SEC Speaks Out in Atypical Fashion

The SEC’s Division of Enforcement took an unusual step last Friday by issuing a memo to the industry. The subject of the memo is how and why Enforcement chooses its venues for cases, either a federal district court or a Commission Administrative Law Judge (ALJ). The use of Commission appointed ALJs to hear cases has been the subject of controversy recently. Some industry professionals claim the ALJ process is tainted by conflicts of interests. Perhaps this memo is meant to help clear up that perception.

The memo lays out the various circumstances that determine venue selection. We’ve broken it down in its simplest form below:

  • Type of claim – certain claims may only be brought in one forum/venue (for example, a failure to supervise claim must be brought via an administrative action);
  • Risk of loss – where there is a risk of loss of funds (monies disappearing) and emergency relief is required to protect assets, a federal district court can issue a temporary restraining order, asset freeze, etc.;
  • Regulatory Bars and Suspensions – when the Commission seeks a regulatory bar or suspension against a registered person or firm then this may only be accomplished via the administrative process;
  • Timeliness – the Commission’s administrative process is typically more efficient and faster, so if “time-is-of-the-essence” it is often the choice;
  • Relief Defendants – claims involving relief defendants must be brought in a district court;
  • Pre-trial discovery – procedures differ between administrative actions and district court actions and are weighed on a case by case basis;
  • Complex securities law issues – cases involving complex securities regulations may be brought as administrative actions in order to facilitate development of law; and
  • History – case law history has a strong influence over choice of venue; the more similar a case and its circumstances to another historical case, the greater the chance of it being held in the historical venue.

View the memo, “Division of Enforcement Approach to Forum Selection in Contested Actions”