SEC Publishes A Memo On Forum Selection

In the wake of a series of law suits challenging the discretion of the SEC to bring actions as administrative proceedings and questioning of Chair White last week at a Senate Subcommittee budget hearing on the topic, the staff posted on the agency website: “Division of Enforcement Approach to Forum Selection in Contested Actions.” This is the first guidance published by the agency beyond comments made in speeches or at programs.

The Approach

The overall approach is guided by the mission of the agency which is “to protect investors and the integrity of the markets through strong, effective, and fair enforcement of the federal securities laws.” A series of factors which tend to delimit forum selection choices in certain instances are identified. Nevertheless, the forum selection decision is discretionary — there is “no rigid formula dictating the choice of forum.” To the contrary, the Division considers “a number of factors . . .” which may differ from case to case although “in some circumstances a single factor may be sufficiently important to lead to a decision . . .” The list provided is not exhaustive and may not contain factors considered in some instances. Those identified are:

Factor 1: “The availability of the desired claims, legal theories, and forms of relief in each forum.” The selection of a particular forum might be dictated by the nature of the charges or the relief sought. For example, a failure to supervise charge can only be brought in an administrative forum while a control person liability theory must be pursued in district court, according to the staff. Likewise, the need to seek a TRO or to name a relief defendant would dictate that the forum be district court.

Factor 2: “Whether any charged party is a registered entity or an individual associated with a registered entity.” These persons have “long been subject to the Commission’s regulatory oversight. . .” and an administrative forum provides the agency with additional remedies not available in district court such as “associational bars and suspensions. . .” While it is possible to bring a district court action against these persons and obtain the additional remedies in a tag-a-long administrative proceeding, it may be more efficient to bring one action.

Factor 3: “The cost-, resource-, and time-effectiveness of litigation in each forum.” The focus here is the efficient use of the SEC’s limited resources. Thus where a quick or “more timely public airing” is necessary an administrative forum may be the choice. Yet if complete relief may only be obtained by naming a relief defendant, the efficient choice may be district court. Procedure can also be a significant factor. If, for example, a broad range of claims should be addressed through summary judgment, or if there is a particular need for depositions, then the appropriate venue may again be district court.

Factor 4: “Fair, consistent, and effective resolution of securities law issues and matters.” Where the action is “likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules . . .” the expertise of the Commission and the Administrative Law Judges, subject to appellate review, “facilitate development of the law” dictating the choice of an administrative forum. In contrast, if there are questions of state law, other specialized areas of federal law or if “similar charges are being or have been brought against similarly situated parties . . .” then it may be “preferable” to bring the action in the same forum.

Analysis

While the posting of this memorandum may be a response to the rash of law suits filed against the Commission over forum selection, and questioning in the Senate last week, it is unlikely to ameliorate the concerns presented. Three points are critical:

First, the memorandum does little to actually define the forum selection process. Much of what it discussed has little significance to the day-to-day forum decisions for most cases. To be sure there are instances when the nature of the claim or the remedy dictates the choice. This is not most cases however. This is particularly true following Dodd-Frank which added provisions to the statutes which, in part, may be driving the move to the administrative forum. Viewed in this context, the discussion of these factors offers little insight into, or guidance about, the SEC’s forum selection process.

Second, citing the Commission’s resources as a driving factor adds little to illuminate the opaque process. If speed and cost were the determinative factors an administrative proceeding would always be the choice since the agency has imposed time limits on most of these actions. All this really tells the public is that after spending whatever time the SEC deems necessary to conduct an investigation, a rush to judgment is the way to go despite a host of factors such as the complexity of the action, difficult credibility issues which should be resolved by a jury and other factors which might dictate bringing the case in district court.

Third, stating that difficult or unsettled legal issues may dictate the selection of an administrative forum in view of the Commission’s expertise and the availability of appellate review raises the prospect of selecting an administrative forum in an effort to avoid having those issues resolved by the courts which has traditionally been the case. This approach may not only permit the agency to avoid trial losses, such as those suffered in recent months, but to side-step developing case law it does not like. For example, by moving insider trading cases into an administrative forum, the SEC may avoid the requirements of Newman regarding the personal benefit test for illegal tipping. Since virtually all insider trading law has been fashioned by the courts, such a move could stilt the development of the law. The prospect of appellate review does not change this point since the SEC will no doubt claim on appeal that the court should defer to its views. Not only will this undermine the development of the law, it creates the perception of unfairness – supposedly one of the key goals of enforcement policy.

While it clearly would be beneficial if the SEC addressed the questions regarding forum selection to reassure the public regarding the fairness of its processes, this memorandum misses the mark. It offers virtually no insight into what can only be viewed as a “black box” process used by the agency to make these critical decisions. Anxiety regarding that process can only be intensified by the prospect that in addition to those actions typically brought in that forum whole new classes of actions may now be brought there to take control of the development of the law. Avoiding the courts in that fashion can only add to the perception of unfairness, undercutting the mission of the agency.