SECURITIES CORNER

The U.S. Supreme Court appeared ready to declare the SEC's in-house courts to be unconstitutional. Several justices expressed concerns about potential spillover effects on the government's ability to prosecute other violations such as immigration, customs, and workplace safety laws. Yet, the chances that the Court will limit the administrative law judges’ ability to impose civil penalties remains high. 

In the case at issue, an investment firm was ordered by the SEC, in an in-house SEC court, to pay nearly $1 million for allegedly deceiving investors in a pair of hedge funds. Following the decision by an SEC in-house court, the hedge fund manager appealed to the Fifth Circuit, where they won on a ruling that held such proceedings were unconstitutional. 

Several justices questioned the government’s attorney and why individuals facing securities law violations should not be allowed to have their cases heard before a jury, and instead subject themselves to the authority of an administrative law judge. In response, the government’s attorney pointed to a 50-year-old Supreme Court ruling that held the Seventh Amendment does not apply to administrative proceedings where government agencies turn to maintain the public's right to an open and fair market.

The Court believed that it was problematic that the government can deprive an individual of their property, their money, or substantial sums in a tribunal that is at least perceived as not being impartial. Additionally, the Court was concerned with the SEC's ability to impose financial penalties through administrative proceedings. The Court also struggled with a potentially radical change that could leave the courts wrestling with the future of other agencies. The latest arguments appear to foreshadow that the Court might vote to limit the ability of administrative law judges to impose civil penalties. 

Earlier this year, the SEC adopted amendments to modernize and enhance public disclosures regarding repurchases of an issuer’s equity securities that are registered under the Securities Exchange Act of 1934. The amendments (1) required additional detail regarding the structure of an issuer’s repurchase program and its shares repurchased, (2) eliminated the requirement to file monthly repurchase data in a periodic report, and (3) revised and expanded the existing periodic disclosure requirements about these repurchases. 

Following the adoption of these rules, but prior to the rules becoming effective, the U.S. Chamber of Commerce along with others filed suit against the SEC in the Court of Appeals for the Fifth Circuit asking the court to review the SEC’s order seeking to prevent their implementation. The court postponed implementation of the rules stating that the SEC violated the Administrative Procedure Act in finalizing the rules. 

As part of this decision, the court gave the SEC the opportunity to respond and address the deficiencies the court highlighted. Recently, the SEC issued an order postponing the effective date of the rules as well as a letter acknowledging that it was not able to address the deficiencies, effectively leaving open the question of whether the SEC will appeal the court’s decision or resubmit a rule proposal that complies with the court’s ruling.