WASHINGTON - The Securities and Exchange Commission has pursued most recent municipal market enforcement actions in federal court rather than in front of its own administrative law judges, where critics have charged that the SEC enjoys a distinct home field advantage.
The commission's enforcement division released guidance late last week addressing how it selects whether to pursue an enforcement action via administrative proceeding or in federal court.
The release came only a few weeks after SEC enforcement chief Andrew Ceresney faced criticism from House Republicans over the SEC's use of administrative proceedings, where the commission prevailed in 100% of the cases it brought in 2014.
Lawmakers said in March that administrative proceedings, presided over by administrative law judges who are SEC employees, could be a violation of due process rights guaranteed in the U.S. Constitution. The SEC can generally bring cases either as administrative proceedings or as lawsuits in federal court, but not both.
The SEC filed lawsuits in federal court in most of its highest profile muni cases last year, including complaints against Allen Park, Mich. and Harvey, Ill. The commission used administrative proceedings in a few other cases, such as those against Kansas for its faulty pension disclosure and King's Canyon Joint Unified School District in California for failing to disclose continuing disclosure failures in an official statement.
Ceresney said in March that 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.
The newly released guidance offers some indication of the SEC's thinking when it decides how to proceed with an enforcement action, but also stresses that choice of venue is a judgment call unique to the facts and circumstances of each case.
"Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case," the SEC said. "Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum."
Some of the recent muni choices are explained in the guidance. The SEC points out, for example, that only in district court can it pursue emergency action to prevent imminent wrongdoing, such as it did when it got a court order halting a bond issuance in Harvey.
"In situations where there is a need for emergency proceedings or relief - where the alleged violative conduct is ongoing and/or there is a risk that proceeds of the alleged wrongdoing will be dissipated or moved offshore or evidence will be destroyed - only a federal district court can issue the necessary emergency relief to protect investors," SEC said in its guidance.
Paul Maco, a partner at Bracewell & Giuliani in Washington, said the SEC has historically been hesitant to bring cases in federal district court except in cases of obvious financial harm to investors. The trend has shifted to more federal court actions because of the remedies available there, he said. For example, in both Harvey and in Allen Park the SEC sought and won industry bans against issuer officials, something it could not have done in administrative proceedings.
The guidance also said that the SEC considers cost and time effectiveness when making the venue decision. Administrative proceedings are generally swifter than court proceedings and can offer the advantage of resolving the case more quickly and allowing witnesses to testify while their memories are still fresh.
The questions raised in the case are another major factor, according to the guidance. While administrative law judges develop extensive knowledge of industry practices, a case which raises unsettled and complex legal issues under the federal securities laws should possibly be considered for federal court action subject to appellate court review, the SEC said.
