Jonathan G. Katz
Re: File No. S7-04-03
Ladies and Gentlemen:
This letter is submitted on behalf of the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association (the "Committee")* in response to the Securities and Exchange Commission's request for comments on its February 12, 2003 release entitled "Rules of Practice" (the "Proposing Release"). The Securities Litigation Committee, Section of Litigation of the American Bar Association concurs with the views expressed in this letter.
The comments expressed in this letter represent the views of the foregoing Committees only and have not been approved by the American Bar Association's House of Delegates or Board of Governors and therefore do not represent the official position of the ABA. In addition, this letter does not represent the official position of the ABA Section of Business Law, nor does it necessarily reflect the views of all members of the Committees.
At the outset, we would like to commend the Commission for its efforts to ensure that its administrative proceedings are resolved in timely fashion. For many years, social science research has shown that the most important factors in determining the effectiveness of sanctions - much more so than the severity of the sanctions - are the swiftness and sureness of those sanctions. An enforcement program which imposes swift and sure sanctions will be substantially more effective in deterring wrongdoing than one which imposes sanctions which are harsher, but distant and uncertain. Moreover, pending SEC administrative actions impose great cost and uncertainty upon innocent respondents, and these respondents deserve to have the threat of sanctions resolved in as expeditious a manner as possible. Today, most SEC administrative proceedings are resolved in a timely manner. However, a minority of such cases have endured unjustifiable delays, with the result that some cases now on appeal from the Commission involve facts from the early 1990s. The Commission is right to deplore these delays and to attempt to prevent them from recurring. The Sarbanes-Oxley Act expanded the Commission's administrative jurisdiction, both by creating new administrative remedies for the SEC,1 and by creating new substantive obligations which the Commission may enforce using its existing administrative authority.2 The Commission has recently asked Congress for additional administrative authority, notably including the ability to impose civil money penalties in administrative proceedings against any respondent, regardless of whether that respondent is associated with an entity such as a broker-dealer, investment advisor or investment company registered under the federal securities laws.3 The Senate recently passed legislation responding to this request (S. 476). While do not comment in this letter on the merits of this grant of additional authority, these developments underscore how important it is that Commission administrative proceedings be both timely and fair.
Almost without exception, Commission administrative proceedings currently proceed expeditiously from institution through the end of the hearing. Data gathered by a member of the Committee indicates that on average, over the past seven years, ALJs took 229 days from the order instituting proceedings through the end of the hearing. The large majority of the delay occurs in the post-hearing process - over the same time period, ALJs took an average of 426 days from the end of the hearing through the issuance of the initial decision. And, in the large majority of cases appealed to the Commission, the Commission takes longer than the time suggested in Rule 900 of the current Rules of Practice (eleven months) to schedule and hear oral argument and render a final decision.4 As discussed below, we believe the Commission should focus on these two actual sources of delay in any effort to speed the process of administrative proceedings.
The Committee is concerned that changes to the Rules of Practice contained in the Proposing Release will not address these primary sources of delay in Commission administrative proceedings, and may have the unintended consequence of significantly reducing the fairness of some proceedings. The Proposing Release indicates that at the outset of a proceeding, the Commission would set a target (90 days, 180 days, or 270 days) by which the ALJ would be required to conclude that proceeding. Any request for an extension beyond this target would be "strongly disfavored" and counsel would be required to make a "strong showing" of "substantial prejudice". The ALJ would retain discretion to set all dates leading up to this target. If, as the data demonstrate, the primary source of delay in ALJ decisions is in writing the initial decisions after the hearing is completed, this fact will create a strong incentive for ALJs to reserve a substantial amount of time after the conclusion of a hearing to write those initial decisions. Working back from a 180 day target, an ALJ would likely set aside one month for writing the decision (at a minimum), one month for post-trial briefing, one month for the completion of a final transcript, and one month for the hearing itself. Under Rule 220(b), respondents have twenty days from service of an order instituting proceedings to answer that order. Under Rule 230(d), the Division of Enforcement need not even "begin" producing investigative materials to the respondent until 14 days after the answer. This schedule would leave respondents less than one month - an unreasonably short period of time by any measure - to evaluate the discovery materials from the staff, issue subpoenas to third parties, receive and evaluate evidence obtained from third-party subpoenas, locate and interview fact witnesses, obtain expert witnesses, and prepare for the hearing.5
Such a compressed pre-hearing schedule, we believe, would be fundamentally unfair in the large majority of proceedings. And such a schedule provides no latitude for the possibility that a respondent may need to obtain new counsel, or that the respondent's counsel may have other pressing court dates or scheduling conflicts. As the Commission begins to bring more complex administrative cases, for example financial fraud cases seeking administrative officer-and-director bars, the potential for unfairness will become even greater. By contrast, the Enforcement staff are subject at most to the potential of a five-year statute of limitations in conducting their investigation before the issuance of an order instituting proceedings.
We believe that these concerns can be alleviated - and the Commission's objectives furthered - through two principal modifications.
First, since the data links a significant portion of the delay to the writing of decisions, we believe a more targeted approach would set concrete deadlines for decisions. For example, ALJs could be required to complete the initial decision within three months after the completion of the transcript and the conclusion of post-trial briefing. By comparison, Rule 9268 of the NASD's Code of Procedure requires that hearing panel decisions be completed within sixty days of the filing of post-hearing briefs. Similarly, the Commission should be subject to a meaningful deadline in reviewing appeals. The Proposing Release suggests that the Commission shorten the time in which it decides appeals from eleven months to seven months. However, the data indicates that the problem is not with the current target in Rule 900 of eleven months; the problem is that the Commission almost never meets its current target (and sometimes misses that target by months or even years). Simply changing the target, without any consequence if the target is missed, seems unlikely to address the underlying problem.
In federal criminal law, there are consequences for delay: the Speedy Trial Act, 18 U.S.C. §§ 3161 et seq., requires that cases be dismissed if they are not brought to trial within the strict time limits set by the Act. In the civil arena, failure to prosecute by a plaintiff, although less specifically defined, also may result in dismissal of a case. We suggest that the Commission consider adopting a similar principle: if an ALJ does not enter a decision within a certain time after the end of the hearing, the matter should be dismissed. Similarly, if the Commission is not able to resolve an appeal within a certain time, the action should be dismissed. Without a sanction for failure to process cases expeditiously, we believe there is no real incentive for the Commission to address the very real problem of delay in Commission administrative proceedings.6
|Second, the fairness of an expedited process would be enhanced if the Commission's discovery obligations were accelerated modestly. After an investigation bounded only by the possibility of a five-year statute of limitations, the Division of Enforcement staff should be prepared to produce its entire investigative record (not merely "begin" production) to respondents immediately upon Commission approval of the order instituting proceedings. We suggest that the Commission amend Rule 230(d) to produce the investigative record immediately, rather than beginning production 14 days after the respondent's answer.
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The Committee appreciates the opportunity to comment on the proposal and respectfully requests that the Commission consider the recommendations set forth above. We are prepared to meet and discuss these matters with the Commission and the staff and to respond to any questions.
W. Hardy Callcott
Co-Chairs, Securities Litigation Committee:
Louis F. Burke
cc: William H. Donaldson, Chairman