Trump, Congress should break up SEC's in-house courts
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The late Justice Antonin Scalia, in a 2013 interview with New York Magazine, said that “[a] lot of stuff that’s stupid is not unconstitutional.”

Stupid may be too strong a word to describe the Dodd-Frank Act’s expansion of the SEC’s ability to use its in-house courts to obtain multi-million-dollar judgments. But, that expansion was a very bad idea, regardless of whether it is constitutional.

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The new Congress, together with President-elect Trump, can fix it.

In 2010, the Dodd-Frank Act empowered the SEC to obtain potentially crippling financial penalties against anyone (not just securities industry professionals) in a hearing before the SEC’s in-house judges, rather than in a federal court.

Defendants in hearings before the SEC’s administrative judges can be slapped with millions of dollars in penalties and barred from their profession for life, all without any opportunity to argue the case to a federal judge or jury.

The SEC has defended this process by arguing that its in-house judges are fair and competent professionals. In my experience, this is true.

But, experience has also proven that the SEC’s in-house judges are treated as stop-offs on the road to a decision by the commission itself.

If the SEC enforcement staff does not get the result that it seeks before the in-house judge, the SEC staff can (and does) appeal to the five commissioners who authorized the staff to bring the case in the first place.

Not surprisingly, those commissioners can (and do) reverse the in-house judge’s rulings and find for the SEC staff, or jack up the penalties imposed on the defendant.

The SEC responds that, ultimately, a defendant can appeal the commission’s decision to a federal appellate court.

However, the commission has also successfully argued in those appeals courts that the scope of review is limited and the appellate court must defer to the factual and legal findings of the commission.

When I tell normal people (meaning, non-lawyers) about this system in which people’s professional and financial futures hang in the balance, they are rightly shocked.

Lawyers, by contrast, have found ways to rationalize this, invoking fancy legal arguments that defy common sense and basic fairness. Individuals or entities accused of securities violations that carry significant sanctions deserve better. 

The SEC has tremendous investigative powers. The commission staff has years to thoroughly investigate its cases, with the ability to subpoena witnesses and documents with little, if any, oversight by the courts.

It is not too much to ask, then, that if the SEC believes it has a case, to prove it by a preponderance according to the rules of evidence before a neutral federal judge and an impartial jury.

This is what the federal courts are for. They decide complex cases, including securities law cases, every day.

 Over the last few years, targets of SEC investigations have been waging a battle in the federal courts challenging the constitutionality of the SEC’s use of in-house courts.

For the most part, these efforts have been unsuccessful, stymied by a series of Supreme Court rulings from the 1970s that seem to bless “justice” of this type.

Perhaps those Supreme Court decisions were correct. As Justice Scalia observed, some very bad ideas are constitutional.

Which is where the new Congress and the president-elect come in.  Courts shouldn't intervene and invalidate a law just because it’s a bad idea.

As Justice Felix Frankfurter explained more than 70 years ago, the courts should allow the democratically-elected branches to correct errors that become evident by experience.

The expanded use of administrative proceedings is one of the many errors of the Dodd-Frank Act that should be corrected by the political branches.

President-elect Trump has promised to “dismantle” the error of the Dodd-Frank Act. This should include a repeal of Dodd-Frank’s expansion of the SEC’s power to use administrative proceedings.

Alternatively, Congress should pass the Due Process Restoration Act of 2015 (H.R. 3798), on which the House Financial Services Committee favorably reported this past summer. That bill would permit the defendant in an SEC administrative proceeding to move his or her case to federal court. 

If the SEC has a case, it should have nothing to fear from taking it to court — a federal court.

 

Matthew T. Martens is a partner with the Washington law firm WilmerHale. He served as Chief Litigation Counsel for the SEC’s Division of Enforcement from 2010 to 2013.


 

The views expressed by contributors are their own and not the views of The Hill.