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SEC has been illegally denying hearings for 25 years, professor writes in new article

Tuesday, October 06, 2020


LAWRENCE — When parties are accused of wrongdoing by a regulatory agency like the Securities and Exchange Commission, they are ordinarily entitled to procedural rights, like the right to present their defense at an in-person oral hearing. But what happens if the agency unilaterally decides to skip those hearings? A University of Kansas law professor has written a new article pointing out that is exactly what has been happening for 25 years at the SEC and other federal regulatory agencies.

Alexander Platt, associate professor of law at KU, is the author of “Is Administrative Summary Judgment Unlawful?,” which was recently named “Download of the Week” by The Legal Theory Blog. It is forthcoming in the Harvard Journal of Law and Public Policy and is available on SSRN.

The paper examines in detail the use of administrative summary judgments by the SEC. The action has lawyers for the defense and prosecution submit paperwork to the presiding judge instead of conducting a full, in-person hearing. That action is illegal, Platt wrote, under section 556(d) of the Administrative Procedure Act, often referred to as the “Constitution for the Administrative State.” Yet the practice has been broadly accepted by agencies and blessed by several appellate courts. The practice is widely viewed as a way to skip over “unnecessary” hearings.

Summary judgment is commonly used by lawyers in state and federal courts to expeditiously resolve cases. But, as Platt wrote, that was not always so. When Congress passed the Administrative Procedure Act in the mid-20th century, many courts sharply restricted the use of the technique. Platt wrote that Congress followed this restrictive mode and intended to allow defendants facing enforcement actions by administrative agencies with an absolute right to oral hearings.

“The statute is clear. In any case where the agency (SEC) is looking to impose sanctions on a party, they may not skip the oral hearing,” Platt said. “Agencies and courts have gotten this issue so wrong because they just haven’t looked at the APA or its history.”

Platt illustrated several reasons why the practice can be harmful. Chief among them is the aforementioned denial of a right to a legal party. For example, someone who has been convicted of illegal securities-related activity in a federal or state court is likely to face additional sanctions by the SEC. Before the agency’s administrative law judge imposes these additional sanctions, the person has the right to explain why the wrongdoing happened, their level of remorse, intentions to atone for wrongdoing and more.

“There are cases where it’s plausible that the denial of in-person hearings could make a real difference. Once you’ve been prosecuted, the SEC will often want to bring additional proceedings to impose sanctions,” Platt said. “Being able to make the case in person could make a real difference.”

Administrative summary judgment can also distort the agency enforcement priorities as well as public perception of those priorities.

“At times, the enforcement policy of the SEC seems to have rested heavily on the use of administrative summary judgments, because that technique allows them to file and resolve a larger number of cases,” Platt said.

Platt noted how the SEC in the mid-2010s used the administrative summary judgment extensively as part of its “broken windows” method of enforcement. Each year, the agency emphasized record-breaking enforcement statistics, which seemed to show the agency had pursued many more cases than normal. But, while it may appear the agency was tough on enforcement, Platt said that a closer look at the numbers shows that a good number of these actions were relatively minor offenses, raising the possibility that the agency was actually leaving more harmful violations uninvestigated and unpunished.

The illegal use of administrative summary judgments is not confined to the SEC, as Platt wrote. The practice has spread across the American enforcement bureaucracy, with agencies including the Department of Health and Human Services, Federal Mine Safety and Health Review Commission, Commodity Futures Trading Commission and Nuclear Regulatory Commission engaging in the practice as well, all in violation of the law.

It is not difficult to understand how a practice that is in fact illegal has been allowed to happen and persist. In the 1960s, '70s and '80s, courts commonly deferred to agencies to interpret statutes such as the APA and how to enforce them. However, the Supreme Court and many lower courts have taken a different approach in recent decades, holding such agencies to the letter of statutes.

Platt said he doesn’t expect things to change without judicial intervention. A respondent facing sanction from the SEC or other federal agency can use the arguments outlined in the paper to challenge the use of administrative summary judgment in front of the agency, and then, ultimately, the appellate courts that review agency decisions.

“I don’t think it’s likely the SEC will willingly change its procedures,” Platt said. “Because they’ve been doing it so long, and because they have so many courts of appeals on their side. They’re not going to voluntarily discontinue the practice. That leaves litigation.”

Top image: A graph shows the increase in use of administrative summary judgments by the SEC in recent years. Credit: Alexander Platt

Right image: Alexander Platt, associate professor of law. Credit: Earl Richardson.