SEC Issues Proposals To Amend In-House Court Procedures

Sep 24 2015 | 5:07pm ET

The U.S. Securities and Exchange Commission has proposed amendments to the way its highly controversial in-house courts operate.

Aimed at addressing persistent and wide-ranging criticism of the SEC’s administrative proceedings, in which an SEC-appointed administrative law judge presides over enforcement actions brought by the regulator instead of sending them to federal court, the plan focuses on updating certain rules governing the proceedings. 

The SEC’s proposals include the ability for defendants to take depositions from witnesses and seek extensions before a case goes to trial.

Initially created to speed up resolution of enforcement and other proceedings, the process has since been criticized as unfair to defendants in part because such cases do not usually involve depositions, interrogatories, juries or rules of evidence, which can put defense teams at a disadvantage. Critics have also contended, with some success, that the use of such judges is unconstitutional because they violate the Appointments clause of the U.S. Constitution. 

The U.S. Court of Appeals for the Second Circuit put a stay on a high-profile administrative proceeding against private equity maven Lynne Tilton’s ’s Patriarch Partners last week, temporarily halting the case pending a decision in Tilton’s challenge – one of several – regarding the constitutionality of the judges. Back in June, an insider trading case in Atlanta was thrown in limbo when a federal judge ruled the use of in-house judges by the SEC was “likely unconstitutional”. 

Meanwhile, on September 17, a federal judge in New York refused to lift an injunction he issued halting an SEC in-house case against former S&P executive Barbara Duka, saying her constitutional challenge is likely to succeed. 

Perhaps seeing the writing on the wall, the SEC’s willingness to change some of the rules may suggest the agency is trying to keep home-court advantage by compromising on some of the procedural changes requested by defense attorneys.


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