Monday, February 23, 2015

Best Defense a Good Offense? Wells Notice Recipient Brings Constitutional Challenge

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

An investment adviser who received Wells notices of a potential SEC administrative proceeding is seeking injunctive and declaratory relief preventing the enforcement action. According to the complaint, SEC administrative proceedings violate Article II of the Constitution and give the agency an unfair advantage (Gray Financial Group, Inc. v. SEC, February 19, 2015).

The plaintiffs are closely-held Gray Financial Group and two of its officers. Following an “onerous” investigation, SEC staff made a preliminary determination to recommend enforcement action against the plaintiffs, in the form of an administrative proceeding, for alleged fraud in the marketing of funds of funds to Georgia pension plans. The plaintiffs are asking for an injunction against the prospective administrative proceeding and a declaratory judgment that the statutory and regulatory provisions on the positions and tenure protections of administrative law judges are unconstitutional.

According to the complaint, Article II, as interpreted by the Supreme Court, permits only one layer of tenure protection for executive branch officers. Administrative law judges, however, enjoy at least two layers of tenure protection. Administrative proceedings also offer advantages to the SEC that federal court proceedings do not, including the lack of a jury, the inapplicability of federal rules of civil procedure and evidence, and limited discovery. The plaintiffs cite a recent study finding that the SEC has prevailed on its last 219 decisions in administrative proceedings but has lost several high-profile cases in federal court.

The complaint rides the tide of a series of recent challenges to administrative proceedings. Last month, the Commission directed its Enforcement Division and the respondents in an administrative proceeding to file supplemental briefs on the executive power issue.

The case is No. 15-cv-00492.

No comments: