The staff of the U.S. Securities and Exchange Commission (SEC or “the Commission”) ignited a firestorm when it announced plans to shift litigation from federal courts to its internal administrative proceedings. Critics complain that the SEC’s administrative proceedings are fundamentally unfair and give the agency a “home-court” advantage. They complain of discovery restrictions, the rapid pace at which hearings proceed, the admissibility of hearsay testimony, the absence of juries, the fact that administrative law judges (ALJs) and the Commission’s enforcement division are all paid by the Commission, the fact that appeals from ALJ rulings are initially to the Commission that initiated the proceeding, and myriad other procedural critiques. Critics also observe that the Commission’s insistence on Chevron deference to its administrative decisions, combined with this shift to administrative proceedings, could, over time, dramatically reduce the federal judiciary’s role in the interpretation of the federal securities laws.
This Article catalogues the long list of criticisms of the Commission’s administrative proceedings. It also evaluates data describing the outcome of litigated matters and finds that, with the exception of insider trading cases, the Commission has an exceptionally high and statistically indistinguishable record of success in administrative and federal court proceedings alike. The data thus seem not to support the view that the Commission has a generalized home-court advantage in administrative proceedings. Nonetheless, the Commission’s virtually unfettered discretion in forum selection decisions, when it can assign cases to a forum that it controls, raises a plethora of institutional design concerns.
While legislation designed to cut back dramatically on the number of proceedings litigated in the administrative forum has been introduced in Congress, this Article suggests that a more nuanced policy response may be appropriate. Cases litigated by the SEC can be divided into three categories. Some, such as insider trading matters, are better resolved in federal court and can be presumptively assigned to that forum unless the defendant consents to an administrative proceeding. Others, such as late filing cases, raise technical issues that can be presumptively assigned to the administrative forum. The third category, composed of cases that fit neither presumptive category, could proceed in the administrative forum subject to a respondent’s right to petition for discretionary removal to federal court following a procedure modeled on Federal Rule of Civil Procedure 23(f). The federal judiciary would thus be able to act as a monitor, controlling the SEC’s exercise of discretion in its forum selection decisions and providing respondents with a means to challenge those determinations. Indeed, in this capacity, federal court review would create new institutional incentives that could induce the Commission to modernize its internal procedures so that federal courts would be more likely to perceive those procedures as providing a fair and efficient forum for the resolution of the Commission’s complaints.