Shearman & Sterling LLP | Government Regulatory Enforcement Blog | Does the SEC’s Adoption of Amendments to Rules of Practice Mean It Will Resume Litigating Enforcement Actions as Administrative Proceedings?<br >  
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  • Does the SEC’s Adoption of Amendments to Rules of Practice Mean It Will Resume Litigating Enforcement Actions as Administrative Proceedings?
    On July 13, 2016, the SEC adopted amendments to the Rules of Practice that govern administrative proceedings to, among other things, expand discovery and extend the timelines for conducting administrative proceedings.  Press Release, SEC Adopts Amendments to Rules of Practice for Administrative Proceedings (July 13, 2016),  The adopted amendments are little changed from those that were initially proposed in September 2015.  At the time, SEC Chair Mary Jo White defended the amendments as “provid[ing] parties with additional opportunities to conduct depositions and add[ing] flexibility to the timelines . . . while continuing to promote the fair and timely resolution of the proceedings.”

    Before this week’s amendments, the SEC’s Rules of Practice (“SEC Rules”) limited a respondent’s ability to mount a defense in an administrative proceeding in certain key ways.  Perhaps most significantly, the Rules required that the presiding ALJ issue an initial decision in a case within 120, 200, or 300 days of the issuance of an Order Instituting Proceedings (“OIP”), which in turn meant that a hearing must be held within one, two-and-a-half, or four months of the OIP.  This potentially allowed the SEC to investigate a matter for several years, issue an OIP, create an extensive investigative record, and force a respondent to prepare a defense in only weeks or months.  This compressed timeframe was exacerbated by the fact that the SEC Rules, unlike the Federal Rules of Civil Procedure (“Federal Rules”), did not provide for motions to dismiss and substantially limit discovery by, for example, only permitting depositions where they are necessary to preserve evidence.

    The most significant changes to the amended rules are to adjust the timing of the administrative proceedings, provide parties additional opportunities to depose witnesses, and explicitly provide for dispositive hearings.  Specifically, under the amended rules, the prehearing “discovery” period is extended to up to ten months.  In addition, parties in certain proceedings can now notice up to three depositions per side in a single-respondent case and five depositions per side in a multi-respondent case, and each side can request an additional two depositions.  Finally, respondents can now bring three types of dispositive motions at different stages of an administrative proceeding, which generally correspond to certain dispositive motions under the Federal Rules of Civil Procedure.  Although the amended rules undoubtedly will help respondents defend themselves in administrative proceedings, they still fall far short of the Federal Rules, most prominently in the still constrained time and discovery limitations. 

    Last year, potentially as a result of the criticism of the SEC Rules and the assorted constitutional challenges to administrative proceedings brought by respondents, the SEC effectively stopped litigating enforcement actions as administrative proceedings.  Now that the SEC Rules are amended, we expect the Commission to increase the rate at which it files litigated actions as administrative proceedings.  If it does, protests from respondents over the procedural limitations in administrative proceedings are likely to continue.