SEC Administrative Proceedings: Backlash and Reform

Abstract

The Securities and Exchange Commission’s aggressive prosecution of securities violations inside administrative proceedings (APs) has generated backlash. Key stakeholders are now attacking the agency’s enforcement program as illegitimate and a growing number of respondents charged in APs have launched broad constitutional challenges. Though these suits target deeply entrenched features of administrative adjudication, they have already begun to prove successful, and threaten significant transformations to the SEC and beyond.

Historically, the SEC’s enforcement architecture embodied respect for the principle that, holding all else equal, procedures ought to be commensurate with the stakes of the adjudication. After Dodd-Frank, the agency abandoned this principle. The backlash is, at least in part, attributable to and justified by this reversal.

The SEC should have done after Dodd-Frank what it had done after previous expansions of its administrative penalty powers: reestablish the equilibrium between penalties and procedures by revising the Rules of Practice that govern APs. The SEC’s recently proposed amendments to these rules are too little, too late. A bolder approach is required.

Keywords: Securities and Exchange Commission, Administrative Proceedings