CORPORATION, FINANCE, AND SECURITIES LAW SECTION
March 21, 2003
Via e-mail: firstname.lastname@example.org
Securities and Exchange Commission
Re: Proposed Amendments to Rules of Practice (Release Nos. 33-8190, 34-47355, 35-27650, 39-2405, IA-2109, IC-25933; File No. S7-04-03)
Ladies and Gentlemen:
This letter is submitted on behalf of the District of Columbia Bar's Corporation, Finance, and Securities Law Section ("Section") in response to the Commission's request for comments on the above-identified Release issued February 12, 2003 regarding Proposed Amendments to the Commission's Rules of Practice (the "Release"). The views expressed herein represent only those of the Section and not those of the D.C. Bar or its Board of Governors. This letter was prepared by the Section's Broker-Dealer Regulation and SEC Enforcement Committee.
THE PROPOSED AMENDMENTS
The Commission has announced a proposal to amend its Rules of Practice governing administrative proceedings before the agency's administrative law judges (ALJs) to "reduce significantly the time required to complete an administrative proceeding."1 As discussed below, while the Section shares this goal, it feels that the method proposed raises concerns as to whether respondents will be allowed sufficient time to meet charges against them. Other methods may prove more effective in speeding up the Commission's proceedings.
Under the proposal, amended Rule 360(a)(2) would have the Commission, in issuing its order instituting proceedings, evaluate the "nature, complexity, and urgency" of each case. Based on this evaluation, the Commission would then set a deadline (in the order instituting itself) of "90, 180 or 270 days" for the ALJ to wrap up the entire proceeding. All interim dates for events between institution and ALJ decision would continue, as before, to be set by the ALJ.
If counsel need an extension of any such date, amended Rule 161(c)(1) would require counsel to make a "strong showing" that denial of the extension would "substantially prejudice their case," in order to overcome the amended rule's new "policy of strongly disfavoring" requests for extensions. In addition to considering the usual factors pertaining to extension requests, the amended rule would require the ALJ to specifically consider whether granting the extension would have an "impact" on the ALJ's ability to meet the Commission's overall deadline of 3, 6 or 9 months for reaching decision on the merits after trial.
If the ALJ needs an extension, based on a determination that he or she cannot get the decision filed by the deadline, amended Rule 360(a)(2) would require the ALJ to request the Chief ALJ to file a motion with the Commission asking the Commission for such an extension. The parties could then support or oppose the Chief ALJ's motion to the Commission. Nowhere else do the rules provide for the Chief ALJ to make a motion to the Commission - effectively making the Chief ALJ appear as a litigant before the Commission. The Chief ALJ would have to make her motion to the Commission at least 30 days before the deadline for the decision. The amended rule does not specify whether the Chief ALJ's motion to the Commission would be considered if filed later than 30 days before the deadline.
If any respondent makes a settlement offer during the pendency of the proceeding, amended Rule 161(d)(2) would allow the ALJ to stay proceedings while the Commission considers the settlement offer. If the Commission rejects the settlement offer, the stay would lapse. But the amended rule does not specify whether the stay affects the 3, 6 or 9 month deadline established for completion of the case.2
Once the proceeding is decided by the ALJ, either the Division or a respondent may appeal to the Commission. Amended Rule 900(c) reduces the non-binding "guideline" for completion of the Commission's consideration of the appeal from 11 months to 7 months. As the guideline for Commission action is merely precatory, the amended rule does not specify any consequence if the Commission does not decide the appeal within this 7-month period.
CAUSES OF DELAY IN PROCEEDINGS
Experience in recent years has shown that the simple fact of delay can jeopardize a proceeding.3 But it does not appear that respondents and their counsel are principally to blame. Cases generally get old for a variety of other reasons.
Years of Preparation. The Commission's Staff can take as much time as it needs to investigate a matter. Even with "real time" enforcement, staff can still spend a year (or two or three) preparing their case - locating and questioning witnesses, gathering documents, analyzing records, working with experts. All this is done before Staff ever recommend the case to the Commission for litigation. Once Staff recommend the matter, it can take additional months for internal review by Enforcement Division supervisors, other interested divisions, the General Counsel's office and ultimately the Commissioners and their legal assistants. No case is authorized for institution of proceedings if the Staff does not think the case is ready to go, and the Staff's ability to thus control when to "pull the trigger" gives them an unfair advantage over respondents' counsel.
Cases Too Soon Old. In some matters, the problem is that the Commission has chooses to institute a case based on old facts. After instituting a case against a head bond trader based on old conduct, the Commission dismissed the case on appeal because no remedial purpose would be served after the passage of time.4 Another case charging an accountant with improper professional conduct, likewise instituted by the Commission on old facts, was dismissed "given the age of the events ... and under all the circumstances here."5 The age-upon-institution problem may arise either from late discovery of the alleged violation or from delay in investigating the matter. But in either case, the Commission should weed out cases that, if instituted, will likely lead to age-of-case dismissals.
SROs likewise share the blame for delaying disciplinary matters before they even reach the Commission. A New York Stock Exchange disciplinary proceeding charging a broker with unsuitable recommendations and material misrepresentations and omissions was dismissed because Commission found that "the delay in the underlying proceedings was inherently unfair").6
Delay at the Commission Level. The Commission's own review process can add substantially to the delay in its administrative proceedings. In one matter, the Commission, on its own motion, stayed a proceeding for three years while it considered the application of professional discipline rule (Rule 102(e)) to an accountant whose license had lapsed. The Commission then determined that it could not decide the issue without a full record and sent the case back to the ALJ for trial without deciding the issue.7
Delays at the Commission level most typically arise during the Commission's review of ALJ decisions. Rule 900(c) of the SEC's Rules of Practice requires the SEC to publish biannual statistics on the state of the agency's administrative proceedings.8 The most recent Rule 900 report, covering the period from April 1 through September 30, 2002, shows that the median time for the Commission to consider a matter was approximately 18 months (546 days), and that for the preceding two reporting periods the Commission's median time for consideration was approximately 24 months (734 days and 713 days).9 In one such case charging fraud against a broker that had been pending on appeal to the Commission for over three years, the Commission on its own initiative determined to dismiss the case without passing on the merits.10
IMPOSSIBLE SQUEEZE ON RESPONDENTS
The principal difficulty with the present proposal is that it takes away time at the expense of respondents, but not at the expense of the Commission or its staff. The Staff gets to decide when to pull the trigger by asking the Commission to institute. This lets the Staff take as long as it needs (up to 2 or 3 years) to both investigate the matter and prepare it for presentation in the proceeding. And on review of the ALJ's decision, the Commission can take as long as it needs (typically 18 to 24 months) to issue its decision.
In between, the pending proposal gives respondents potentially only a few weeks to prepare a defense to complex charges based on a very large and detailed evidentiary record. For most respondents, these are bet-everything cases that can result in substantial monetary sanctions, a broker-dealer associational bar, an officer and director bar,11 or other relief that will ruin them financially and exclude them from future employment.
Test Driving the Proposed Amendments. The difficulties posed by the present proposal can best be illustrated by playing out the sequence of events in a typical SEC administrative proceeding. In such a proceeding, the Commission will most likely establish 6 months as the deadline for completing the case, with the 3 and 9 month options reserved for atypical matters.12
Assume the Commission issues its order instituting (containing the 6 month deadline for decision on the merits) on July 1. If it is received by July 5, respondent will have to file her answer by July 25, under Rule 220(b).13 At this point, respondent will often not have seen the documents and investigative testimony supporting the charges against her. The Division will only have to "begin" making these materials available for inspection and copying on August 8 under Rule 230(d) (14 days after answer). As the Division is usually prompt in making its production, respondent should have obtained all of this evidence by August 20 or so.
Also within 14 days of answer, presumably on August 8 here, the ALJ will call the parties in for a prehearing conference under Rule 221(b). In addition to assuring that the Division is making its required production, the ALJ will use the conference to set dates for the remainder of the case. With a Commission-mandated December 31 deadline for decision of the case (6 months following institution on July 1), the ALJ will work backwards from December 31 in setting other dates in the proceeding.14 To withstand appellate scrutiny, the ALJ will have to produce a decision containing complete transcript, exhibit and legal citations, and for this reason, the ALJ will need to allow at least a month (December) to prepare the decision. The parties will need at least a month (November) for post-trial briefs and reply briefs. It will likely take a month (October) for the stenographer to prepare and correct the transcript. With this calculation, the ALJ will most likely set the case for a week or two of trial commencing on September 15.15
This will give respondent a period of just over a month, from August 8 (prehearing conference) to September 15 (trial), to prepare a defense. During this period, respondent's counsel will have to analyze perhaps 20 volumes of investigative testimony and perhaps 10 cartons of documents and electronic records gathered during what may have been a multi-year investigation. Counsel will also have to subpoena documents from third parties, requiring production in advance of the September 15 trial, to allow time for analysis.16 Counsel will also have to subpoena witnesses to testify at trial. This will mean that subpoenas will have to be served no later than September 1, and that counsel will only have between August 20 (completion of Division's production) and perhaps September 1 to analyze the substantial production (that the Division took a year or two to amass) and determine whom to subpoena and for what.
As SEC matters are often technical in nature, respondent will have to consider using one or more expert witnesses. This will mean that, during the period mid-August through mid-September, respondent will have to locate and retain experts, provide them with documents and records, obtain and analyze their reports, and make a determination whether to use them at trial.17
Impact on Counsel. Of course, this "rocket docket" assumes counsel has no other cases. However, counsel may have been ordered to trial in a federal court matter or may have other litigation or SEC commitments during this period. Such commitments may require counsel to decline participation in litigation adhering to the schedule contemplated by the new proposals.18 This would substantially prejudice a respondent whose counsel had already invested time preparing for investigative testimony and drafting a Wells submission. And, facing the need to retain new counsel for a proceeding with a 6 month deadline, respondent will be deprived of counsel of her choice and will have to settle for a lawyer not otherwise busy or who can defer other cases and concentrate almost exclusively on respondent's case.
And this rocket docket likewise assumes that, as matters proceed, none of the witnesses, experts, parties, attorneys or ALJ will have any illnesses, family emergencies, client emergencies or any other distraction to keep them from their responsibilities on the case. Counsel who have litigated know that they are constantly called upon to juggle and reshuffle to get cases done. But this proposal takes no account of such real world experience. Indeed, the Commission Staff handling these cases - particularly the presently overburdened trial attorneys on the Staff - may well experience similar difficulties keeping multiple cases active while handling a proceeding under the present proposals.
Consequences of the Proposal. The bottom line is that a respondent cannot prepare an adequate defense if the timing of the proceeding plays out as outlined above. The cases that the Commission commences as administrative proceedings are often no less complex than the civil actions it files in federal court. Yet in federal court, pleadings and initial conferences can often take two or three months, discovery six months to a year or more, pretrial proceedings and motions another six months, and post-trial briefing three months beyond trial. The Court will then take as long as it needs, consistent with responsibilities in other cases, to issue a reasoned decision with appropriate record and legal citations.
The squeeze that the present proposal may place on respondents could lead them to attempt a due process challenge to the fairness of the proceeding. To the extent such challenges are made, they will add a year of litigation in the courts of appeals. And to the extent any of them are sustained, they will lead to a remand for further proceedings and a new trial. Additionally, a system that involves post-trial briefs hurriedly thrown together, and an ALJ decision relying on such briefing and likewise hurriedly thrown together, can result in decisions containing error, again leading to more appeals and more delay. In short, by hurrying up the wrong way, the process can actually slow down.
ALTERNATIVE PROPOSALS TO SPEED PROCEEDINGS
As an alternative, the Commission could consider amending the Rules of Practice in ways that would speed adjudication without restraining respondents' ability to defend. Most fundamentally, any amendment should avoid a sledge hammer solution that sets a monolithic deadline for the entire case, with an inflexible demand that the parties and the ALJ somehow figure out a way to squeeze everything into that time box. Better to realize that each proceeding has certain discrete segments, and that each segment needs different treatment. We offer the following ideas for the Commission's consideration.
Earlier Production of the Investigative Record. Rule 230(d) already requires the Staff to produced the non-privileged portions of the investigative record (investigative testimony transcripts and exhibits, as well as other documents gathered during the investigation). The Rule could be amended to require this production at the beginning of a case, at the same time as service of the order instituting. At present, the Staff must "begin" production 14 days following the respondent's answer.
Alternatively, the rule could require Staff to produce even before instituting the proceeding. Instead of a short Wells call or notice that simply outlines proposed charges, the staff could be required at the time of the Wells call to turn over the investigative testimony and documents that will ultimately have to be produced under Rule 230(d). In addition to getting the administrative process underway at a much earlier date, production of these materials at the time of the Wells call would (i) enable respondents to make more informed decisions on whether to settle, (ii) enable the Commission to receive far more substantive Wells submissions, and (iii) not in any way hinder the Division, as its investigation would by then already be complete, and as these are materials that must be turned over in any event as part of any litigated proceeding.
Pretrial Period. If the rules require early production of required documents to respondents, this period will effectively be shortened. But this period must remain flexible to meet the needs of a particular case and to allow respondents a sufficient time to prepare their defense. This is a matter that should be committed to the sound discretion of the ALJ. And during this pretrial period, the Commission should avoid taking interlocutory appeals, absent some compelling public policy need.
Trials. Trials take as long as they take. Those with a few witnesses are short. Those with many witnesses, or that involve multiple sittings to accommodate witnesses in different parts of the country, take longer. Lengthy trials in complex cases should not cut into the overall time period for brief-writing and other necessary activity in the case. The trial period should not be subject to any time limit.
Post-Trial Briefs. The rules could be amended to set a presumptive time period for post-trial briefing. The time period would begin with delivery of the corrected trial transcript (which must be cited in the briefs). A suggested period would be 30 days for exchange of post-trial briefs, followed by another 20 days for exchange of post-trial reply briefs. The ALJ would have discretion to extend these presumptive periods to accommodate competing demands on counsel.
ALJ Decisions. This period should be measured from the date of delivery of post-trial reply briefs to the ALJ. The rules could set a presumptive standard - maybe 120 days - for issuance of the ALJ's decision. But notwithstanding the presumptive standard, the rule could also require ALJs to consult with the Chief ALJ to establish a particular date for each case, given the nature of the case and the record, for issuance of a decision. The ALJ would then privately confer with the Chief ALJ on any application to extend the time needed for decision. The parties would simply be notified that the Chief ALJ had allowed the ALJ a particular extension.
The alternative method to control the time taken by the ALJ Decision segment of the proceeding would be to set a fixed period for this segment in all cases, again perhaps 120 days. The rules would then provide for dismissal of the proceeding if the ALJ missed the deadline. The present proposal fails to specify any consequence if the ALJ misses the deadline.
Commission Decisions. The present proposal to reduce the guideline for the Commission Decision segment of a proceeding from 11 months to 7 months is helpful. But again, the proposal fails to specify any consequence if the Commission misses the end of the guideline period. A way to handle this would be to move to the 7 month period as a guideline, but to specify that if the Commission failed to decide the matter after 11 months, the proceeding would be dismissed.
Adding Adjudicative Resources. At present, the Enforcement Division has almost 1,000 staff, mostly lawyers, at headquarters and in eleven regional and district offices around the country. These Enforcement staff are setting new records in case production - generating an unprecedented number of cases in the last fiscal year. While many of these are filed as settled cases, a fair number of these proceed to litigation, many in the administrative context. And entire new categories of cases have been added to the administrative docket - cease-and-desist proceedings and (since Sarbanes-Oxley) officer and director bar proceedings.
Yet despite this increase in cases, the agency still has only five administrative law judges, all of whom are based in Washington. The number of administrative law judges at the SEC was approximately the same decades ago when the burden on these judges was substantially lighter. Likewise, the ALJs' support staff is exceptionally small, compared with the size of other SEC offices. One clear way to reduce delay in administrative proceedings would be for the SEC to use a portion of its presently anticipated budget increase to add more administrative law judges and staff to support them. This could well include two full-time law clerks for each ALJ, in view of the increased demands currently being made upon them.19
We urge the Commission not to adopt the proposed rule amendments, and instead to seriously consider the Section's alternative proposals set forth above. Each case is unique, and each case is litigated under unique circumstances. ALJs should continue to have the professional discretion to manage the litigation process before them to meet the needs of each case. Depriving any judge of the ability to manage the litigation process through inflexible time restraints that may prove unrealistic is inherently unwise.
Where the public interest and protection of investors require fast action, the Commission is free to file in federal court and seek its usual range of emergency relief - temporary restraining orders, asset freezes and the like. But shoe-horning a respondent's only opportunity to prepare and present a defense into just a few weeks can run a very real risk of increased delays through appeals raising fairness issues and challenging hurried decisions containing error.
cc: Hon. William H. Donaldson, Chairman