Tuesday, December 08, 2015

Gibson Dunn: Proposed Amendments to SEC Rules of Practice Don’t Go Far Enough

By Amanda Maine, J.D.

In a comment letter to the SEC, Gibson, Dunn & Crutcher LLP praised the SEC’s efforts to amend its rules of practice in proposals that would expand discovery rights and timetables for respondents in administrative proceedings. However, expressing concerns that the SEC’s proposed amendments were inadequate to address the perceived unfairness of the administrative process and the credibility of the SEC’s enforcement system, the firm offered several suggestions on how the proposals could be improved. The SEC proposed the amendments following criticism of the SEC’s administrative processes in the courts and by others in the legal and securities fields.

Timetables. The SEC’s current rules impose mandatory time limits for the conduct of administrative proceedings. The proposals would modestly expand some of these time restraints, but the revised timelines are inadequate, according to Gibson Dunn. The letter, signed by former U.S. Solicitor General Ted Olson, proposed that administrative law judges (ALJs) be granted the flexibility to depart from the default timelines. The letter noted that the original timelines as finalized in 1995 were initially guidelines, which were not made mandatory until 2003. The letter also observed that other agencies use this kind of flexible scheduling. In addition, the letter advised that “only a portion” of the SEC’s administrative proceedings would justify such extensions, particularly in the most complex litigated matters.

Scope of discovery. The proposal would also allow three depositions in single-respondent proceedings and five depositions in multiple-respondent proceedings. Gibson Dunn advised that five should be the minimum number of depositions allowed, regardless of the number of respondents. The letter noted that cases against single respondents, including multiple-victim cases such as offering frauds and Ponzi schemes, will often involve multiple witnesses. The letter also suggested that ALJs be afforded the flexibility to permit more depositions based on the unique circumstances of a particular proceeding. The SEC should issue guidance that ALJs can consult when determining if expanding the number of depositions is appropriate, the letter suggested.

Gibson Dunn also recommended that direct testimony from experts always be allowed in administrative proceedings, instead of the current approach which permits ALJs to require that a written expert report be submitted as a substitute for direct testimony. Gibson Dunn would also prohibit the admission of hearsay subject to certain exceptions based on the Federal Rules of Evidence, at least in cases where a civil monetary penalty or an associational bar is being sought.

Other suggestions. The letter proposed that the SEC allow the use of “conditional stipulations” similar to conditional pleas in criminal cases. The conditional stipulation would allow a respondent to accept substantially all facts alleged by the SEC as true while reserving his or her right to challenge the SEC’s legal theory of liability. The letter also suggested that the process for summary disposition be amended. Currently, ALJs may grant summary disposition, but it is an unreviewable decision that has only been obtained “a handful” of times since 1995. Gibson Dunn would also expand interlocutory review and require that a hearing be stayed if a respondent challenged the legality of a proceeding before the ALJ or before the Commission. In addition, the letter calls for a more efficient route for judicial review and urges the SEC to apply the changes to currently pending matters to the fullest extent possible.

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