Congress should put an end to in-house courts at the SEC
How would you feel if a police officer gave you a traffic ticket based on information he had received — and the same officer was sitting in robes at the judge’s bench when you went to court to contest the ticket? Do you think you’d get an open-minded and fair hearing? Some federal agencies such as the Securities and Exchange Commission have just such a system, though it’s now being criticized by courts and could be subject to further challenges.
Recently, in Jarkesy v. SEC, the Fifth Circuit found several features of the SEC’s in-house courts to be unconstitutional. The court of appeals was concerned about the right to a jury trial in civil cases. The SEC had sued a defendant for securities fraud, found a violation, and imposed a monetary penalty. The appellate court reasoned that fraud cases for a monetary penalty had been tried by juries in common-law courts for many years, and Congress could not eliminate the jury trial right just by permitting an agency to bring such a case as an administrative proceeding.
The decision also faulted the statutes giving the SEC total discretion to assign an enforcement case either to the in-house court or to a federal district court. Congress should have given the SEC a basis for choosing one or the other in a particular case but had not.
A final problem identified by the court of appeals was that the president could not exercise sufficient control over the SEC administrative law judge who tried the defendant’s case before it went to the SEC commissioners for review. The president faced two levels of restrictions on his ability to remove the judge, which impeded the control the president needed over an officer of the United States.
The flaws the Fifth Circuit found only begin to address the constitutional problems with the use of an administrative agency’s internal court system for the agency’s own enforcement cases. At the SEC and other agencies, officials investigate and charge a person for violating a law and then use a streamlined process within the same agency to decide whether the person committed the violation. The heads of the agency, such as the commissioners of the SEC, both start a case alleging that a person broke a law and then later determine that, yes, the defendant did it.
The most fundamental objection to SEC administrative proceedings is that they either are inherently unfair to defendants and biased in favor of the SEC or appear to be unfair. Defendants caught up in the process emerge with a sense that they did not receive the same even-handed and impartial consideration that they would have received in federal court.
For instance, the procedures used at the trial level of an administrative proceeding hamper a defendant’s ability to prepare and present a full defense. The SEC rules are a skeletal version of the procedures used in federal district courts and severely restrict a defendant’s ability to obtain information to defeat the allegations of misconduct. In a complicated case, the SEC schedule is too short.
The decisionmaker in an SEC administrative proceeding is initially an administrative law judge who is not sufficiently independent of agency enforcement goals. The SEC commissioners, who may review this judge’s initial decision, also have an interest in the SEC’s enforcement program and are sometimes the very same commissioners who charged the defendant. Their impartiality is certainly open to question.
A defendant is entitled to go to federal court only after the layers of proceedings at the SEC. Even in federal court, the defendant faces a steep uphill climb because the facts found by the SEC are generally treated as conclusive and courts often defer to the SEC’s legal analysis.
Congress should give serious consideration to abolishing SEC administrative proceedings. They are not necessary to an effective securities enforcement program, and they fail to meet the standards of impartiality and fairness we expect from federal institutions.
Contrary to some observers’ fears, this would not be the end of the administrative state. It would strengthen confidence in the operations of agencies that have enforcement powers. It would say that those agencies may no longer judge their own cases and that a charge of misconduct must be supported with evidence and legal argument persuasive enough to convince an impartial and objective decisionmaker.
Andrew N. Vollmer is a senior affiliated scholar with the Mercatus Center at George Mason University, former professor of law, general faculty, at the University of Virginia School of Law, and former deputy general counsel of the Securities and Exchange Commission.
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