[House Report 114-697]
[From the U.S. Government Publishing Office]


114th Congress    }                                     {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                     {      114-697

======================================================================



 
                  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.''
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     By fiscal year, in millions of dollars--
                                                         -----------------------------------------------------------------------------------------------
                                                            2017     2018    2019   2020   2021   2022   2023   2024   2025   2026  2017-2021  2017-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 DECREASES IN REVENUESa
 
Penalties...............................................     -250     -253     -6     -6     -6     -6     -6     -6     -7     -7      -521       -553
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal year, in millions of dollars--
                                                      --------------------------------------------------------------------------------------------------
                                                        2016   2017   2018   2019   2020   2021   2022   2023   2024   2025   2026  2016-2021  2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                NET INCREASE IN DEFICITS
 
Statutory Pay-As-You-Go Impact.......................      0    250    253      6      6      6      6      6      6      7      7       521        553
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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]