Will It Be Enough?: SEC Amends Rules to Look More Like Federal Court

In a move that will make Securities and Exchange Commission administrative proceedings look more like civil litigation in federal court, on July 13, 2016, the SEC announced that it had adopted amendments to its rules of practice.  These rules appear similar to those the Commission proposed last September.  For critics of the amendments, they may not go far enough, but the expanded discovery and clarifications regarding dispositive motion practice may address some of the issues previously raised regarding the Commission’s perceived home-court advantage.

As we have repeatedly reported in this space, federal district courts and appellate courts have criticized and scrutinized the SEC’s administrative courts.  Even the administrative law judges themselves have been the subject of allegations of undue influence in favor of the government.  Yet recently, the tide has seemingly shifted.  In March of this year, the Supreme Court declined to address the constitutionality of SEC administrative proceedings.  Then, earlier this summer, the Second and Eleventh joined the Seventh and D.C. Circuits in determining that respondents in an SEC enforcement proceeding cannot challenge the constitutionality of that proceeding in a federal district court until the administrative proceeding ends.

But the SEC’s latest amendments to the rules suggest that the SEC has not been entirely deaf to its critics.  Among the highlights in the Commission’s 125-page release:

  • SEC Rule 233 is amended to allow depositions in certain proceedings. Under the prior rule, any party could move for permission to take the deposition of a witness who was unlikely to be able to appear and testify at trial.  Under the new rule, single parties in 120-day proceedings (a designation based in part on the nature, complexity, and urgency of the matter) will automatically be allowed three depositions, while multiple-party proceedings on the 120-day track will allow for five jointly-noticed depositions.  Parties to 30- and 75-day proceedings will not be allowed to automatically take depositions.
  • SEC Rule 250 is amended to provide for three different types of dispositive motions. As the SEC describes the amendments, the motions “generally correspond to certain dispositive motions that may be filed in federal court under the Federal Rules of Civil Procedure.”
    • Thus under amended Rule 250(a), no later than 14 days after a respondent files an answer, any party may move for a ruling on the pleadings on one or more claims or defenses, asserting that, even accepting the non-moving party’s factual allegations as true and drawing all reasonable inferences in favor of that party, the moving party is entitled to a ruling as a matter of law. Because the amended rule still requires an answer, the new Rule 250(a) motion is not entirely analogous to a motion to dismiss under Federal Rule of Civil Procedure 12(b), but because it takes place before discovery and requires the hearing officer to “promptly grant or deny the motion,” it nonetheless affords respondents an early opportunity to seek dismissal.
    • Under amended Rule 250(b), parties in 30- and 75-day proceedings may move for summary disposition, provided that the respondent has answered and documents have been made available to the respondent pursuant to Rule 230. In a Rule 250(b) motion, the party may move for summary disposition on one or more claims or defenses, asserting that the undisputed facts, declarations, affidavits, documentary evidence or facts officially noted pursuant to Rule 323 show that (1) there is no genuine issue of material fact, and (2) the movant is entitled to summary disposition as a matter of law.  Thus a rule 250(b) motion can best be analogized to a motion for summary judgment under Federal Rule of Civil Procedure 56.
    • A Rule 250(c) motion is the same as a motion filed under Rule 250(b), except that it (1) applies to 120-day proceedings, and (2) requires leave of the hearing officer before it can be filed.

There are a number of other changes to the rules, which the SEC says are designed to provide additional discovery opportunities and flexibility while continuing to promote the fair and timely resolution of administrative proceedings.  The new rules also explicitly exclude evidence deemed “unreliable,” while clarifying that hearsay may be admitted if it is relevant, material, and bears satisfactory indicia of reliability so that its use is fair.  While some of these amendments will be welcome to respondents and the securities defense bar, the staunchest critics will note that the changes do not address the fundamental concerns regarding the constitutionality of the ALJs and these proceedings.

The amended rules will take effect 60 days after publication in the Federal Register.