Constitutional Challenges to SEC Administrative Proceedings

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) authorized the Securites and Exchange Commission (SEC) to impose civil penalties in cease-and-desist proceedings before an administrative law judge (ALJ) against any person who violated any provision of the federal securities laws or any rule promulgated under those statutes. See Section 929P(a). Prior to Dodd-Frank, although the SEC could seek civil penalties against any person as an alleged violator in federal court, the SEC’s authority to impose civil penalties in administrative proceedings was limited to persons associated with regulated entities. Thus, Section 929P(a) established a parallel between the relief available to the SEC in federal court and in an administrative proceeding against any alleged violator.

Nothing in Dodd-Frank, the federal securities laws, or the SEC’s rules defines the circumstances in which the SEC must, should or may select one forum or the other. The decision is completely within the SEC’s discretion. One SEC commissioner has stated that “[t]o avoid the perception that the commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.”¹ However, no such guidelines have been promulgated.