Source: https://www.vedderprice.com/sec-administrative-proceedings-under-constitutional-scrutiny
Timestamp: 2019-04-24 12:22:01+00:00

Document:
Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the SEC has come under greater scrutiny and criticism regarding its use of administrative proceedings.
Criticism stems mainly from the perceived one-sided nature of administrative proceedings, and the Defense Bar, in particular, views administrative proceedings as “stacking the deck” in favor of the Commission. Specifically, this “home court” alternative to pursuing claims in federal district court creates significant disadvantages for defendants, including accelerated hearing schedules, the inapplicability of the Federal Rules of Civil Procedure and the Federal Rules of Evidence, limited pre-hearing discovery and the elimination of a jury trial.
Many critics have also questioned the constitutionality of the administrative proceedings. These constitutional challenges include due process and equal protection concerns as well as Article II violations. The SEC has had success in fending off these constitutional challenges, mainly by arguing that the district courts lack subject matter jurisdiction to hear the constitutional challenges raised by defendants because Congress granted exclusive authority to review orders entered in administrative proceedings to the U.S. Circuit Courts of Appeal. The Commission has been very successful in asserting this jurisdictional argument, until recently.
On June 8, 2015, a Georgia federal judge issued a preliminary injunction halting an administrative proceeding against a real estate developer accused of insider trading. In Hill v. SEC, Case No. 1:15- cv-01801 (N.D. Ga. June 8, 2015) (Hill Opinion), Judge Leigh Martin May enjoined the SEC from moving forward with the evidentiary hearing in the administrative proceedings that had been instituted against Charles L. Hill, Jr. on the grounds that his claim over the constitutionality of the administrative proceeding was likely to succeed on the merits.
The SEC first challenged the court's subject matter jurisdiction. Specifically, the SEC argued that, under 15 U.S.C. § 78y, judicial review of Hill's constitutional claims could come from the Court of Appeals only after the administrative proceeding had concluded and the SEC issued a final order in Hill's case.6 Judge May initially noted that the SEC's position was in "tension" with 28 U.S.C. § 1331, which provides that federal district courts "have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States,"7 and 28 U.S.C. § 2201, which authorizes declaratory judgments.8 After a lengthy discussion, Judge May concluded that the district court did have jurisdiction over Hill's constitutional claims.
Notably, Judge May's order preliminarily enjoins the SEC from "conducting the administrative proceeding brought against [Hill] . . . before an [ALJ] who has not been appointed by the head of the Department."17 This left open the question of whether the Hill Opinion has any real teeth to it.
The SEC intends to appeal Judge May's decision and is awaiting the solicitor general's approval to move forward with the appeal to the Eleventh Circuit. In a separate case brought by Lynn Tilton, the owner of the Patriarch Partners investment companies, a New York federal court judge ruled that Tilton cannot challenge the constitutionality of the SEC’s administrative proceedings against her in federal court.18 Tilton has since filed an appeal with the Second Circuit.
(ii) whether the charged party is a registered entity or an individual associated with a registered entity; (iii) the cost-, resource- and time- effectiveness of litigation in each forum; and (iv) the fair, consistent and effective resolution of securities law issues and matters.
Regardless of the outcome of the Hill case, one thing is clear—the SEC's use of administrative law proceedings is likely to foster a continued attack by the defense bar.
1 See Hill Opinion p. 10.
7 28 U.S.C. § 1331.
8 Hill Opinion p. 12.
11 501 U.S. 868 (1991).
12 Hill Opinion p. 36.
16 Id. p. 44 (citing Freytag, 501 U.S. at 878).
17 Id. p. 44 (emphasis added).
18 The case is Tilton v. SEC, 1:15-cv-02472 (S.D.N.Y.).

References: v. 
 § 78
 § 1331
 § 2201
 § 1331
 v.