of Hearsay Evidence:  Hearsay evidence – unsworn, out of court statements – can only be used if it is relevant, material, and bears satisfactory indicia of reliability so that its use is fair.  Previously, there was no meaningful restriction on the use of hearsay evidence.  The proposed standard is derived from the Administrative Procedure Act and used in other types of administrative proceedings.  But this new standard is not as strict as the limitations on hearsay in federal court – where hearsay is barred unless it meets a specifically enumerated exception.[4]
  4. Streamlining the Appeal Process:  A new proposal would generally limit the time for the SEC itself to review an appeal to eight months after the end of appellate briefing, or up to ten months for complex appeals.   This would avoid the situation (in many cases) where an SEC appeal languishes for years before a decision.  But the SEC could still exercise its discretion to give itself an extension of the 8-10-month deadline.  In addition, the SEC proposes to eliminate the requirement of a detailed petition for review that must specifically address each issue to be addressed on appeal (at the risk of waiver) even if those issues will be addressed in an opening appellate brief.  Instead, the SEC proposes merely a summary notice of issues to be addressed on appeal, limited to three pages.[5]

Each of these proposals is more favorable for a respondent, because the proposals will increase (i) the time for a respondent to build his or her defense and review the SEC’s documents; (ii) the meaningful discovery devices available through depositions to build a defense; (iii) the protections against the use of unreliable hearsay evidence; and (iv) the likelihood that the SEC will address an appeal quickly enough to undo the harm caused by an erroneous initial decision.

But the glaring omission from the SEC’s proposed amendments is any meaningful attempt to address the most significant criticisms of its use of in-house administrative proceedings.  Nowhere does the SEC address the issue that its administrative proceedings are unconstitutional under the appointments clause because SEC administrative law judges are not appointed by the Commission itself – as required for inferior agency officers.  Yet two Courts have already held that these proceedings are likely unconstitutional under this argument – including one in the Southern District of New York (the Lynn Tilton case) – and the U.S. Court of Appeals for the Second Circuit recently enjoined an in-house proceeding (Duka) while it decides the issue.  And nowhere does the SEC address the criticism – including from a former head of the SEC Division of Enforcement – that these proceedings are inherently biased because the SEC both authorizes the initiation of a case and decides the appeal of any initial decision.

Thus, although the SEC’s proposed amendments to its in-house administrative proceedings offer welcome changes that help make these proceedings fairer, the bitter controversy over whether these proceedings are biased and unconstitutional is far from over.

If you have questions about this Alert, please contact Sam Lieberman at 212.573.8164 or


[1] S.E.C. Rel. No. 34-75976 at 4-5.

[2] Id. at 7-9.

[3] Id. at 10-11

[4] Id. at 18.

[5] Id. at 19-24.



Date: 10/01/2015
Type: Alerts
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