SEC Reforms Administrative Hearings Part 2

Guest Post by Expert Geoff Winkler

Last week we discussed the background and recent history of the SEC’s Rules of Practice (“Rules”). This week’s blog is Part 2 of this topic, which will focus on the reforms to the Rules and their impact on defendants.

Reforms to the SEC’s Rules of Practice  

The new SEC reforms, which will take effect 60 days after being published in the Federal Register, seek to address three major areas of complaint, including extending the hearing timetable, limits on “unreliable” evidence and expanded discovery.

Extended Timetable

When the SEC institutes a proceeding against a party, it provides the administrative law judge (“ALJ”) hearing the proceeding a timeline of 120, 210 or 300 days in which the ALJ must issue a decision. Under the former rules, a proceeding with a 300-day deadline must begin within four months. Under the new rule, such a proceeding must begin within eight months. This should allow the defendant more time to review the SEC’s case, conduct discovery and prepare for the proceeding.

Admissible Evidence

Federal courts have strict rules on what evidence is allowable, but they generally exclude hearsay evidence. Under the former rules, however, ALJs must admit all evidence that is “relevant” and only exclude evidence that is “…irrelevant, immaterial or unduly repetitious.” The relevancy of evidence “favors liberality in the admission of evidence in administrative proceedings, and all evidence that ‘can conceivably throw any light upon the controversy’ at hand should normally be admitted.” (Rosenblum). The new rule seeks to limit the scope of allowable evidence by preventing “unreliable” evidence from being presented and better protect the rights of the defendant.

Expanded Discovery

Finally, under the former rules, defendants are limited in the types of discovery that are available to them. Although they can serve subpoenas for documents, pre-trial depositions were not previously available, except when a witness was not available to testify at trial. Under the new rules, the defendant can depose up to three individuals if they are the only named party, or a total of five individuals if multiple defendants are named. By allowing depositions, defendants will be better able to defend their cases by determining if the witness had information that could benefit or harm their case, giving them time to develop materials that may help impeach the witness in the future.

Conclusion

Although these reforms are a significant improvement over the former rules, many believe that these changes still do not go far enough to protect the rights of the accused. Tom Quaadman, senior vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said, “yet more due process reforms are needed in order for parties to have full discovery rights.” The SEC still has a significant advantage over the accused since, prior to filing a proceeding, they have years to investigate and build a case without the limits on discovery. Until more of these issues are addressed, the SEC will continue to face criticism because, according to former U.S. Solicitor General Theodore Olson, “the perception that administrative proceedings are fundamentally unfair has damaged the creditability of the SEC’s enforcement system.”