Traditionally, the Securities and Exchange Commission (“SEC”) has only been able to impose penalties on regulated entities and individuals through the administrative process. Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is now able to apply civil penalties against any person or company. This change has created some increased efficiencies as well as potential problems.
Prior to Section 929P of Dodd-Frank, the best alternative to an administrative hearing for non-regulated entities was for the SEC to file a lawsuit in Federal Court. Defendants often consider the administrative option to be quicker and less costly. But the advantages of the administrative option for the SEC appear to be even greater and include: limited discovery, no right to a jury trial, and inherently biased administrative law judge, and a biased appeal to the SEC Commissioners. This last point brings up an obvious ethical problem.
The administrative judges are appointed by the SEC and any appeal of the judges’ decision is appealed to the SEC Commissioners. Since it takes a vote of the SEC Commissioners to proceed with an enforcement action, those Commissioners are hearing the appeal of the case they authorized to proceed in the first place. The judges are not held to any code of conduct or code of ethics.
Since the passage of Dodd-Frank, the SEC has not lost a single administrative process case. They have a 100% success rate. However, their record was only about 60% successful when they filed lawsuits in Federal Court.
The SEC has been open with its intention to try more cases in its administrative process and defendants who had hoped to fight the SEC’s allegation in Federal Court may find that they are instead sent to an administrative process without many of the tools they had hoped to use such as the right to a jury, expansive discovery, dispositive motions, evidentiary challenges, or even time to prepare for trial.
One good option to help prevent an administrative process is to better understand your business and how to avoid actions that can introduce you to the process. A solid Compliance program that helps define your potential risks and implements processes to mitigate your risk exposure is essential. Please click here to read the complete story.
If you would prefer to focus your attention on your clients and the day-to-day operation of your firm, Red Oak Compliance Solutions is here to help with any or all of your compliance requirements.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.