SEC ADMINISTRATIVE PROCEEDING OR DISTRICT COURT: HOW THE SEC CHOOSES

The SEC gave a little peek behind its closed doors when it recently issued some guidelines on how it chooses whether to bring a case in federal district court or as an administrative proceeding before an Administrative Law Judge. The SEC’s explanation is in response to the growing public concern that the SEC litigates its tougher cases before its own in-house tribunal and not in district court.

The SEC explained that there is no rigid formula in deciding the selected forum, but that the Division of Enforcement (the “Division”) recommends the forum that will best utilize the SEC’s limited resources to protect investors and the integrity of the markets. The Division’s recommendation is then subject to review and approval by the Commission. The Division considers multiple factors in recommending a forum, with some factors deserving more weight than others for the particular case. In some cases, a particular factor may even be sufficiently important to be dispositive of the forum decision. The factors the Division considers include:

• The availability of the desired claims, legal theories, and forms of relief. For example, certain charges (e.g., failure to supervise) can only be brought in an administrative proceeding. In contrast, only a federal district court can issue emergency relief such as a temporary restraining order or asset freeze.
• The charged party’s status as a registered entity. If the charged defendant is a registered entity or an individual associated with a registered entity, then it may be more efficient to bring the case as an administrative proceeding because associational bars and suspensions can only be imposed in the administrative forum.
• The cost, resource, and time effectiveness of litigating in each forum. While hearings are held quicker in an administrative proceeding, the SEC may be able to obtain all the necessary relief in a single proceeding in district court if multiple parties are involved. The Division also considers the cost and benefits of the pre-trial discovery mechanisms available in the separate forums.
• The fair, consistent, and effective resolution of securities law issues. The Administrative Law Judges that adjudicate the SEC’s cases have extensive knowledge and experience with the federal securities laws, but a district court judge may be the more appropriate person to rule on state law claims or other specialized areas of federal law vital to a particular case.

While the SEC’s guidelines may provide some insight into how the SEC selects the forum it brings a case in, the SEC was quick to point out that its decision will ultimately depend on the facts and circumstances of each individual case, making it difficult to predict with any certainty where a case will likely be brought.