SEC In-House Tribunals: A Call for Reform

Volume 62 | Issue 1 Article 7 5-13-2017 SEC In-House Tribunals: A Call for Reform Drew Thornley Justin Blount Follow this and additional works at: http://digitalcommons.law.villanova.edu/vlr Part of the Administrative Law Commons, and the Securities Law Commons Recommended Citation Drew Thornley & Justin Blount, SEC In-House Tribunals: A Call for Reform, 62 Vill. L. Rev. 261 (2017). Available at: http://digitalcommons.law.villanova.edu/vlr/vol62/iss1/7 This Article is brought to you for free and open access by Villanova University Charles Widger School of Law Digital Repository. It has been accepted for inclusion in Villanova Law Review by an authorized editor of Villanova University Charles Widger School of Law Digital Repository. For more information, please contact . Thornley and Blount: SEC In-House Tribunals: A Call for Reform 2017] SEC IN-HOUSE TRIBUNALS: A CALL FOR REFORM DREW THORNLEY* AND JUSTIN BLOUNT** INTRODUCTION I IN the aftermath of the 1929 crash of the stock market and during the height of the Great Depression, the federal government took steps to strengthen U.S. securities laws.1 To that end, via the Securities Exchange Act of 1934, the U.S. Congress (Congress) created the U.S. Securities and Exchange Commission (SEC), whose “mission [is] to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”2 As “the primary overseer and regulator of the U.S. securities markets,” the SEC has the power to bring enforcement actions against parties it believes to be in violation of the nation’s securities laws.3 The SEC has pursued such enforcement actions via two media: federal courts and the SEC’s in-house administrative tribunals (tribunals).4 Pursuant to expanded authority granted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank),5 the SEC has in* Assistant Professor of Legal Studies, Rusche College of Business at Stephen F. Austin State University, B.A., Economics, The University of Alabama; J.D., Harvard Law School. ** Assistant Professor of Business Law, Rusche College of Business at Stephen F. Austin State University, B.B.A., Finance, Southwestern Oklahoma State University; J.D., Baylor Law School; M.B.A., The University of Texas at Austin. 1. See 15 U.S.C. §§ 78a–78u-2 (2012). 2. See U.S. SEC. & EXCH. COMM’N, What We Do, http://www.sec.gov/about/ whatwedo.shtml#create [https://perma.cc/AX72-RK3P] (last visited Jan. 20, 2017). 3. See id. (“The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud. Crucial to the SEC’s effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws.”). 4. See U.S. SEC. & EXCH. COMM’N, Litigation Releases, https://www.sec.gov/litigation/litreleases.shtml [https://perma.cc/93CT-6X34] (last visited Jan. 20, 2017) (listing enforcement actions brought by SEC in federal court); see also U.S. SEC. & EXCH. COMM’N, Administrative Proceedings, https://www.sec.gov/litigation/admin.shtml [https://perma.cc/VT3V-V3PB] (last visited Jan. 20, 2017) (listing administrative actions taken by SEC outside of federal court system, including administrative tribunals). 5. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929P(a), 124 Stat. 1376, 1862 (2010) [hereinafter Dodd-Frank Act] (amending 15 U.S.C. § 77h–1 to allow SEC to seek monetary penalties in cease and desist actions filed in administrative proceedings). (261) Published by Villanova University Charles Widger School of Law Digital Repository, 2017 1 Villanova Law Review, Vol. 62, Iss. 1 [2017], Art. 7 262 VILLANOVA LAW REVIEW [Vol. 62: p. 261 creased its use of enforcement actions via tribunals where, of late, it has a higher success rate than in such actions brought in federal courts.6 Several recent lawsuits have challenged the SEC’s use of its tribunals. Specifically, plaintiffs have asserted chiefly that (1) defendants are afforded fewer procedural legal protections in tribunals than in federal courts, in violation of the U.S. Constitution’s guarantees of due process, (2) the Administrative Law Judges (ALJs) who preside over the tribunals’ evidentiary hearings are biased toward the SEC, and (3) the method of appointing the ALJs who sit on the tribunals violates the U.S. Constitution’s Appointments Clause, infringing on the doctrine of separation of powers, upon which our country was founded.7 Coincident with this ongoing litigation, opposition to the tribunals is growing elsewhere, with public calls from businesses, Congress, and others for reform of the SEC’s system of administrative enforcement.8 This Article aims to provide an in-depth look at the issues being raised with respect to SEC tribunals and provide recommendations for reform to rectify these problems. Part I explores the history of the doctrine of separation of governmental powers and examines the history of the U.S. judicial branch and the distinction between courts created per Article III of the U.S. Constitution (Article III courts) and courts created per Article I of the U.S. Constitution (non-Article III courts), including U.S. administrative tribunals and SEC tribunals, specifically. Part II discusses and analyzes the current opposition to the SEC’s tribunals and argues that even if the legal claims being made are successful, the underlying problems will 6. See Gretchen Morgenson, Crying Foul on Plans to Expand the S.E.C.’s In-House Court System, N.Y. TIMES (June 26, 2015), http://www.nytimes.com/2015/06/28/ business/secs-in-house-justice-raises-questions.html [https://perma.cc/EZS6TQ66] (“So far this year, the S.E.C. has a better record in federal court . . . and over the longer term the S.E.C. wins more often in its home courts. From 2012 through June 25, 2015, it succeeded on average in 92.7 percent of matters heard by its internal judges, versus a 77 percent success rate in federal courts. Against individuals, its success rate over the period is 84.7 percent in cases heard administratively, 76 percent in district courts.”). 7. See Rebecca L. Dandy, SEC Administrative Proceedings Under Constitutional Scrutiny, VEDDER PRICE (Aug. 2015), http://www.vedderprice.com/sec-administrative-proceedings-under-constitutional-scrutiny/ [https://perma.cc/GB2D-V7PV] (discussing due process, equal protection, and appointments clause challenges being made to SEC administrative proceedings). Another constitutional challenge that has been brought against these SEC tribunals is the assertion that they violate the Seventh Amendment’s right to a trial by jury. See Hill v. SEC, 114 F. Supp. 3d 1297, 1313–16 ( (...truncated)