Lawmakers Question Enforcement Procedures

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WASHINGTON — Lawmakers are concerned about the Securities and Exchange Commission's extensive use of administrative proceedings to enforce securities laws in the wake of the Dodd-Frank Act, a trend that has not extended to municipal cases.

House Republicans hammered SEC enforcement chief Andrew Ceresney over the commission's use of administrative proceedings during a hearing held on Thursday by the House Financial Services Committee's capital markets subcommittee. Last year the enforcement division had a 100% success rate in cases it brought via administrative proceedings, which are held at the SEC and presided over by administrative law judges who are SEC employees.

Rep. Scott Garrett, R-N.J., who chairs the subcommittee, told Ceresney that he has heard of instances in which the enforcement division threatened to use an administrative procedure rather than a more defendant-friendly federal court in order to get defendants to settle without a trial. Garrett said he supports a strong enforcement program, but is concerned that the rights of those accused of wrongdoing could be endangered by reliance on administrative procedures.

"This is not appropriate in a country that values appropriate due process," Garret said.

Lawsuits have been filed challenging the constitutionality of the administrative proceedings, and the proceedings have also brought criticism from Jed Rakoff, a federal judge for the U.S. District Court for the Southern District of New York in Manhattan, where many cases against financial services firms are brought.

Ceresney said administrative proceedings are more popular now in part because of the 2010 Dodd-Frank Act, which gave the SEC the power to impose civil monetary penalties on any securities law violator in an administrative proceeding. Prior to that law, only SEC-registered broker-dealers and investment advisers could face penalties in in-house proceedings.

Ceresney told Rep. Bruce Poliquin, R-Maine, that the SEC staff take a variety of factors into account when deciding whether to bring a case in federal court or via an administrative proceeding, but have not developed a formal written policy dictating when the decision should go one way or another.

"I might recommend that you think about doing that," Poliquin said.

But while administrative proceedings are faster and often cheaper for all involved, recent major municipal enforcement cases have demonstrated a different trend.

"In muniland, the trend appears to be the opposite, at least in enforcement actions over the last year, where the SEC has gone into federal district court to secure the remedies available, accounting for the many 'firsts' in the last twelve months," said Paul Maco, a partner at Bracewell & Giuliani in Washington.

Maco pointed to Harvey, Ill., where the SEC went to federal court to bar a potentially fraudulent muni offering from happening, and Allen Park, Mich., where the commission sought and won federal court orders permanently barring two former city officials from participating in future offerings.

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