[House Report 115-1118]
[From the U.S. Government Publishing Office]


115th Congress   }                                     {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                     {     115-1118

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



 
                  DUE PROCESS RESTORATION ACT OF 2017

                                _______
                                

January 2, 2019.--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. 2128]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2128) 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

    The ability for the U.S. Securities and Exchange Commission 
(SEC) to control the forum in which an action is brought raises 
due process concerns because the SEC's in-house tribunals do 
not guarantee respondents the same types of rules and processes 
that help ensure fairness in the U.S. justice system. For 
example, SEC administrative proceedings do not afford 
respondents the same protections as they would receive under 
the Federal Rules of Civil Procedure and the Federal Rules of 
Evidence, and respondents do not have the opportunity to have a 
jury trial. To address these concerns, on April 25, 2017, 
Representative Warren Davidson introduced H.R. 2128, the ``Due 
Process Restoration Act to provide respondents in actions 
brought by SEC in an ``in-house'' administrative proceeding 
with the ability to have their case removed to a federal 
district court. The legislation requires the ``clear and 
convincing evidence'' standard of proof to be used in an action 
brought by the SEC in an administrative proceeding.

                  Background and Need for Legislation

    Investor protection is a serious issue, and it merits the 
level of seriousness other violations of the law require in our 
legal system. Accordingly, the goal of H.R. 2128 is to afford 
respondents in SEC civil enforcement cases with fair and 
transparent processes when accused of wrongdoing by providing 
the ability of the respondents to remove cases to federal 
district court. Nothing in the bill requires a respondent to 
remove a case, and nothing in the bill inhibits the SEC's 
ability to pursue the action in civil court.
    Specifically, H.R. 2128 would: (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.
    Under the prior Administration, the SEC increasingly turned 
to its own administrative law judges (ALJs)--rather than the 
federal courts--to adjudicate enforcement actions. SEC 
administrative proceedings are quasi-judicial proceedings in 
which ALJs appointed by the SEC adjudicate enforcement actions 
under SEC rules. Under former-SEC Chair Mary Jo White, senior 
SEC officials in the Enforcement Division praised the 
efficiency of these administrative proceedings and confirmed 
that they will be used more extensively in the future. During 
FY 2014, the SEC's Enforcement Division won all six of its 
litigated administrative proceedings, compared to only 11 of 
its 18 cases brought in federal court. While the SEC under the 
leadership of Chairman Jay Clayton has been more measured in 
its reliance on ALJs, a different Commission could revert back 
to the troubling trend relied on by former-Chair White.
    The shift from litigation in federal court to 
administrative proceedings has afforded the SEC distinct ``home 
court'' advantages that, if abused, could undermine the United 
States' reputation for transparent and open capital markets and 
a blind justice system. First, administrative proceedings are 
handled by ALJs hired and employed by the SEC pursuant to SEC 
procedural rules that favor the agency's lawyers--i.e., the use 
of hearsay and other unreliable evidence and limits on pretrial 
discovery and common defense motions allowed in courts. Because 
administrative proceedings overwhelmingly favor the SEC, and 
because appeals impose significant burdens on respondents, the 
SEC has used these proceedings at times to entice the targets 
of its enforcement actions to settle. In fact, a former head of 
the Enforcement Division publicly admitted in 2014 that ``there 
have been a number of cases in recent months where [the SEC 
has] threatened administrative proceedings, it was something we 
told the other side we were going to do and they settled.''
    Section 929P of the Dodd-Frank Act amended the Securities 
Act of 1933, the Securities Exchange Act of 1934, the 
Investment Advisers Act of 1940 and the Investment Company Act 
of 1940 and made administrative proceedings even more 
attractive for the SEC by greatly expanding the SEC's authority 
to obtain civil penalties in administrative proceedings against 
any person or entity. Before the enactment of Section 929P, the 
SEC could only obtain civil money penalties in administrative 
proceedings against regulated entities such as brokers, 
dealers, investment companies, and investment advisers. Now, 
Section 929P authorizes the SEC to obtain civil money penalties 
in administrative proceedings against any person or entity who 
violates the federal securities laws.
    While the SEC has publicly supported administrative 
proceedings as a more efficient way to resolve enforcement 
matters, critics have decried the inherent unfairness of the 
SEC's use of administrative proceedings. Former-SEC 
Commissioner Michael Piwowar has pointed out that the change to 
administrative proceedings ``has the appearance of the 
Commission looking to improve its chances of success by moving 
cases to its in-house administrative system.'' After all, in 
federal court cases seeking penalties, a defendant not only can 
take full discovery--including depositions of all the key 
individuals--he has a right to a jury trial presided over by a 
federal judge appointed pursuant to Article III of the U.S. 
Constitution. Administrative proceedings, on the other hand, 
may not permit all depositions a respondent thinks may be 
necessary and are heard before an ALJ--who is an employee of 
the SEC whose decision is subject to an appeal to the full 
Commission that employees the ALJ and authorized the 
enforcement action in the first place; only then can a 
defendant appeal to a U.S. Court of Appeals. In testimony 
before the Subcommittee on Capital Markets, Securities, and 
Investment, Andrew Vollmer highlighted the concerns with the 
ALJ process saying,

          The basic problem with SEC administrative proceedings 
        (APs) is that they are either inherently unfair to 
        defendants or appear to be unfair. Defendants caught up 
        in the process emerge with a sense that they did not 
        receive the same evenhanded and impartial consideration 
        from an AP that they would have received in district 
        court. The first level of adjudication is before an 
        administrative law judge (ALJ) who has or appears to 
        have reasons to favor the SEC. The second level of 
        adjudication is before the Commission itself, which is 
        the same body that voted to charge the defendant. A 
        defendant could be forgiven for questioning whether the 
        body--sometimes the very same Commissioners--that sued 
        him is entirely open minded on the ultimate question of 
        whether he committed the violation.

    As Bradley J. Bondi outlined in testimony before the same 
Subcommittee hearing:

          The perceived unfairness may be due to the fact that 
        the SEC appears to have won more frequently in 
        administrative proceedings than in district court. In 
        2015, The Wall Street Journal reported that from 
        October 2010 through March 2015, the SEC won 90% of its 
        administrative proceedings, while in the same period 
        the SEC prevailed in only 69% of the cases it brought 
        in federal district court. Furthermore, a 2016 study 
        suggested that, after Dodd-Frank, the SEC has shifted 
        weaker cases from district court to administrative 
        proceedings or has brought actions as administrative 
        proceedings that it would not have brought at all 
        before Dodd-Frank.

    Such criticisms have led SEC Commissioners, market 
participants, and at least two federal judges to question the 
constitutionality of SEC administrative proceedings. In June 
2015, a federal district court in Atlanta found that the SEC's 
use of an in-house judge to preside over an insider-trading 
case was ``likely unconstitutional'' because the SEC's 
appointed ALJ was hired through its office of in-house judges, 
rather than being appointed by the five commissioners. 
Similarly, a Manhattan federal judge ruled on August 12, 2015, 
in a separate case that a proceeding presided over by an SEC 
ALJ was ``likely unconstitutional.'' Like his counterpart in 
Atlanta, this judge questioned the validity of the SEC's 
process for appointing ALJs, on the ground that the 
Commissioners who run the SEC should choose the ALJ, rather 
than less senior people within the agency.
    On August 9, 2016, the U.S. Court of Appeals for the 
District of Columbia Circuit issued its opinion in Lucia v. 
SEC, which held that the SEC's use of ALJs is constitutional. 
The D.C. Circuit ruled that the SEC's use of ALJs does not 
violate the Appointments Clause of the Constitution because, 
rather than acting as officers of the United States, the SEC's 
ALJs act as employees who lack the authority to issue ``final 
decisions.'' Under the Constitution, the President must appoint 
``inferior officers'', the head of a federal agency or by a 
court. But in November 2017, the Trump administration stopped 
defending the SEC's position, telling justices that the 
agency's judges are officers subject to the appointments clause 
and urged the Supreme Court to hear the case because other 
agencies also employ judges in a manner similar to the SEC. 
Following this reversal, the SEC has attempted to ratify its 
prior appointment of the five current administrative law judges 
to avoid challenges over pending administrative proceedings. In 
January 2018, the Supreme Court agreed to take up an appeal of 
Lucia and heard oral argument on April 23, 2018.
    The Supreme Court issued a decision of June 21, 2018, 
stating that ALJs are ``officers'' who must be appointed to 
their position by the ``heads of Departments'' under the 
Constitution's Appointments Clause. However, the Supreme Court 
did not rule on whether the Commission's ratification of its 
prior ALJ appointments was valid. Following the decision, the 
SEC put a stay on all pending administrative proceedings. The 
SEC lifted the stay on August 22, 2018. Respondents in SEC 
pending administrative proceedings now are afforded the 
opportunity to be reheard before another ALJ.
    While H.R. 2128 addresses a distinct issue regarding the 
fairness of administrative proceedings than at the heart of 
Lucia, this court case underscores the importance of ensuring 
administrative proceedings are not perceived as biased. H.R. 
2128 does ensure important protections in that regard. Further, 
while the SEC did implement some revisions to its rules of 
practice that govern administrative proceedings, those 
revisions--as set forth above--fall short of the procedural 
safeguards that underscore the trust market participants have 
in the U.S. federal court system. The SEC's changes to its 
rules of practice neglect to establish--at least publicly--
criteria for when the SEC will bring an action in an 
administrative proceeding rather than in federal court.
    In response to the SEC's shift toward administrative 
proceedings under the prior Administration and the fact that no 
safeguards exist from another Commission to follow such a 
course, the Committee on Financial Services first considered 
legislation to provide for the removal of SEC administrative 
proceedings to federal court during the 114th Congress. 
Stanford University professor Joseph Grundfest testified before 
the Subcommittee on Capital Markets and Government Sponsored 
Enterprises on December 2, 2015, about the legislation and 
noted 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.'' In the 115th Congress, 
H.R. 10, the Financial CHOICE Act of 2017, included language 
similar to Rep. Davidson's H.R. 2128, the Due Process 
Restoration Act. H.R. 2128 provides legal certainty and 
predictability to respondents in SEC enforcement actions and in 
doing so, ensures that they receive all of their Constitutional 
due process protections.

                                Hearings

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 2128 on April 26 and 28, 
2017 and June 13, 2018.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
September 13, 2018, and ordered H.R. 2128 to be reported 
favorably to the House without amendment by a recorded vote of 
31 yeas to 20 nays (recorded vote no. FC-209), 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 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 31 yeas to 20 nays 
(Record vote no. FC-209), 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. 2128 
will ensure fairness and protect substantive rights by 
enhancing procedural due process rights for defendants in SEC 
enforcement matters.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    The Committee has not received an estimate of new budget 
authority contained in the cost estimate prepared by the 
Director of the Congressional Budget Office pursuant to Sec. 
402 of the Congressional Budget Act of 1974. In compliance with 
clause 3(c)(2) of rule XIII of the Rules of the House, the 
Committee opines that H.R. 2128 will not establish any new 
budget or entitlement authority or create any tax expenditures.

                 Congressional Budget Office Estimates

    The cost estimate prepared by the Director of the 
Congressional Budget Office pursuant to Sec. 402 of the 
Congressional Budget Act of 1974 was not submitted timely to 
the Committee.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      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

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 2128 as the ``Due Process 
Restoration Act of 2017''.

Section 2. Private parties authorized to compel the securities and 
        exchange commission to seek sanctions by filing civil actions

    This section amends the Securities Exchange Act of 1934 by 
adding `SEC. 40' to allow an individual who is a party to an 
administrative proceeding brought by the Commission to 
terminate that proceeding within 20 days of receiving notice 
and, in such instances, to authorize the SEC to bring a civil 
action against the person. The section also permits a legal or 
equitable penalty to be imposed upon a person against whom an 
action is brought in an administrative proceeding only 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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

         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. 2128 would undermine the Securities and Exchange 
Commission's (SEC) enforcement efforts based on the erroneous 
belief that Wall Street bad actors are being treated unfairly. 
Specifically, the bill would allow a party subject to a cease-
and-desist order and a monetary penalty in an SEC 
administrative enforcement action to require the SEC to bring 
the case in federal court. Moreover, the bill would subject the 
SEC to a heightened burden of proof if the respondent chose to 
keep the case in an administrative forum. As a result, alleged 
violators of federal securities laws could select a venue based 
on their own interests, rather than the interests of the 
public.
    The SEC uses administrative enforcement proceedings to 
quickly stop financial bad actors and prevent them from causing 
further harm to investors and the U.S. capital markets. These 
proceedings have the benefit of conserving valuable agency 
resources by allowing the SEC to efficiently resolve 
enforcement actions, which could drag on for years in the 
congested federal court system. During a recent hearing before 
the Subcommittee on Capital Markets, Securities, and 
Investment, the Majority's own witness, securities lawyer 
Bradley J. Bondi, who represents public companies and financial 
institutions in SEC enforcement matters, testified about the 
importance of administrative resolution of securities cases. 
According to Mr. Bondi, ``not all enforcement actions require 
the formality of federal district court. Some cases, such as 
those involving disciplinary actions against registered 
investment professionals and so-called `follow-on' actions 
following a criminal prosection, could be adequately brought as 
administrative proceedings, thereby avoiding adding to the 
already crowded federal docket.''\1\
---------------------------------------------------------------------------
    \1\Written Testimony of Bradley J. Bondi before the Subcommittee on 
Capital Markets, Securities, and Investment on ``Ensuring 
Effectiveness, Fairness, and Transparency in Securities Law 
Enforcement'' (June 13, 2018), available at https://
financialservices.house.gov/uploadedfiles/hhrg-115-ba16-wstate-bbondi-
20180613.pdf.
---------------------------------------------------------------------------
    If H.R. 2128 were enacted, an alleged wrong-doer could 
choose between exploiting the delays involved in federal court 
litigation or receiving the benefit of a higher standard of 
proof in the SEC's administrative forum. Compared to the 
current standard, pursuant to which more that 50% of the 
evidence (i.e., a ``preponderance of the evidence'') must 
support the SEC's claims, the bill's evidentiary burden would 
require the SEC to prove that its allegations are highly and 
substantially likely to be true. This so-called ``clear and 
convincing evidence'' standard would make it harder for the SEC 
to enforce securities laws and regulations and would create a 
disparity between the standards applied by an administrative 
judge and a federal judge when adjudicating the same violation.
    There is no justification for thus tipping the scales of 
justice in favor of alleged securities fraudsters. Contrary to 
the assertions of unfairness underlying H.R. 2128, SEC 
administrative proceedings are subject to substantial due 
process requirements, including protections that are not 
available to civil defendants in federal court. For example, in 
an administrative proceeding, SEC enforcement staff must turn 
over to the respondent any exculpatory material in the 
government's possession. This production is not required in 
federal civil litigation. Additionally, administrative judge 
decisions are subject to de novo review (i.e., without any 
deference) by the full Commission, either at the respondent's 
request or on the Commission's own initiative. If the 
respondent disagrees with the Commission's final decision, they 
can challenge it before a federal court of appeals.
    H.R. 2128 is an unwarranted bill that would hamper the 
SEC's ability to hold bad actors accountable, protect 
investors, and maintain market integrity. Financial Services 
Committee Democrats, who rejected similar legislation in the 
114th Congress, unanimously voted against H.R. 2128 when the 
bill was marked up. 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, also 
oppose the changes contemplated by this legislation. Similarly, 
state securities regulators represented by the North American 
Administrators Association, urged the Committee to reject H.R. 
2128, stating that the bill, ``would disrupt our securities 
markets and the efficient functioning of the federal 
judiciary.''
    For these reasons, we oppose H.R. 2128.

                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Nydia M. Velazquez.
                                   Wm. Lacy Clay.
                                   Michael E. Capuano.
                                   Charlie Crist.

                                  [all]