[House Report 114-697]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-697
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DUE PROCESS RESTORATION ACT OF 2015
_______
July 21, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3798]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3798) to amend the Securities Exchange Act of
1934 to permit private persons to compel the Securities and
Exchange Commission to seek legal or equitable remedies in a
civil action, instead of an administrative proceeding, and for
other purposes, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
Purpose and Summary
Introduced by Representative Scott Garrett on October 22,
2015, H.R. 3798, the Due Process Restoration Act of 2015,
provides respondents in Securities and Exchange Commission
(SEC) enforcement cases with the ability to have their case
removed from the SEC's administrative or ``in-house''
proceedings to a federal district court. H.R. 3798 would
accomplish three things: (1) grant a defendant in a SEC
administrative proceeding against whom a cease and desist order
and a penalty may be issued the right to terminate the
proceeding, not later than 20 days after receiving notice of
such proceeding; (2) permit the SEC to bring the same action in
federal court against that person who terminated the
administrative proceeding and seek the same remedy that might
have been imposed; and (3) raise the burden of proof for cases
that remain in SEC administrative proceedings to a higher
``clear and convincing'' standard.
Background and Need for Legislation
The SEC's in-house tribunals have recently come under
criticism for using procedures that favor the interests of the
SEC, as respondents are not afforded the same protections as
they would receive under the Federal Rules of Civil Procedure
and the Federal Rules of Evidence that apply in federal
district court. The respondents do not have the opportunity to
have a jury trial, and any appeals of the administrative
proceeding are first heard by the very same SEC Commissioners
that authorized the enforcement action. Mr. Thomas Quaadman
from the U.S. Chamber of Commerce's Center for Capital Markets
Competitiveness testified on H.R. 3798 on December 2, 2015,
before the Subcommittee on Capital Markets and Government
Sponsored Enterprises in support of the legislation and noted,
``We believe that the Due Process Restoration Act of 2015 is an
important step forward in restoring the balance between the
appropriate uses of administrative proceedings and preserving
the due process rights of defendants.''
The SEC possesses a wide array of enforcement authority to
supplement and effectuate its penalty authority. Over the past
six years, the SEC has increasingly turned to its own
administrative law judges (ALJs)--rather than the federal
courts--to adjudicate enforcement actions. This shift from
litigation in federal court to administrative proceedings has
occurred largely as a result of Section 929P of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, which expanded
the SEC's authority to obtain civil penalties in administrative
proceedings against any person or entity. SEC administrative
proceedings are quasi-judicial proceedings in which ALJs
appointed by the SEC adjudicate enforcement actions under SEC
rules.
Notwithstanding the ``home-field'' advantage that the SEC
receives from using its ALJs, the increased use of SEC in-house
proceedings has also prompted at least one federal district
court judge, Ned Rakoff, to express concerns in a November 2014
Reuters article that administrative proceedings, ``could hinder
``the balanced development of the securities laws.''\1\ Judge
Rakoff urged the SEC to ``consider that it is neither in its
own long-term interest, nor in the interest of the securities
markets, nor in the interest of the public as a whole, for the
SEC to become, in effect, a law onto itself.''\2\ Additionally,
Stanford University professor Joseph Grundfest testified before
the Subcommittee on Capital Markets and Government Sponsored
Enterprises on December 2, 2015, that the, ``agency's push to
administrative proceedings raises a concern that it is on a
mission systematically to substitute its interpretation of the
federal securities laws for that of the federal judiciary.''
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\1\U.S. judge criticizes SEC use of in-house court for fraud cases,
Reuters, November 5, 2014, available at http://www.reuters.com/article/
us-sec-fraud-rakoff-idUSKBN0IP2EG20141105
\2\Id.
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Publicly available data indicate that in FY 2014, the SEC's
Enforcement Division brought nearly half of its litigated
actions as administrative proceedings, an increase of over 35%
since 2012. Moreover, it has been reported that the SEC brought
82% of its enforcement actions as administrative proceedings,
rather than federal-court cases, in the six months ending in
March 2015, representing an increase from less than half of
those matters a decade earlier. Senior officials in the
Enforcement Division, including Andrew Ceresney, the Division's
director, have praised the efficiency of these administrative
proceedings and confirmed that they will be used more
extensively in the future.
The Enforcement Division has developed a strong preference
for administrative proceedings for two reasons. First, ALJs
preside over all SEC administrative proceedings. The
Administrative Procedure Act (APA) in 1946 created the ALJ
function to ensure fairness in administrative proceedings
before federal agencies. Despite the fact that SEC ALJs are not
Article III judges with life tenure--they are hired from a pool
of candidates who have met criteria developed by the Office of
Personnel Management--they are supposed to serve as independent
and impartial triers of fact in formal proceedings requiring a
decision on the record after the opportunity for a hearing.
ALJs rule on preliminary motions, conduct pre-hearing
conferences, issue subpoenas, conduct hearings (which may
include written and/or oral testimony and cross-examination),
review briefs, and prepare and issue decisions, along with
written findings of fact and conclusions of law.
Notwithstanding the intent of the APA, there are significant
differences between proceedings before ALJs and federal court
litigation that advantage the agency:
Unlike in federal court cases seeking penalties, in
which, following the opportunity to take full discovery
(including depositions of all the key individuals), a
defendant has a right to a jury trial presided over by
a neutral federal judge, administrative proceedings are
before an administrative law judge, a commission
employee, who renders an initial decision that is
subject to an appeal to his or her employer, the
commission (which itself brought the administrative
complaint), with an unfavorable commission decision
being subject to appeal to a U.S. Court of Appeals.
ALJs follow other SEC procedural rules that also favor the
agency's lawyers. For example, according to a former
Enforcement Division official:
The rules give the accused only a few months to
prepare a defense--after SEC prosecutors have typically
spent years building the case--and they give
administrative law judges only a few months after the
hearing to evaluate the mountains of evidence presented
and write detailed decisions that typically run several
dozens of single-spaced pages. The rules also allow SEC
prosecutors to use hearsay and other unreliable
evidence, and they severely limit the kinds of pretrial
discovery and defense motions that are routinely
allowed in courts.
Professor Grundfest noted that H.R. 3798, ``has many
virtues. Simplicity is one. There is no ambiguity as to which
causes action can be removed, how they can be removed, and the
consequences of removal. Predictability is another.'' The SEC
has heard repeated criticism of administrative proceedings (1)
from defendants who feel they weren't given adequate due
process protections, (2) from former SEC judges who felt
pressure to rule in favor of the Commission, and (3) from U.S.
District Judges who find the panels unconstitutional, H.R. 3798
will ensure that respondents in SEC enforcement actions can
remove those actions to federal district court and receive all
of their Constitutional due process protections.
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining matters relating to H.R. 3798 on December 2,
2015.
Committee Consideration
The Committee on Financial Services met in open session on
March 2, 2016, and ordered H.R. 3798 to be reported favorably
to the House without amendment by a recorded vote of 32 yeas to
25 nays (recorded vote no. FC-105), a quorum being present. An
amendment offered by Mr. Ellison was not agreed to by a
recorded vote of 25 ayes to 32 nays (recorded vote no. FC-104),
a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
amendment offered by Mr. Ellison was defeated by a recorded
vote of 25 ayes to 32 nays (Record vote no. FC-104), a quorum
being present. The second record vote in committee was a motion
by Chairman Hensarling to report the bill favorably to the
House without amendment. That motion was agreed to by a
recorded vote of 32 yeas to 25 nays (Record vote no. FC-105), a
quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals And Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3798
will ensure fairness and protect substantive rights by
enhancing procedural due process rights for defendants in
Securities and Exchange Commission (SEC) enforcement matters.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 28, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3798, the Due
Process Restoration Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall.
Enclosure.
H.R. 3798--Due Process Restoration Act of 2015
Summary: Under current law, the Securities and Exchange
Commission (SEC) may bring legal actions against parties deemed
to have violated laws governing financial transactions and
financial disclosures either through administrative proceedings
heard by the SEC's in-house administrative law judges or by
filing a civil action in a U.S. federal district court. H.R.
3798 would allow parties to administrative proceedings brought
by the SEC to require the agency to terminate such proceedings.
The SEC then would have the option to bring civil actions in a
federal district court against the parties that terminated
their administrative proceedings. The bill also would define
the standard of proof that would apply in administrative
proceedings.
CBO estimates that enacting H.R. 3798 would decrease
revenues by $553 million over the 2017-2026 period; therefore,
pay-as-you-go procedures apply. Enacting the bill would not
affect direct spending.
In addition, CBO estimates that implementing the bill would
increase discretionary costs for the SEC by about $4 million
per year over the 2017-2021 period for administrative expenses
related to the expected increase in the number of civil
actions. However, the SEC is authorized to collect fees
sufficient to offset its annual appropriation; therefore, CBO
estimates that the net effect on discretionary spending would
be negligible, assuming appropriation actions consistent with
the legislation.
CBO estimates that enacting H.R. 3798 would not increase
net direct spending or on-budget deficits by more than $5
billion in any of the four consecutive 10-year periods
beginning in 2027.
H.R. 3798 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments.
If the SEC increases fees to offset the costs of
implementing the bill, H.R. 3798 would increase the cost of an
existing mandate on private entities required to pay those
fees. Based on information from the SEC, CBO estimates that the
incremental cost of the mandate would be small and fall well
below the annual threshold for private-sector mandates
established in UMRA ($154 million in 2016, adjusted annually
for inflation).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 3798 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
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By fiscal year, in millions of dollars--
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2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
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DECREASES IN REVENUESa
Penalties............................................... -250 -253 -6 -6 -6 -6 -6 -6 -7 -7 -521 -553
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aIn addition, CBO estimates that the net effect of the legislation on spending that is subject to appropriation would be negligible.
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted late in fiscal year 2016, the necessary
amounts will be appropriated near the start of each year, and
spending will follow historical patterns for the SEC.
Revenues
Current law authorizes the SEC to bring legal actions
against parties deemed to have violated laws governing
financial transactions and financial disclosures using either
in-house administrative proceedings or civil actions in federal
district court. A portion of the amounts that parties found
liable are ordered to pay as a result of either type of
proceeding is remitted to the Treasury and recorded in the
budget as revenue. Under current law, CBO estimates that
revenues from those legal actions will total roughly $700
million per year; approximately $500 million of that amount
stems from cases that will be handled through the SEC's
administrative proceedings.
Based on information provided by the SEC, CBO expects that
enacting H.R. 3798 would not affect the overall number of
actions brought by the SEC or the total penalties resulting
from such actions. However, CBO expects that under H.R. 3798,
half of the cases that would have been handled by the SEC in
administrative proceedings under current law would instead be
handled in civil proceedings in federal district court. Civil
proceedings take, on average, two years longer than SEC
administrative proceedings. CBO estimates that moving more
legal actions into district courts would delay by two years the
collection of revenues related to civil proceedings that would
otherwise have been settled as administrative proceedings. As a
result, CBO estimates that enacting H.R. 3798 would reduce
revenues by $553 million over the 2017-2026 period; most of
that reduction would occur in 2017 and 2018.
Spending subject to appropriation
On the basis of information provided by the SEC, CBO
expects that the agency would need about 15 additional staff to
handle the increased number of court cases that would occur
under the bill--those cases require more staff than
administrative proceedings. CBO therefore estimates that
implementing H.R. 3798 would increase the SECs costs by about
$4 million per year, assuming appropriation of those additional
amounts. However, the SEC is authorized to collect fees
sufficient to offset its funding; therefore, CBO estimates that
implementing the bill would have a negligible effect on
discretionary spending, assuming appropriation actions
consistent with the legislation.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in revenues that are subject to those
pay-as-you-go procedures are shown in the following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 3798, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON MARCH 2, 2016
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By fiscal year, in millions of dollars--
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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016-2021 2016-2026
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NET INCREASE IN DEFICITS
Statutory Pay-As-You-Go Impact....................... 0 250 253 6 6 6 6 6 6 7 7 521 553
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In long term direct spending and deficits: CBO estimates
that enacting H.R. 3798 would not increase net direct spending
or on-budget deficits by more than $5 billion in any of the
four consecutive 10-year periods beginning in 2027.
Estimated impact on state, local, and tribal governments:
H.R. 3798 contains no intergovernmental mandates as defined in
UMRA and would not affect the budgets of state, local, or
tribal governments.
Estimated impact on the private sector: If the SEC
increases fees to offset the costs of implementing the bill,
H.R. 3798 would increase the cost of an existing mandate on
private entities required to pay those fees. Based on
information from the SEC, CBO estimates that the SEC would need
to increase fees by no more than $5 million per year to cover
costs associated with an increase in the number of civil court
proceedings used in lieu of administrative proceedings.
Therefore, the incremental cost of the mandate would fall well
below the annual threshold for private-sector mandates
established in UMRA ($154 million in 2016, adjusted annually
for inflation).
Estimate prepared by: Federal Costs: Stephen Rabent; Impact
on State, Local, and Tribal Governments: Rachel Austin; Impact
on the Private Sector: Logan Smith.
Estimate approved by: H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 3798 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015),
the Committee states that no provision of H.R. 3798 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015),
the Committee states that H.R. 3798 contains no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1: Short title
This section cites H.R. 3798 as the ``Due Process
Restoration Act of 2015''.
Section 2: Private parties authorized to compel the Securities and
Exchange Commission to seek sanctions by filing civil actions
Amends the Securities Exchange Act of 1934 by adding ``SEC.
40'' to allow an individual who is a party to a proceeding
brought by the Commission to terminate that proceeding within
20 days of receiving notice; to authorize the SEC to bring a
civil action against the person if they terminate the
proceeding; and, to allow for a legal or equitable penalty to
be imposed upon the person, if the Commission provides clear
and convincing evidence that the person violated the law.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
* * * * * * *
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
SEC. 40. PRIVATE PARTIES AUTHORIZED TO COMPEL THE COMMISSION TO SEEK
SANCTIONS BY FILING CIVIL ACTIONS.
(a) Termination of Administrative Proceeding.--In the case of
any person who is a party to a proceeding brought by the
Commission under a securities law, to which section 554 of
title 5, United States Code, applies, and against whom an order
imposing a cease and desist order and a penalty may be issued
at the conclusion of the proceeding, that person may, not later
than 20 days after receiving notice of such proceeding, and at
that person's discretion, require the Commission to terminate
the proceeding.
(b) Civil Action Authorized.--If a person requires the
Commission to terminate a proceeding pursuant to subsection
(a), the Commission may bring a civil action against that
person for the same remedy that might be imposed.
(c) Standard of Proof in Administrative Proceeding.--
Notwithstanding any other provision of law, in the case of a
proceeding brought by the Commission under a securities law, to
which section 554 of title 5, United States Code, applies, a
legal or equitable remedy may be imposed on the person against
whom the proceeding was brought only on a showing by the
Commission of clear and convincing evidence that the person has
violated the relevant provision of law.
MINORITY VIEWS
H.R. 3798 is another example of Republicans protecting Wall
Street criminals over investors and the public. Specifically,
the bill would allow white collar defendants in administrative
proceedings before the Securities and Exchange Commission (SEC)
to either require the agency to bring the case in federal court
or be subject to a higher burden of proof These changes would
hamper the ability of the SEC to hold bad actors accountable,
protect investors, and maintain market integrity.
H.R. 3798 is based on a false premise: that the SEC is
unfairly prosecuting Wall Street criminals by using the
administrative process, rather than the federal court system.
First, Congress has explicitly authorized the SEC, like other
agencies, to utilize administrative proceedings, which conserve
valuable agency resources and efficiently resolve enforcement
actions. Whereas cases brought in federal court can drag on for
years, cases brought before an administrative law judge allow
the SEC to obtain a prompt hearing and remedies against bad
actors who may otherwise remain in the industry every day.
Second, the administrative proceedings are appropriately
used by the agency and are fair for defendants. The SEC chooses
the forum that best serves the public interest and brings 70%
of contested cases in federal court. In a recent investigation
into allegations of bias, the SEC's Office of Inspector General
did not find any evidence of improper influence on the
Administrative Law Judges in favor of the SEC. Tellingly, the
historical win-loss record for the SEC in administrative cases
and in the courts are comparable. Last year, the SEC actually
fared better in the courts, prevailing against 100% of
defendants in contested cases, compared with only 70% of
defendants in administrative proceedings.
Finally, as the courts have held, the SEC's administrative
proceedings provide defendants with sufficient due process
protections. If a defendant disagrees with the outcome of an
administrative proceeding, he can appeal his case to the full
Commission and, following that, to the federal courts.
Given these facts, it is clear that the real intent of the
bill is to tip the scales in favor of Wall Street defendants
and stymie the ability of the SEC to bring enforcement actions.
This intent was made clear when Republicans rejected Mr.
Ellison's amendment to afford consumers similar protections in
mandatory arbitration cases. The state securities regulators,
represented by the North American Securities Administrators
Association, oppose the bill, stating ``the likely impact of
H.R. 3798 would be to cripple aspects of the SEC's ability to
protect investors and police U.S. financial markets.'' The bill
is also opposed by Americans for Financial Reform, Public
Citizen, Center for Justice and Democracy, Consumer Action,
Consumers for Auto Reliability and Safety, Main Street
Alliance, and National Association of Consumer Advocates.
For all of these reasons, we oppose H.R. 3798.
Maxine Waters.
Joyce Beatty.
Keith Ellison.
Michael Capuano.
Wm. Lacy Clay.
[all]