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U.S. Chamber of Commerce Criticizes SEC’s In-House Court


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The U.S. Chamber of Commerce on Wednesday plans to urge the Securities and Exchange Commission to overhaul its use of its administrative judges, marking the first public call by a leading business organization for reforms to the agency’s controversial in-house tribunal.

In a new report, the chamber says the SEC’s shift to sending a higher number of cases to its five judges, including complicated cases that were traditionally tried in federal court, raises “serious fairness issues.”

The business lobbying group recommends sweeping changes to the agency’s in-house court, including restricting its use for certain complicated cases, updating the rules and revising the deadlines. A key proposal is to give defendants charged with serious offenses the right to request a trial by jury in federal court rather than have the case heard by an SEC judge.

 

“It’s a matter of due process and fairness,” Mr. Quaadman said. New procedures are needed to ensure an “even playing field for all participants,” he added.

Andrew Ceresney, the SEC enforcement chief, said in a statement that the recommendations in the report “would significantly weaken the Commission’s ability to protect investors through strong and effective enforcement of the federal securities laws.”

SEC officials think Congress gave the agency the power to choose whether to send a case to federal court or an in-house judge, and oppose the idea that defendants should have that choice instead, according to a person close to the agency.

However, the SEC is open to revising the rules governing its in-house court, the person added.

The business group’s report adds to criticism of the SEC’s in-house system in recent months from defense lawyers, a federal judge, a former SEC judge and even one of the agency’s own commissioners.

Several cases have been filed in federal court, seeking to challenge the SEC’s decision to bring a case before its in-house judges.

A number of these legal challenges cite a page-one article in The Wall Street Journal in May that showed how the SEC enjoys a home-court advantage before its own judges. The agency won against 90% of defendants before its own judges in contested cases from October 2010 through March of this year, compared with a 69% success against defendants in federal court over the same period, the Journal reported.

The agency now uses its own judges for the lion’s share of its enforcement work, partly because of enhanced powers it gained under the 2010 Dodd-Frank financial legislation. In the first half of this fiscal year, the SEC sent a record 82% of its enforcement actions to its administrative judges, up from 69% in the fiscal year ending September 2013, according to Cornerstone Research.

This tally includes settled cases, as well as the contested actions that are the focus of concerns about the in-house court. In the first nine months of this fiscal year, the SEC brought 63% of its contested cases in federal court, compared with 57% in fiscal 2014, according to a spokesman.

The SEC has rejected any suggestion the reason it is stepping up its use of in-house judges is to win more cases.

Senior officials have defended the in-house court as fair, as well as faster and more efficient than federal court, saying it offers adequate protections for defendants.

But the Chamber of Commerce said the rules governing the in-house court, dating back a decade or more, are ill-suited to some of the more complicated cases now being sent there, including those involving insider-trading allegations. In such cases, the very tight deadlines in the SEC tribunal can make it difficult for defendants, who may be faced with literally millions of pages from the SEC investigation, to prepare properly for the hearing.

“There are times where, for minor matters, an administrative proceeding is the appropriate tool to use,” said Mr. Quaadman. “However, for more serious offenses a party should have the ability to go into court and preserve their right to a jury trial.”

While court decisions have found that not every defendant is entitled to a jury trial, the report said anyone would be “hard pressed to argue” this legal right should not apply in cases where the SEC is seeking millions of dollars in sanctions or to bar someone from the securities industry.

The business organization also questions many of the advantages claimed by the SEC for its tribunal, including officials’ claim that the SEC judges’ specialist knowledge is an advantage in dealing with complicated cases.

For the last 30 years, the SEC “has not hired a single [administrative law judge] who had directly relevant experience or expertise related to the federal securities laws,” the report states, though it adds that the SEC judges gain such expertise over time.

Erin Wirth, president of the Federal Administrative Law Judges Conference, a professional organization of administrative judges across government, including the SEC, said the criticism was misplaced. The SEC’s judges, like the rest of the nearly-1,700 federal administrative law judges, are “hired on the basis of an extensive and complex examination process,” Ms. Wirth said. Administrative judges, like district court judges, are generalists and there is no need for them to be specialized in their field, she added.

The Chamber of Commerce intends to lobby lawmakers, as well as the SEC itself, to adopt its proposals, Mr. Quaadman said.

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