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SEC Faces Continued Setbacks on use of Administrative Proceedings

A federal court in New York last week found that the SEC’s process for appointing administrative law judges (ALJs) is “likely unconstitutional.” Barbara Duka, a former managing director at Standard and Poor’s Rating Services, was charged by the SEC with “loosening” key ratings methodology “to make S&P’s ratings more attractive to fee-paying CMBS issuers.” The SEC initiated administrative proceedings in January, and Duka challenged the constitutionality of the administrative courts. The court issued a preliminary injunction last week halting the administrative proceedings. The ruling was based on the agency’s process of hiring ALJs through the SEC’s Office of Administrative Law Judges and the Office of Personnel Management rather than through appointments by the Commissioners. The finding mimics a June decision by a federal district court in Georgia that granted a stay of administrative proceedings on the same basis.

The SEC’s Inspector General recently released an interim report into allegations of bias by administrative law judges. The interim report was released due to “heightened interests in ongoing SEC administrative proceedings,” and the document noted that the office is “still gathering additional facts and completing investigative steps.” According to the report, the Inspector General began the investigation on June 30, 2015 at the behest of staff in the Office of the Chair. The report notes that the office has interviewed Chief ALJ Brenda Murray and ALJ Cameron Elliot. Elliot recently made headlines for declining to submit an affidavit stating that he felt no pressure to rule in a certain manner in administrative proceedings. Both parties denied any bias or influence.