By Catherine Botticelli and James Bobseine
A recent report by the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce (Chamber Report) regarding the enforcement program of the Securities and Exchange Commission (SEC or Commission) identified weaknesses in that program, and made recommendations to remedy those weaknesses. The Chamber Report is only one of a chorus of voices criticizing the SEC‘s enforcement practices, and certain of the SEC‘s actions in the last few months suggest that it has begun to heed these calls for reform.
The recommendations of the Chamber Report, titled Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices, include, among others: adopting procedures to limit the SEC‘s use of administrative proceedings; clarifying the SEC‘s policy on admissions of wrongdoing; streamlining the SEC‘s ―long and costly‖ investigative process; and returning to, and codifying, certain ―time-honored practices‖ in the Wells process. According to the Chamber Report, the SEC‘s adoption of the recommendations would help ―ensure clear, predictable, and efficient practices for market participants while eliminating unnecessary ambiguity and serve the tripartite mission of the SEC to promote investor protection, competition, and capital formation.
The Chamber Report was based on a survey of more than 75 legal and compliance executives of public U.S. companies and 30 interviews with persons familiar with the Commission‘s enforcement processes and practices. Although unlikely to directly result in any immediate changes at the SEC, the Chamber Report joined other interested parties suggesting reforms, including members of the judiciary, members of the Commission itself, academics, and federal legislators from both sides of the political divide. Indeed, a number of developments since mid-July have only served to further underscore the importance of issues raised in the Chamber Report.
Reforming the SEC’s Use of Administrative Proceedings
In recent years, the SEC‘s use of administrative law judges (ALJs) to hear its cases has faced growing criticism, as the SEC has increasingly opted to bring enforcement actions in administrative forums. According to an analysis cited in the Chamber Report, over the last 25 years, the SEC‘s Division of Enforcement (Enforcement Division) has ―dramatic[ally] shift[ed]—from bringing cases roughly equally as civil actions in federal court and administrative proceedings before ALJs, to bringing dramatically more cases as administrative proceedings. This increase has coincided with greater agency authority to impose civil penalties in cease-and-desist proceedings, granted by the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).