If you have ever undergone an intense legal battle, only to find yourself—in the aftermath—pulled into a different tribunal for additional punitive measures, the subsequent section might seem all too familiar. This aptly signifies the gloom-ridden world of the Securities and Exchange Commission “follow-on” administrative enforcement proceedings. To clarify, these proceedings typically comprise over 20% of the multitude of enforcement cases handled by the agency every year. Imposing infrastructural challenges to the SEC’s in-house administrative tribunals are now under the scanner from the US Supreme Court, rendering these follow-on proceedings particularly susceptible to constitutional objections.
Federal legislation grants authority to the SEC to suspend or ban securities industry members if they have been convicted for certain offenses, or prohibited by court orders from participating in specific monetary activities. However, the SEC is required to decide that such suspension or ban is in the interest of the public, and this decision must be influenced by factors such as the nature and intent of the misconduct, and the prospect of its repetition.
The constitutionality of this process is uncertain, especially as the SEC is an executive body and its commissioners are not judges. Potentially a disregard of the Constitution’s Article III, the SEC is venturing into territory exclusively earmarked for federal courts with actual judges and juries that can deal with cases or disputes.
Furthermore, the SEC’s predisposition in a follow-on case compromises its impartiality. This becomes glaringly evident when the SEC, after labeling and suing you as an alleged lawbreaker in front of the public, then relentlessly prosecutes you using the same attorneys, secures a court injunction stating that you deserve further punishment, and uses said injunction as a basis to ban or suspend you from the industry.
Skeptics might argue that the SEC is very unlikely to ascertain that a follow-on ban or suspension is unnecessary, thereby undermining the possibility of a fair trial in an unprejudiced tribunal. Similarly, the chance for fairness becomes elusive when the arbitrator is tasked with deciding its own case, or a case that is closely related to its own, and when the arbitrator has to decide on a case instituted by its own legal representatives against an accused party it had previously sued citing the same circumstances.
While the SEC might blame unjust situations on Congress for faulty wording of the relevant securities laws, the SEC’s proximity to the courts makes it possible for it to seek an industry bar or suspension from the court itself that decrees a predicate injunction. Instead, the SEC prefers to leave that decision to its own discretion, in place of persuading a court to validate a bar or suspension.
It is only a matter of time before one such SEC follow-on subject brings to court a challenge against this process.
Original article written by Russell G. Ryan, a former SEC enforcement attorney, who currently holds the position of senior litigation counsel with the New Civil Liberties Alliance.
Read the full article at: Bloomberg Law – US Law Week