By Richard J.L. Lomuscio

In an apparent response to criticisms from the defense bar and the federal judiciary, the Division of Enforcement of the U.S. Securities and Exchange Commission (“SEC”) last week issued its first formal guidance on the factors determining whether contested actions will be brought before administrative law judges or in federal district court.

The guidance – contained in a four page memorandum titled “Division of Enforcement Approach to Forum Selection in Contested Actions” that was  issued on May 8, 2015 – does not directly address the various critiques or otherwise offer a defense of the SEC’s sometimes maligned administrative courts.  The SEC instead emphasizes that there is no “rigid formula dictating the choice of forum” and provides a non-exhaustive list of “potentially relevant considerations” used to make these determinations, including whether:

  • The forum provides for the desired claims, legal theories, and relief applicable to the particular action (Mem. at 1);
  • Any charged party is a registered entity of an individual associated with a registered entity (Mem. at 2);
  • The forum will provide the effective and efficient use of the SEC’s limited resources given the claims at issue (Mem. at 2); and
  • The forum is best for the fair, consistent, and effective resolution of securities law issues (Mem. at 3).

These factors, however, are just guideposts, and the forum will ultimately be determined based on the facts and circumstances of particular cases.  (Mem. at 1.)  As the SEC explains: “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.  Indeed, in some circumstances,  a single factor may be sufficiently important to lead to a decision to recommend a particular forum.”  (Mem. at 1.)

While the SEC’s guidance is welcome to the extent it provides some insight into the forum selection process, it ultimately raises more questions than it answers given its breadth and the SEC’s refusal to address the legitimate constitutionality concerns raised by the defense bar relating to the increased use of administrative proceedings.  As we have written in the previous post “SEC Faces New Constitutional Challenge to Administrative Proceedings Based on Tenure Protection of Administrative Law Judges,” the SEC has faced a flurry of challenges to the use of administrative proceedings, which provide fewer protections to litigants than those provided in cases brought in federal court. Despite this new guidance, it is likely that the SEC will continue to face such challenges as these cases make their way through the federal appellate courts.

Source: SECurities Law Perspectives