Security - Check Permissions

MFDF - Mutual Fund Directors Forum - Facing Mounting Criticism, Enforcement Division Issues Forum Selection Guidance

Member Login



Request an account

Sample Banner 1

Facing Mounting Criticism, Enforcement Division Issues Forum Selection Guidance

Last week, the SEC released guidance detailing the Division of Enforcement’s approach in selecting a forum for contested actions. The guidance states that “the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission,” but that “[t]here is no rigid formula dictating the choice of forum.” Instead the Division weighs several factors to make the decision.

According to the guidance, the Division may choose a particular forum due to “desired claims, legal theories, and forms of relief in each forum.” Additionally, where the party is or is associated with a registered entity, the Division leans towards an administrative hearing, again due to the charges and forms of relief available. The guidance notes that the ability to hold hearings quickly and/or in a single proceeding, the ability to resolve or narrow a case through a motion for summary judgment or summary disposition, and the costs and benefits of the different types of discovery available in each venue are all factors in the Division’s choice of forum.

Lastly, the guidance notes that the Division seeks “[f]air, consistent, and effective resolution of securities law issues and matters.” The Administrative Law Judges “develop extensive knowledge and experience concerning issues that frequently arise” and administrative courts should be considered where cases are “likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules” in order to “facilitate development of the law.” On the other hand “where application of state law or other specialized areas of federal law is integral to the matter, district court may be appropriate.”

The guidance comes in the wake of criticism from commissioners, a federal judge, and Congress, as well as a series of articles from the Wall Street Journal noting the Commission’s increased win-rate when using administrative courts and questioning the practice of funneling cases in house. One WSJ article published last week noted that, in contested cases brought before administrative courts from October 2010 to March 2015, the SEC won 90% of the time. Taking cases to federal court over the same period, yielded a 69% success rate. Over the past 10 years, the agency has won more than 80% of cases brought before its own administrative judges every year. The article also highlights the SEC’s 95% win rate of appeals from January 2010 to March 2015 from those administrative rulings, heard by the Commission itself. Though in one instance the Commission lowered a financial sanction on appeal, it actually raised the sanctions in seven other cases.

George Canellos, a former director of the Division of Enforcement has also called for changes to the administrative court system to "end the very grave appearance of injustice." Whereas Commissioners currently approve the enforcement actions and subsequently review appeals from the administrative courts, Canellos suggested that the Division of Enforcement should bring cases without input from the Commissioners to resolve any appearance of unfairness.

In a speech this week, Andrew Ceresney, Director of the Division of Enforcement, argued that Dodd-Frank gave the Commission expanded authority to obtain many of the same penalties that it can achieve in federal court, thus leading to the increased use of administrative courts. He highlighted the efficiency of bringing settled cases in the administrative courts and suggested that the settled actions account for the “vast majority of the uptick in the numbers of actions.” While he admitted that the Division has brought more cases in administrative courts, he noted that it still brings most cases in federal courts (75% of currently pending litigation).

Ceresney also gave an overview of the SEC’s litigation program and argued that “the SEC’s ability to successfully litigate cases is critical to its mission of protecting investors.” He noted that the cases with the strongest evidence of wrongdoing generally are “typically brought by the criminal authorities or settle on terms favorable to the Commission, as they should.” Those cases that are litigated are generally “those where the evidence is less clear cut, the law is unsettled, the defendants have determined to spare no expense in attempting to clear their names, or, in many cases, all of the above.” The Division’s 130 litigators currently have 500 cases pending, according to Ceresney.

In FY 2014, 30 cases went to trial, more than any year in the past ten, and the Division has filed 80 litigated actions and tried 16 cases thus far in FY 2015. Ceresney suggests that the increase in litigation is due to “an increased focus on individual liability, aggressive enforcement of the securities laws, and the significant sanctions that the Commission has been seeking.”