• Archive for January, 2017

    Court Rulings on SEC’s In-house Courts May Accelerate Deregulatory Trend, But Compliance Professionals Should Not be Complacent

    by  • January 25, 2017 • Faculty Commentary • 0 Comments

    By Alexander Dill

    Two recent federal appeals courts take opposite positions on the constitutionality of how the SEC hires its administrative law judges (ALJs), who administer the federal securities laws in its in-house courts. The D.C. Circuit found the process constitutional, while the 10th Circuit did not. Commentators note that, given this conflict and the importance of the issue for other federal agencies that employ in-house courts, the Supreme Court is likely to take up the issue. As Peter Henning pointed out earlier this month, a holding by the Court that the appointment process is unconstitutional would have wide-ranging ramifications throughout the federal administrative system. Such a ruling could raise questions regarding the validity of existing ALJ judgments even if the SEC revised its ALJ hiring practices to pass constitutional muster. The specific issue is whether the ALJs are “inferior officers” under Article II of the Constitution, who must be appointed by the President, a court, or the head of a “Department” (such as an SEC Commissioner), or “employees,” subject only to an agency’s own internal hiring practices. Currently, the SEC’s Office of Administrative Law Judges hires ALJs, not Commissioners. The underlying policy rationale is to safeguard the separation of powers: the executive branch must retain accountability over important appointments.

    The SEC has been widely criticized by the industry and other commentators for bringing cases it can’t win into its in-house system. ALJs are alleged to be conflicted since they are hired by the very agency that brings the enforcement action. The Dodd-Frank Act helped make the in-house process more controversial by increasing the SEC’s authority in bringing cases before its ALJs. The SEC’s success rate in the administrative courts is considerably higher than in federal court. Defendants have limited discovery rights and must exhaust the in-house process in order to appeal to federal court. And even when defendants get to court, the appeals court rules on the basis of a court record compiled in-house, often to the SEC’s advantage.

    A ruling by the Supreme Court that the SEC’s ALJ appointment process is unconstitutional could reinforce a deregulatory trend that the new Administration has promised for financial markets regulation. Compliance and risk-management professionals should monitor how the controversy unfolds. However, they should not become complacent. On the one hand, a roll-back of Dodd-Frank and the appointment of a new SEC Chair and other SEC Commissioners will contribute to a lighter regulatory “touch.” On the other hand, prosecution of financial scandals is a bipartisan issue. The control functions in financial institutions, risk management and compliance in particular, should not relax their vigilance concerning industry-wide practices that skirt ethical strictures in capital market transactions.

    Originally posted January 22, 2017, on Compliance Today: A Blog on Financial Institution Compliance.