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SEC Adopts Amendments Updating its Rules of Practice for Administrative Proceedings

On July 13, 2016, the SEC announced its adoption of several amendments that update the SEC’s rules of practice governing its administrative proceedings.  The final amended rules are available here.

As SEC Chair Mary Jo White stated in the SEC’s announcement, “[t]he amendments to [the SEC’s] rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of [the SEC’s] administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings.”  For example, under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75, or 120 days from completion of post-hearing or dispositive motions.  Further, amended Rule 360 extends the length of the pre-hearing period from four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases.

One significant improvement to the SEC’s rules of practice governing its administrative proceedings is the amendment of Rule 250, which now provides that three types of dispositive motions may be filed at different stages of an administrative proceeding.  Before its amendment, under Rule 250, a party had the ability to move for summary disposition after the respondent filed an answer and received all necessary documents.  This type of motion was analogous to a motion for summary judgment under the Federal Rule of Civil Procedure 56.

Under amended Rule 250, however, any party may now file a motion for a ruling on the pleadings (analogous to a motion under Federal Rule of Civil Procedure 12(b)(6) or 12(c)) as a matter of right, without seeking leave from the hearing officer.  Amended Rule 250(b) addresses filing for motions for summary disposition in proceedings designated as 30- and 75-day proceedings, and amended Rule 250(c) governs the filing of such motions in 120-day proceedings.  Parties are not required to seek leave to file a Rule 250(b) motion, but are required to seek leave before filing a Rule 250(c) motion and must show good cause to support their request.  Finally, under amended Rule 250(d), parties may file a motion for a ruling following completion of the Division’s case in chief at a hearing without leave.  The SEC, however, had made clear that “Rule 250(d) motions should be granted only in the rarest of cases.”

Amended Rule 220 places an additional onus on respondents regarding the information and arguments to be disclosed in answers to orders instituting administrative proceedings.  Under this amended Rule, respondents must disclose whether they are asserting any “reliance” defenses and whether they relied on the advice of counsel, accountants, auditors, or other professionals in connection with any claim, violation alleged, or remedy sought.

Another important change is amended Rule 320, which provides the standards for admissibility of evidence in administrative proceedings and which both gives and takes away in terms of respondents’ rights in these proceedings.  First, the SEC amended the rule such that unreliable evidence is now excluded, in addition to irrelevant, immaterial, or unduly repetitious evidence, which was already addressed in Rule 320 before its amendment.  Second, and significantly, despite many commenters’ arguments that the Commission should incorporate the Federal Rules of Evidence governing hearsay, amended Rule 320(b) states that hearsay may be admitted if it is relevant, material, and reliable.

Finally, many of the SEC’s amendments expand the scope of discovery and provide helpful clarity regarding discovery procedures in administrative proceedings; these amendments, however, do not provide respondents with the ability to take full and fair discovery in administrative proceedings. For example, amended Rule 233 expands the use of depositions in 120-day cases, and amended Rule 232 provides standards governing motions to quash or modify deposition notices or subpoena.  Further, amended Rule 221 increases the importance and scope of the prehearing conference, as parties now are to discuss depositions and expert witness disclosures and reports at the prehearing conference, in addition to many other topics.

Although the SEC’s amended rules are a move in the right direction in terms of addressing recent critiques that the SEC’s administrative proceedings do not afford due process to respondents, this set of amendments fails to fully address these concerns.  For example, the SEC may still take unlimited discovery during the investigation phase, and although the SEC did expand deposition rights and some prehearing deadlines, these amendments do not come close to creating full and fair discovery for respondents and will do little to hinder continued due process challenges to the SEC’s authority with respect to these proceedings.

The amendments will become effective sixty (60) days after their publication in the Federal Register.  They will apply to all proceedings initiated on or after this effective date.  Stay tuned to this space for further coverage regarding the SEC’s administrative proceedings and other topics.

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Dominique Windberg