Is the SEC’s Use of Internal Courts Constitutional?
The Securities and Exchange Commission (“SEC”) may be forced to take a look at its own operations to see if the way it handles enforcement is fair enough. For years now, the SEC has been seeking to expand the cases heard by appointing in-house judges a/k/a administrative law judges or ALJs to tackle the enforcement proceedings against those that may be violating the securities laws.
For many respondents, this in-house court was like a parallel judiciary. The SEC has defended its use of insider judges, saying there is certain level of securities law expertise needed to tackle these complex issues.
Long story short, courts in New York and Georgia refused to dismiss challenges by potential respondents on the SEC’s use of ALJs. The cases were built on the fact that these judges were appointed by the administrators and not by the Commissioners, and this makes any judgements passed by the SEC’s ALJ’s unconstitutional.
The SEC’s win ratio in administrative hearing is much higher than those cases brought in federal court where the judges have lifetime tenure. In one study, the SEC’s win ratio was twenty percent (20%) higher in its internal proceedings than in federal court.
As recently as September 24, 2015, the SEC proposed certain changes to the rules surrounding ALJs to include extending the time before hearing and to allow depositions, just as in federal court. These changes are just proposals and are currently in the sixty (60) day comment period.
If the cases go the wrong way, the SEC’s past rulings may be called into question, and it may have to bring enforcement cases in federal court. The ripples of this can be felt throughout Washington, and many industry experts are keen to know how things are going to turn out. The impact this will have on the securities industry is still uncertain.