[Federal Register Volume 68, Number 116 (Tuesday, June 17, 2003)]
[Rules and Regulations]
[Pages 35787-35790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15262]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 201

[Release Nos. 33-8240; 34-48018; 35-27686; 39-2408; IA-2137; IC-26074; 
File No. S7-04-03]


Rules of Practice

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments 
to its Rules of Practice to formalize new policies designed to improve 
the timeliness of its administrative proceedings. The changes include 
specifying in all orders instituting proceedings a maximum time period 
for completion by an administrative law judge of the initial decision 
in the proceeding, establishing policies disfavoring requests that 
would delay proceedings once instituted and creating time limits for 
the negotiation and submission of offers of settlement to the 
Commission. The Commission has taken additional steps to reduce delay 
in its internal deliberations on appeals from hearing officer's initial 
decisions and from final determinations of self-regulatory 
organizations and, accordingly amends current guidelines for issuance 
of Commission opinions.

EFFECTIVE DATE: July 17, 2003.

FOR FURTHER INFORMATION CONTACT: Scot E. Draeger, Counsel to 
Commissioner Campos at (202) 942-0500. Margaret H. McFarland, Deputy 
Secretary, or J. Lynn Taylor, Assistant Secretary, at (202) 942-7070, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
Rules 161, 230, 360, 450, and 900 of its Rules of Practice [17 CFR 
201.161, 201.230, 201.360, 201.450, and 201.900].

I. Discussion

    The Commission adopted, after notice and comment (Release No. 33-
8190 (February 12, 2003) 68 FR 8137 (February 19, 2003), comprehensive 
revisions to its Rules of Practice that became effective on July 24, 
1995. These revisions were the result of an approximately two-and-a-
half year study by the Commission's Task Force on Administrative 
Proceedings that culminated in a comprehensive report. The Task Force 
found that the fundamental structure of the Commission's administrative 
process was sound and successfully protected the essential interests of 
respondents, investors, and the public, but that some changes were 
necessary. The Task Force recommended changes to the Rules of Practice 
in an effort to set forth applicable procedural requirements more 
completely, in a format easier to use, and to streamline procedures 
that had become burdensome.
    Promoting the timely adjudication and disposition of administrative 
proceedings was one of the principal goals of this project. While many 
of the rule amendments were designed to improve efficiency and 
timeliness, the Commission as part of this project did not impose firm 
deadlines for completion of the proceedings. Instead it included, as 
Rule 900, a series of non-binding goals for the completion of each step 
in the administrative process. Rule 900 included a ten-month guideline 
for completion of the hearing and issuance of the initial decision by 
the administrative law judge and it contained an eleven-month target 
for completion of deliberations by the Commission when it reviews 
appeals of administrative law judges' initial decisions and appeals of 
determinations of the securities self-regulatory organizations. In the 
seven years since the adoption of these non-binding targets, the 
Commission and its administrative law judges have generally failed to 
meet these goals.
    Based upon this experience with non-binding completion dates, the 
Commission has determined that timely completion of proceedings can be 
achieved more successfully through the adoption of mandatory deadlines 
and procedures designed to meet these deadlines. Because there is a 
wide variation in the subject matter, complexity and urgency of 
administrative proceedings, the Commission believes that a ``one-size-
fits-all'' approach to timely disposition is not feasible. Instead the 
Commission is adopting procedures in which it will specify, in the 
order instituting proceedings, a deadline for completion of the hearing 
process and the issuance of an initial decision. In every non-settled 
administrative proceeding, the Commission's Order Instituting 
Proceedings will specify the maximum time for completion of the hearing 
and issuance of the initial decision. This deadline will be either 120, 
210, or 300 days, in the Commission's discretion, after consideration 
of the type of proceeding, the complexity of the matter, and its 
urgency. Certain commenters expressed concern that setting one time 
period with only an outside deadline for the issuance of an initial 
decision by the hearing officer would create an irresistible incentive 
for the hearing officer to set very short timelines for the litigants 
to prepare for hearing and for post hearing briefing, and to reserve 
the majority of the overall time period for the hearing officer to 
draft the initial decision.\1\ In response to this concern, the 
Commission has provided in Rule 360(a)(2), that each of these periods 
is further broken down into three parts to ensure fairness to both the 
litigants and the administrative law judges by providing sufficient 
time: (1) For the litigants and the judge to prepare for hearing, (2) 
for the litigants to obtain the transcript and prepare briefs, and (3) 
for the administrative law judge to prepare an initial decision.
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    \1\ See comments on the Section of Business Law of the American 
Bar Association at 3.
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    As provided in Rule 360(a)(3), if during the proceeding the 
presiding hearing officer were to decide that the proceeding could not 
be concluded in the time specified, the hearing officer could request 
an extension of the stated deadline. To obtain an extension, the 
hearing officer would first consult with the Chief Administrative Law 
Judge (ALJ). If the Chief ALJ concurs in the need for an extension, the 
Chief ALJ would file a motion with the Commission on behalf of the 
hearing officer explaining why circumstances require an extension and 
specifying the length of the extension. An extension could be granted 
by the Commission, in its discretion, on the basis of the motion filed 
by the Chief ALJ. Parties to the proceeding would be provided copies of 
the motion and could separately or jointly file in support of or in 
opposition to the request. Any such motion by the Chief ALJ would have 
to be filed no later than thirty days prior to the expiration of the 
time period specified in the order instituting proceedings.
    To complement this new procedure, the Commission has amended Rule 
161 to make explicit a policy of strongly disfavoring extensions, 
postponements or adjournments except in circumstances where the 
requesting party makes a strong showing that the denial of the request 
or motion would substantially prejudice their case. This amendment to 
Rule 161 effects a

[[Page 35788]]

significant change in administrative cease-and-desist proceedings. 
Section 21C(b) of the Securities Exchange Act of 1934 (and parallel 
provisions in the other Federal securities laws) requires that the 
notice instituting proceedings ``shall fix a hearing date not earlier 
than 30 days nor later than 60 days after service of the notice unless 
an earlier or a later date is set by the Commission with the consent of 
any respondent so served.'' Under current practice, parties routinely 
request extensions of the 60-day deadline, and the hearing officers 
routinely grant such requests. To the extent that the Commission has 
chosen a timeline under which the hearing would occur beyond the 
statutory 60-day deadline, the amendment exempts these requests from 
the policy of strongly disfavoring such requests, absent a strong 
showing of substantial prejudice. This would typically be the case 
under both the 300-day and 210-day timelines articulated in new Rule 
360(a)(2).
    We requested comment on the impact of the proposed changes to the 
scheduling of cease and desist proceeding hearings. The Commission 
received very few comments on the proposal. However, most of the 
comments were supportive.\2\ Certain commenters did express concern 
that respondents will have less time to meet the charges against 
them.\3\ In response to this concern, the Commission has amended Rule 
230(d) to provide for earlier production of the Commission staff's 
investigative record.
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    \2\ See comments of NASD and Mary L. Schapiro at 2 (``NASD staff 
believes that the proposed deadlines contained in the Release are an 
appropriate mechanism to focus the parties and ALJs on achieving 
timely resolution of cases.''). See also comments of Barbara 
Mortensen and John Polanskey, two individual investors who wrote 
separately to support the proposal. (``Please move toward all rule 
changes that will improve the timeliness of your administrative 
proceedings * * *.'' Polanskey at 1.)
    \3\ See comments of Corporation, Finance, and Securities Law 
Section, District of Columbia Bar at 1, 4-8. See also comments of 
the Section of Business Law of the American Bar Association at 3.
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    In addition to the adopted amendments to the Commission's Rules of 
Practice, the Commission has provided guidance to its staff that they 
should not seek or support extensions or stays not consistent with the 
standards set forth above. Similarly, staff have been instructed to 
adopt new procedures to ensure that settlement negotiations do not 
delay the hearing process. These procedures are consistent with those 
described in Rule 161(c)(2). Under that rule, if the Commission staff 
and one or more respondents in the proceeding file a joint motion 
notifying the hearing officer that they have agreed in principle to a 
settlement on all major terms, then the hearing officer shall stay the 
proceeding as to the settling respondent(s), or in the discretion of 
the hearing officer as to all respondents, pending completion of 
Commission consideration of the settlement offer. Any such stay will be 
contingent upon: (1) The settling respondent(s) submitting to the 
Commission staff, within fifteen business days of the stay, a signed 
offer of settlement in conformance with Rule 240, and (2) within twenty 
business days of receipt of the signed offer, the staff submitting the 
settlement offer and accompanying recommendation to the Commission for 
consideration. If the parties fail to meet either of these deadlines, 
or if the Commission rejects the offer of settlement, the hearing 
officer must be promptly notified and, upon notification of the hearing 
officer, the stay shall lapse and the proceeding will continue.
    Because unnecessary delays may result from multiple ``agreements in 
principle'' that do not result in an actual signed offer, this 
procedure will be limited. In the circumstance where (1) a hearing 
officer has granted a stay because the parties have ``agreed in 
principle to a settlement,'' (2) the agreement in principle does not 
result in the submission of a signed settlement offer in conformance 
with Rule 240 within 15 business days of the stay, and (3) the stay 
lapses, the ALJ will not be required to grant another stay related to 
the settlement process until both parties have notified the ALJ in 
writing that a signed settlement offer has been prepared, received by 
the enforcement staff, and will be submitted to the Commission.
    Finally, the Commission recognizes that it too must shoulder 
responsibility for delays in its appellate review process. In fact, 
some comment letters suggested that delay in the Commission's appellate 
review is a more significant problem than delay in the hearing process. 
Accordingly, during the past year, the Commission has changed certain 
internal processes to reduce delay in its deliberations and 
substantially reduce the time taken to complete its appellate review 
duties. Accordingly, the Commission has amended Rule 900, reducing the 
guideline for issuance of Commission opinions from eleven months to 
seven months from the date of an appeal.
    As part of this initiative to expedite appellate review, the 
Commission has amended Rule 450 to provide that opening briefs must be 
filed within 30 days of the date of a briefing schedule order rather 
than the current 40 days.
    Any and all deadlines and timelines established by these amendments 
to the Commission's Rules of Practice confer no substantive rights on 
respondents.

II. Administrative Procedure Act and Regulatory Flexibility Act

    The Commission finds, in accordance with the Administrative 
Procedure Act, 5 U.S.C. 553(b)(3)(A), that this revision relates solely 
to agency organization, procedures, or practice. It is therefore not 
subject to the provisions of the Administrative Procedure Act requiring 
notice, opportunity for public comment, and publication. The Regulatory 
Flexibility Act, 5 U.S.C. 601 et seq., also does not apply. 
Nonetheless, the Commission previously determined that it would be 
useful to publish the proposed rule changes for notice and comment 
before adoption. The Commission has considered all comments received.

III. Statutory Basis and Text of Amendment

    These rule amendments are adopted pursuant to section 19 of the 
Securities Act, 15 U.S.C. 77s; section 23 of the Securities Exchange 
Act, 15 U.S.C. 78w; section 20 of the Public Utility Holding Company 
Act, 15 U.S.C. 79t; section 319 of the Trust Indenture Act, 15 U.S.C. 
77sss; sections 38 and 40 of the Investment Company Act, 15 U.S.C. 80a-
37 and 80a-39; and section 211 of the Investment Advisers Act, 15 
U.S.C. 80b-11.

List of Subjects in 17 CFR Part 201

    Administrative practice and procedure.


0
For the reasons set forth in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

PART 201--RULES OF PRACTICE

0
1. The authority citation for part 201, subpart D, is revised to read 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 
78c(b), 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78s, 78u-2, 78u-
3, 78v, 78w, 79c, 79s, 79t, 79z-5a, 77sss, 77ttt, 80a-8, 80a-9, 80a-
37, 80a-38, 80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 
and 80b-12.


0
2. Section 201.161 is amended by:
0
a. Revising the phrase ``paragraph (b)'' in paragraph (a) to read 
``paragraphs (b) and (c)'';
0
b. Revising the introductory text of paragraph (b) and paragraph 
(b)(1);
0
c. Redesignating paragraph (b)(2) as paragraph (c)(1); and

[[Page 35789]]

0
d. Adding new paragraph (b)(2) and paragraph (c)(2).
    The revisions and additions read as follows:


Sec.  201.161  Extensions of time, postponements and adjournments.

* * * * *
    (b) Considerations in determining whether to extend time limits or 
grant postponements, adjournments and extensions. (1) In considering 
all motions or requests pursuant to paragraph (a) or (b) of this 
section, the Commission or the hearing officer should adhere to a 
policy of strongly disfavoring such requests, except in circumstances 
where the requesting party makes a strong showing that the denial of 
the request or motion would substantially prejudice their case. In 
determining whether to grant any requests, the Commission or hearing 
officer shall consider, in addition to any other relevant factors:
    (i) The length of the proceeding to date;
    (ii) The number of postponements, adjournments or extensions 
already granted;
    (iii) The stage of the proceedings at the time of the request;
    (iv) The impact of the request on the hearing officer's ability to 
complete the proceeding in the time specified by the Commission; and
    (v) Any other such matters as justice may require.
    (2) To the extent that the Commission has chosen a timeline under 
which the hearing would occur beyond the statutory 60-day deadline, 
this policy of strongly disfavoring requests for postponement will not 
apply to a request by a respondent to postpone commencement of a cease 
and desist proceeding hearing beyond the statutory 60-day period.
    (c)(1) * * *
    (2) Stay pending Commission consideration of offers of settlement. 
(i) If the Commission staff and one or more respondents in the 
proceeding file a joint motion notifying the hearing officer that they 
have agreed in principle to a settlement on all major terms, then the 
hearing officer shall stay the proceeding as to the settling 
respondent(s), or in the discretion of the hearing officer as to all 
respondents, pending completion of Commission consideration of the 
settlement offer. Any such stay will be contingent upon:
    (A) The settling respondent(s) submitting to the Commission staff, 
within fifteen business days of the stay, a signed offer of settlement 
in conformance with Sec.  201.240; and
    (B) Within twenty business days of receipt of the signed offer, the 
staff submitting the settlement offer and accompanying recommendation 
to the Commission for consideration.
    (ii) If the parties fail to meet either of these deadlines or if 
the Commission rejects the offer of settlement, the hearing officer 
must be promptly notified and, upon notification of the hearing 
officer, the stay shall lapse and the proceeding will continue. In the 
circumstance where:
    (A) A hearing officer has granted a stay because the parties have 
``agreed in principle to a settlement;''
    (B) The agreement in principle does not materialize into a signed 
settlement offer within 15 business days of the stay; and
    (C) The stay lapses, the hearing officer will not be required to 
grant another stay related to the settlement process until both parties 
have notified the hearing officer in writing that a signed settlement 
offer has been prepared, received by the Commission's staff, and will 
be submitted to the Commission.
    (iii) The granting of any stay pursuant to this paragraph (c) shall 
not affect any deadline set pursuant to Sec.  201.360.

0
3. Section 201.230 is amended by revising the phrase ``14 days after 
the respondent files an answer'' to ``7 days after service of the order 
instituting proceedings'' in the first sentence of paragraph (d).

0
4. Section 201.360 is amended by:
0
a. Redesignating paragraph (a) as paragraph (a)(1); and
0
b. Adding paragraphs (a)(2) and (a)(3).
    The additions read as follows:


Sec.  201.360  Initial decision of hearing officer.

    (a)(1) * * *
    (2) Time period for filing initial decision. In the order 
instituting proceedings, the Commission will specify a time period in 
which the hearing officer's initial decision must be filed with the 
Secretary. In the Commission's discretion, after consideration of the 
nature, complexity, and urgency of the subject matter, and with due 
regard for the public interest and the protection of investors, this 
time period will be either 120, 210 or 300 days from the date of 
service of the order. Under the 300-day timeline, the hearing officer 
shall issue an order providing that there shall be approximately 4 
months from the order instituting the proceeding to the hearing, 
approximately 2 months for the parties to obtain the transcript and 
submit briefs, and approximately 4 months after briefing for the 
hearing officer to issue an initial decision. Under the 210-day 
timeline, the hearing officer shall issue an order providing that there 
shall be approximately 2\1/2\ months from the order instituting the 
proceeding to the hearing, approximately 2 months for the parties to 
review the transcript and submit briefs, and approximately 2\1/2\ 
months after briefing for the hearing officer to issue an initial 
decision. Under the 120-day timeline, the hearing officer shall issue 
an order providing that there shall be approximately 1 month from the 
order instituting the proceeding to the hearing, approximately 2 months 
for the parties to review the transcript and submit briefs, and 
approximately 1 month after briefing for the hearing officer to issue 
an initial decision. These deadlines confer no substantive rights on 
respondents.
    (3) Motion for extension. In the event that the hearing officer 
presiding over the proceeding determines that it will not be possible 
to issue the initial decision within the specified period of time, the 
hearing officer should consult with the Chief Administrative Law Judge. 
Following such consultation, the Chief Administrative Law Judge may 
determine, in his or her discretion, to submit a motion to the 
Commission requesting an extension of the time period for filing the 
initial decision. This motion must be filed no later than 30 days prior 
to the expiration of the time specified in the order for issuance of an 
initial decision. The motion will be served upon all parties in the 
proceeding, who may file with the Commission statements in support of 
or in opposition to the motion. If the Commission determines that 
additional time is necessary or appropriate in the public interest, the 
Commission shall issue an order extending the time period for filing 
the initial decision.
* * * * *

0
5. Section 201.450 is amended by revising the phrase ``within 40 days'' 
to read ``within 30 days'' in the second sentence of paragraph (a).

0
6. Section 201.900 is amended by:
0
a. Removing paragraph (a)(1)(i);
0
b. Redesignating paragraphs (a)(1)(ii) through (a)(1)(iv) as paragraphs 
(a)(1)(i) through (a)(1)(iii); and
0
c. Revising newly redesignated paragraph (a)(1)(iii).
    The revision reads as follows:


Sec.  210.900  Informal Procedures and Supplementary Information 
Concerning Adjudicatory Proceedings.

    (a) * * *
    (1) * * *
    (iii) Ordinarily, a decision by the Commission with respect to an 
appeal from the initial decision of a hearing officer, a review of a 
determination by

[[Page 35790]]

a self-regulatory organization, or a remand of a prior Commission 
decision by a court of appeals should be issued within seven months 
from the date the petition for review, application for review, or 
mandate of the court is filed, unless the Commission determines that 
the matter presents unusual complicating circumstances, in which case a 
decision by the Commission on the matter may be issued within 11 months 
from the date the petition for review, application for review, or 
mandate of the court is filed. The Commission retains discretion to 
take additional time to dispose of an appeal from the initial decision 
of a hearing officer, a review of a determination by a self-regulatory 
organization, or a remand of a prior Commission decision by a court of 
appeals when the Commission determines that extraordinary facts and 
circumstances of the matter so require. The deadlines in Sec.  201.900 
confer no substantive rights on the parties.
* * * * *

    Dated: June 11, 2003.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 03-15262 Filed 6-16-03; 8:45 am]
BILLING CODE 8010-01-U