In what many will likely consider to be an effort to quiet the increasing chorus of criticism over the SEC’s increased use of administrative proceedings over the last few years, today, the SEC announced a proposal to amend several of the rules governing those proceedings. While the SEC did not expressly acknowledge that the amendments were intended to address the growing number of attacks on the fairness, and even the constitutionality, of administrative proceedings, certainly the timing of today’s release suggests that this had something to do with it.
In any event, here are the highlights of the proposed amendments. Comments can be made for 60 days following the publication of the amendments in the Federal Register.
- Discovery depositions: perhaps the most dramatic change would be the availability of prehearing discovery depositions. Under current procedures, depositions are relegated only to those few situations where testimony must be perpetuated as a result of a witness’s inability to appear and testify at a hearing. The proposed amendment, however, would permit both the respondent and the Division of Enforcement each to take up to three discovery depositions, including the ability to serve accompanying document subpoenas. This includes the right to take discovery depositions of expert witnesses.
For those of you getting excited about the prospect of deposing the SEC examiners, well, not so fast. The proposed rule recites that to be deemed to be a fact witness subject to deposition, the individual must have witnessed or participated in “any event, transaction, occurrence, act, or omission that forms the basis for any claim asserted by the Division, or any defense asserted by any respondent in the proceeding.” As a result, “this excludes a proposed deponent whose only knowledge of relevant facts about claims or defenses of any party arises from the Division’s investigation or litigation.” Since SEC examiners invariably only gain their knowledge from their investigations, depositions of these witnesses would seem unlikely, if not impossible.
- Time limits: today, litigated administrative proceedings are supposed to take 300 days from the day the Order Initiating Proceedings is served on the respondent until the ALJ issues the Initial Decision. Because the ALJ needs time after the hearing to review the record and draft the Initial Decision, a big chunk of that 300-day period is reserved for the post-hearing phase; thus, the length of the prehearing period – approximately four months – is often shorter than ideal, or necessary to prepare adequately for the hearing. Under the proposed amendment, that four-month period is doubled, up to eight months, in order to give parties “additional flexibility during the prehearing phase of a proceeding and afford parties sufficient time to conduct deposition discovery.” In addition, ALJs are expressly given the right to seek an additional 30 days within which to issue the Initial Decision.
- Evidence: as everyone knows, unlike in court, the Federal Rules of Evidence do not apply in administrative proceedings. Rather, under the existing rule, “relevant” evidence is admissible while evidence that is “irrelevant, immaterial, or unduly repetitious” is not. To that list, the SEC proposes to add “unreliable” evidence. In addition, the proposal expressly clarifies that hearsay testimony may be admitted if it is relevant, material, and bears satisfactory indicia of reliability so that its use is fair. I don’t think this really changes anything that is already in practice before ALJs, but it is nice to see the standard expressly articulated.
What is it that people say? The first step to solving a problem is admitting that you have one. Arguably, as evidenced by today’s proposal, the SEC may be admitting that its current set of rules governing administrative proceedings is somewhat less than fair to respondents. But, SEC statistics clearly reveal that the Division of Enforcement is enamored with administrative proceedings – and who can blame them, given their ridiculous winning percentage there. Given that, there seems little chance that, at least in the short run, the SEC is suddenly going to abandon administrative proceedings and increase its court filings, notwithstanding the fact that some of the constitutional challenges to the SEC ALJs have some real legs. At least if these amendments are approved, respondents can feel a little bit better during their four – no, eight – month trip to the gallows.
 A very interesting SEC decision was released last week. In affirming an ALJ’s Initial Decision finding that respondent investment advisors had, in fact, violated the Advisers Act, the SEC took the opportunity to address in detail for the first time these constitutional challenges. Indeed, 13 of the decision’s 52 pages are devoted to the discussion of the constitutional challenges.