Administrative Law Judges: Comparison of SEC and CFTC Programs (Letter
Report, 11/14/95, GAO/GGD-96-27).
Pursuant to a congressional request, GAO compared various aspects of the
Securities and Exchange Commission's (SEC) and the Commodity Futures
Trading Commission's (CFTC) administrative law judge (ALJ) programs.
GAO found that: (1) ALJ programs at SEC and CFTC are similar in
function, size, case-processing time, and results of appeals for
enforcement cases; (2) SEC ALJ do not have the same authority as CFTC
ALJ in hearing reparations cases; (3) the average processing time for
initial decisions concerning enforcement cases is 9 months longer at
CFTC than at SEC and 4 months longer at SEC for appeal decisions; (4) a
SEC task force has proposed changes to SEC procedures in order to cut
processing time for ALJ cases; and (5) SEC has reduced the sanctions
imposed in 70 percent of its cases and CFTC has reduced sanctions
imposed in 80 percent of its cases.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-27
TITLE: Administrative Law Judges: Comparison of SEC and CFTC
Programs
DATE: 11/14/95
SUBJECT: Securities
Securities regulation
Reparations
Administrative law judges
Fines (penalties)
Administrative remedies
Jurisdictional authority
Appellate procedure
Sanctions
Administrative hearings
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Subcommittee on Oversight and
Investigations, Committee on Commerce, House of Representatives
November 1995
ADMINISTRATIVE LAW JUDGES -
COMPARISON OF SEC AND CFTC
PROGRAMS
GAO/GGD-96-27
Administrative Law Judges
(233397)
Abbreviations
=============================================================== ABBREV
ALJ - Administrative Law Judge
CEA - Commodity Exchange Act
CFTC - Commodity Futures Trading Commission
OPM - Office of Personnel Management
SEC - Securities and Exchange Commission
Letter
=============================================================== LETTER
B-259884
November 14, 1995
The Honorable John D. Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives
Dear Mr. Dingell:
This report responds to your request that we compare various aspects
of the Securities and Exchange Commission's (SEC) and the Commodity
Futures Trading Commission's (CFTC) Administrative Law Judge (ALJ)
programs. Your concerns were based, in part, on press reports
indicating that CFTC routinely reverses or scales back penalties
imposed by its ALJs. Generally, SEC and CFTC ALJs serve as hearing
officers in enforcement cases involving alleged violations of
securities and futures laws. They also provide rulings on other
administrative issues. The primary objective of this report is to
compare ALJ program operations at SEC and CFTC, including
case-processing times and results of appeals of ALJ decisions.
Detailed answers to your specific questions concerning issues such as
budgets, staffing, and caseload statistics for both agencies' ALJ
operations are included in appendixes I to III.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The ALJ programs at SEC and CFTC were similar in function, size,
case-processing time, and results of appeals when their operations
involving enforcement cases were considered. SEC's ALJs do not have
the same authority as CFTC's ALJs to hear cases seeking damages on
behalf of customers, called reparations cases.\1 To make the program
comparison meaningful, we included in our review only enforcement
cases for both agencies. While the total processing times for these
cases from hearings through appeals were about the same at both
agencies--averaging between 3.5 and 4 years--the average processing
times for initial decisions was 9 months longer at CFTC than at SEC,
and 4 months longer at SEC than at CFTC for appeal decisions. In an
effort to cut total processing time for ALJ cases to less than 2
years, an SEC task force report proposed changes to SEC's procedures,
which it is implementing. CFTC had not done a similar study, but
because of the program similarity, the kinds of changes SEC makes, if
successful, may also be useful to CFTC's ALJ program. The press
reports that led to this request and a May 1992 hearing\2 about CFTC
reversing its ALJ decisions primarily involved reparations cases.
For enforcement cases, SEC and CFTC changed sanctions in about 40
percent of the appeal decisions. Of those changed sanctions, SEC
reduced the sanctions imposed in about 70 percent of the cases, and
CFTC reduced sanctions imposed in about 80 percent of its cases.
--------------------
\1 According to CFTC officials, CFTC and the Packers and Stockyards
Administration in the Department of Agriculture are the only
government agencies with reparations programs.
\2 Hearing before the Subcommittee on Conservation, Credit, and Rural
Development, House Committee on Agriculture, May 19, 1992.
BACKGROUND
------------------------------------------------------------ Letter :2
The ALJ position in federal agencies, originally called Hearing
Examiner, was created by the Administrative Procedure Act of 1946,
Public Law 79-404. The purpose of the act was to ensure fairness and
due process in federal agency rulemaking and administrative
adjudication proceedings and provide those whose affairs are
controlled or regulated by federal government agencies an opportunity
for a "formal" hearing on the record before an impartial hearing
officer or ALJ. The act sought to ensure the ALJs' judicial
capability and objectivity by precluding agencies from evaluating the
ALJs' performance and by assigning responsibility for determining
their qualifications, compensation, and tenure to the U.S. Civil
Service Commission, later the Office of Personnel Management (OPM).
Within OPM, that responsibility resides within the Office of
Administrative Law Judges.
As of April 1995, OPM reported that there were about 1,320 ALJs
employed in 32 agencies. SEC and CFTC each had three positions\3
for ALJs who preside over administrative proceedings against
securities or futures professionals whom the agencies alleged have
violated securities or commodities laws, regulations, or rules. Each
agency has specialized Rules of Practice (17 C.F.R. sections 201.01
- 201.29 for SEC and 17 C.F.R. sections 10.01-109 and part 3 for
CFTC) that govern these proceedings.
When agency investigations indicate that securities or futures
industry professionals may have committed violations that warrant
sanctions, enforcement staff are to prepare charges against the
alleged violators and obtain approval from their respective
commissions to issue the charges. The commissions may pursue these
charges in federal district courts or in administrative hearings.
The parties to the proceedings are typically the SEC or CFTC and each
person or firm named as a respondent in the complaint.
In administrative proceedings, after finding violations of the
securities or commodities acts or rules, ALJs are to decide which, if
any, sanctions are warranted against the alleged violators, such as a
bar\4 or revocation of their professional registration. ALJs'
responsibilities include ruling on preliminary motions; conducting
prehearing conferences; controlling the course of hearings, which may
include written and/or oral testimony and cross-examination; and
preparing and issuing initial or recommended decisions--written
findings of law and fact--and resulting conclusions.
All parties to the administrative hearings have the right to file an
appeal of ALJ decisions\5 with the appropriate commission\6
based on the facts of the case, the law in question, or the
reasonableness of the penalties assessed. After the commission
issues a decision on the appeal, the respondent can seek judicial
review by the U.S. Court of Appeals and the U.S. Supreme Court.
--------------------
\3 One position at CFTC was vacant as of March 1995.
\4 A bar restricts or prohibits a broker's activities by function,
length of time, or both.
\5 Civil injunctive actions, which are filed in U.S. District Court
and heard by a federal judge rather than the ALJs, are beyond the two
commissions' jurisdiction. Appeals of injunctive cases are heard in
the U.S. Court of Appeals.
\6 Each agency has five commissioners appointed by the President and
staff offices organized by various agency functions, such as
enforcement and market regulation.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
To compare SEC and CFTC ALJ programs, we reviewed the Administrative
Procedure Act of 1946, OPM's Administrative Law Judge Program
Handbook, and SEC and CFTC ALJ policies and procedures. We also
reviewed the February 1993 report by the SEC task force on
administrative proceedings, Fair and Efficient Administrative
Proceedings, and interviewed officials at SEC and CFTC. We also
contacted officials at OPM for general information on ALJ programs.
Appendix I provides details on the results of our comparison, and
appendix II provides a detailed description of each agency's
administrative hearings and appeals process.
To provide statistical data on the cases heard and their outcomes, we
reviewed summary documents for all enforcement cases initiated by the
agencies' enforcement divisions for which the ALJs had made initial
decisions during fiscal years 1989 through 1993. To determine the
extent to which ALJ rulings are accepted or overturned by SEC and
CFTC, we did a similar review of enforcement cases for which the
agencies had issued appeal decisions. We determined the number and
types of cases that the commissions reviewed on appeal, and sanctions
levied in the original and appeal decisions, if they differed. In
cases where this information was unavailable in the summary
documents, we asked agency officials for additional documentation.
We included only administrative enforcement cases for which appeal
decisions had been made during fiscal years 1989 through 1993. (See
app. III.)
We did our work between February 1993 and April 1995 in Washington,
D.C., in accordance with generally accepted government auditing
standards. We obtained oral comments from SEC and CFTC on a draft of
this report. Their comments are discussed on page 5.
FOR ENFORCEMENT CASES, SEC AND
CFTC ALJ PROGRAMS ARE SIMILAR
------------------------------------------------------------ Letter :4
Except for reparations cases which, only CFTC ALJs rule on, ALJs at
CFTC and SEC generally performed similar functions--hearing
enforcement cases involving violations of commodities or securities
laws, including ruling on administrative procedural issues. CFTC
estimated that its ALJ budget, excluding reparations cases, for
fiscal year 1994 was $307 thousand.\7 SEC reported that its ALJ
budget was $585 thousand.
SEC had four and CFTC had three ALJs on board during the period
covering our review--fiscal years 1989 through 1993. The agencies
select judges from a register of qualified applicants tested and
screened by OPM. The judges serving at SEC during the time of our
review averaged about the same number of years of federal service as
their counterparts at CFTC (29 years versus 28). At both agencies,
the ALJs may request training as they believe it is needed, with no
formal training requirements at either agency. (See app. I.)
The hearings and appeals processes at both agencies were similar (see
app. II), as were the times needed by both agencies to process
cases. From initiation of proceedings to appeal decisions, cases
averaged about 48 months at CFTC and 43 months at SEC. The SEC cases
reached initial decisions an average of 9 months faster than at CFTC,
while the time from initial decision to appeal decision averaged 4
months faster at CFTC than at SEC. We recognize that many variables,
such as case complexity and delaying tactics on the part of
respondents, can affect case- processing times.
Only SEC had studied the reasons for lengthy case-processing times.
An SEC task force report, Fair and Efficient Administrative
Proceedings, issued in February 1993, proposed changes to SEC's
processes, such as establishing required time frames for key
processes and improving its case-tracking system. Through these
changes, SEC hoped to reduce its total processing time to about 19
months. SEC published its new Rules of Practice incorporating the
task force recommendations in June 1995. Because its ALJ processes
are similar, if the SEC changes prove successful, CFTC may also be
able to adopt them.
Omitting CFTC cases involving reparations, the percentage of appeal
decisions that changed the amount or type of sanctions were about the
same (38 percent at CFTC versus 39 percent at SEC). Of those changed
decisions, SEC reduced the sanctions imposed in about 70 percent of
the cases, while CFTC reduced the sanctions in about 80 percent of
the cases. (See app. III, pp. 28 and 29.)
--------------------
\7 CFTC officials provided us a budget estimate, which excluded an
estimated amount allocated to reparations cases.
AGENCY COMMENTS
------------------------------------------------------------ Letter :5
We requested comments on a draft of this report from the Chairmen of
SEC and CFTC or their designees. We discussed the draft comments
with the Deputy Executive Director, CFTC on September 15, 1995, and
SEC provided technical comments from the Chief Judge of the Office of
Administrative Law Judges and the General Counsel on September 18,
1995. The SEC and CFTC officials generally concurred with the
draft's contents and conclusions. Both agencies provided us
technical comments, which we have incorporated into this report where
appropriate.
---------------------------------------------------------- Letter :5.1
We are sending copies of this report to the Chairman of the
Securities and Exchange Commission, the Chairman of the Commodity
Futures Trading Commission, and other interested parties. We will
also make copies available to others upon request.
Major contributors to this report were Michael A. Burnett, Assistant
Director; Richard L. Wilson, Senior Evaluator; and Darleen A. Wall,
Evaluator. If there are any questions about this report, please
contact me on (202) 512-8678.
Sincerely yours,
Helen H. Hsing
Associate Director
Financial Institutions and Markets Issues
COMPARISON OF SEC AND CFTC ALJ
PROGRAMS
=========================================================== Appendix I
According to OPM, an ALJ's responsibility is to develop factual
records in matters requiring consideration of technical expertise, as
opposed to common judgment; discern facts; and make fair and
impartial decisions based on those facts. The roles of the ALJs at
SEC and CFTC are similar for enforcement cases and administrative
activities, but, unlike SEC, CFTC has authority to handle reparations
cases. ALJs at both agencies render decisions in enforcement cases
brought by their Enforcement Divisions against violations of
commodities and securities rules and regulations as well as rule on
procedural issues arising during the course of the adjudicatory
procedures, such as continuances. All hearing proceedings at both
agencies are governed by the Administrative Procedure Act of 1946 and
specialized rules of practice (17 C.F.R. sections 201.01-29 for SEC
and 17 C.F.R. sections 10.01-109 and part 3 for CFTC). The length
of a hearing before an ALJ depends upon the nature of the case and
may vary from an hour to several weeks or more.
SEC's ALJ functions are governed by the provisions of the
Administrative Procedure Act, the Securities Act of 1933, the
Securities Exchange Act of 1934, the Trust Indenture Act of 1939, as
well as the Investment Advisers Act of 1940, the Investment Company
Act of 1940, and the Public Utility Holding Company Act of 1935. The
Securities Enforcement Remedies and Penny Stock Reform Act of 1990
(Remedies Act) authorized SEC to impose civil penalties in
administrative actions and to seek civil penalties in U.S. District
Court as sanctions for violations of these acts. The ALJs conduct
hearings following institution of proceedings by SEC against alleged
violators of the securities laws. At the conclusion of those
proceedings, the ALJs issue their decisions, which include any
sanctions the ALJs deem necessary.
CFTC ALJ functions are governed by the provisions of the
Administrative Procedure Act and the Commodity Exchange Act (CEA), as
amended in October 1974. ALJs at CFTC are responsible for the fair
and orderly conduct of hearings and have the authority to administer
oaths, issue subpoenas, rule on and receive evidence, examine
witnesses, regulate the course of hearings, hold prehearing
conferences, rule on motions, enter initial decisions, and certify
interlocutory appeals.\8 The ALJs decide administrative proceedings
brought by CFTC against persons or firms who are alleged to have
violated CEA or CFTC rules and regulations as well as formal
reparations proceedings for those cases involving amounts of $10,000
or more.
Unlike SEC, CFTC is authorized to accept and handle customer
complaints, called "reparations complaints," against persons or firms
registered under the CEA. If a complainant can prove a futures
industry professional has violated the CEA or a CFTC rule and thereby
proximately caused the customer financial harm, CFTC is empowered to
award monetary damages. This program is not a disciplinary forum,
and CFTC is not authorized to impose trading prohibitions or other
nonmonetary sanctions in reparations cases. However, if a registrant
fails to pay a reparations award within 15 days, his or her exchange
trading privileges and CFTC registration are automatically suspended
according to the CEA. CFTC ALJs and Hearing Officers issued 674
reparations decisions during fiscal years 1989 through 1993. We did
not include reparations cases in this review because SEC does not
have a reparations program with which to compare it.
--------------------
\8 Interlocutory appeals are appeals for decisions to be made during
a proceeding. See footnote 15, p. 19, for the specific requirements
for these appeals.
ALJ OFFICES ARE INDEPENDENT OF
INVESTIGATIVE AND PROSECUTORIAL
FUNCTIONS
--------------------------------------------------------- Appendix I:1
SEC's ALJs are under the supervision and direction of the Chief ALJ
in the Office of Administrative Law Judges, who reports directly to
the SEC Chairman. CFTC's ALJs are in the Office of Proceedings'
Hearings Section, under the supervision and direction of the Director
of the Office of Proceedings, who reports to CFTC's Deputy Executive
Director. The line of supervision and direction continues to the
Executive Director and then the CFTC Chairman. At both agencies, the
ALJs' nonadjudicatory responsibilities are subject to agency
administrative direction regarding matters such as hours of duty,
travel, office space and procedures, and staff assistance.
To maintain the independence of ALJs, the Administrative Procedure
Act requires that the ALJs not be "responsible to or subject to the
supervision or direction of any officer, employee, or agent engaged
in the performance of investigative or prosecuting functions" for the
agency. SEC and CFTC ALJs meet this requirement. The Enforcement
Division at each agency handles the investigative and prosecuting
functions.
BUDGET AND STAFFING
--------------------------------------------------------- Appendix I:2
We compared budget and staffing levels for similar functions in the
ALJ offices at both agencies. Both agencies were authorized four ALJ
positions for fiscal years 1989 and 1990. In fiscal year 1991, CFTC
decreased its ALJ positions to three. However, their ALJ staffs
differ somewhat in size and composition, due in part to being
organized differently. SEC's seven-position ALJ office operated as a
separate entity. In contrast, the ALJ positions at CFTC are part of
CFTC's Office of Proceedings and shared six to eight support staff
with the Hearings Section.
To compare SEC and CFTC's programs, we asked both agencies to provide
us information on their budgets.\9 We asked CFTC officials to
subtract from their budget estimate the costs associated with
reparations cases, since only CFTC ALJS rule on these cases. SEC
reported that its ALJ budget for fiscal year 1994 was $585,000. CFTC
estimated that its ALJ budget for fiscal year 1994 was $307,000.
SEC had four ALJs during the 1989 to 1993 time period from which we
selected cases for review. During 1994, the ALJ office consisted of
seven positions--three ALJs, a law clerk, two paralegal specialists,
and one secretary. For budgetary purposes, SEC's ALJs fall under the
agency's Legal and Economic Services Program, which furnishes legal,
adjudicatory, and economic analyses to SEC on a wide variety of
matters. SEC figures showed that the number of administrative
proceedings initiated grew from 155 in fiscal year 1989 to 271 in
fiscal year 1994, about a 75 percent increase. Table I.1 shows SEC's
ALJ personnel and travel budget, and table I.2 show SEC's staffing.
Table I.1
SEC ALJ Staff Budget, Fiscal Years 1989
Through 1994
(Dollars in thousands)
FY FY FY FY FY FY
Budget Category 1989 1990 1991 1992 1993 1994
---------------------- ------ ------ ------ ------ ------ ------
Compensation $348 $361 $434 $497 $505 $494
Benefits 51 55 68 80 79 71
Travel 9 19 13 12 17 20
======================================================================
Total $408 $435 $515 $589 $601 $585
----------------------------------------------------------------------
Source: SEC.
Table I.2
SEC ALJ Staffing, Fiscal Years 1989
Through 1994
(Number of Positions)
FY FY FY FY FY FY
Job category 1989 1990 1991 1992 1993 1994
---------------------------- ----- ----- ----- ----- ----- -----
ALJ 4 4 4 4 4 3
Law clerk 0 0 1 1 1 1
Paralegal specialist 0 0 0 0 0 1
Secretary 2 2 2 2 2 2
======================================================================
Total 6 6 7 7 7 7
----------------------------------------------------------------------
Source: SEC.
According to CFTC officials, during most of fiscal years 1989 through
1993, CFTC had three ALJs. By fiscal year 1994, CFTC's Office of
Proceedings had two ALJs (one of the three ALJ positions was vacant)
and six support staff--three attorney-advisors, two legal
technicians/administrative staff, and one law clerk--who also did
other work in the Hearings Section of the Office of Proceedings. For
comparison purposes, the CFTC Budget Office computed the budget
figures shown in table I.3. They used a multiplier that represents
their estimate of the percentage of staff time and expenses spent on
enforcement cases, eliminating that portion of the budget they
believe was not attributable to enforcement cases. An Office of
Proceedings official told us that the percentages shown in table I.3
for each fiscal year are estimates of the percentages of staff-time
directed toward enforcement cases during the fiscal years covered by
this report. Table I.4 shows actual staffing.
Table I.3
CFTC ALJ Staff Budget, Fiscal Years 1989
Through 1994 (Estimated)
(Dollars in thousands)
FY FY FY FY FY FY
Budget Category 1989 1990 1991 1992 1993 1994
---------------------------------- ---- ---- ---- ---- ---- ----
Estimated percentage of 30% 40% 50% 60% 60% 60%
actual staffing devoted
to enforcement cases
Compensation $158 $214 $287 $280 $335 $242
Benefits 27 39 53 54 67 49
Travel 10 15 11 15 7 16
======================================================================
Total $195 $268 $351 $349 $409 $307
----------------------------------------------------------------------
Source: CFTC.
Table I.4
CFTC ALJ Staffing, Fiscal Years 1989
Through 1994
(Number of Positions)
FY FY FY FY FY FY
Job category 1989 1990 1991 1992 1993 1994
---------------------------- ----- ----- ----- ----- ----- -----
ALJ 4 4 3 3 3 2
Attorney-advisor 3 2 4 3 4 3
Legal technician 3 3 3 2 2 2
Legal clerk 1 0 0 0 0 0
Law clerk 1 2 0 1 1 1
======================================================================
Total 12 11 10 9 10 8
----------------------------------------------------------------------
Source: CFTC.
--------------------
\9 We relied on data supplied by both agencies and did not
independently verify these data. CFTC officials arrived at their
budget estimate by calculating the percentage of ALJ administrative
staff time (ALJ administrative staff worked in the Office of
Proceedings as well) and expenses dedicated to enforcement related
activities, as indicated in the CFTC budget figures in table I.3.
Because SEC had only six cases that were not enforcement cases, we
did not ask SEC to adjust their budget figure and eliminate the costs
associated with these cases.
BACKGROUND, EXPERIENCE, AND
TRAINING
--------------------------------------------------------- Appendix I:3
SEC and CFTC select their ALJs from a register, provided by OPM, of
qualified applicants for the positions. The Administrative Procedure
Act of 1946 gave OPM the responsibility\10 for determining the
qualifications of federal ALJs. OPM ascertains that applicants have
met its minimum qualifications for the ALJ positions\11 and rates and
ranks them on the quality of their experience and other factors, such
as written demonstrations, panel interviews, and personal reference
inquiries, before listing them on the register.
The ALJs presiding over SEC administrative proceedings in fiscal year
1993 had served an average of 20 years as ALJs and averaged 29 years
of federal service, while the CFTC ALJs averaged 14 years as ALJs and
28 years of federal service. Most had previously held ALJ positions
in other federal agencies, and all had served federal or state
agencies in other capacities. Two of SEC's ALJs had previously held
management positions at SEC\12 --one as Assistant Regional
Administrator of a regional office, and one as an Associate
Director--and none of CFTC's ALJs had previously served the agency in
other capacities.
Regarding ALJ training, OPM's Administrative Law Judge Program
Handbook states that it strongly encourages continuing education
programs to help ALJs keep current in new developments in their field
and profession. However, officials at SEC and CFTC told us that the
agencies also have no specific training requirements for their ALJs,
leaving the ALJs to request training as desired. Agency officials
indicated that all of the ALJs had taken at least one training course
during the 5-year period we reviewed.
--------------------
\10 The act conferred responsibility to the U.S. Civil Service
Commission, predecessor to the OPM.
\11 OPM's minimum qualifications for the position of ALJ require that
all applicants must (1) be attorneys with a minimum of 7 years of
administrative law and/or trial experience involving formal
administrative hearing proceedings before local, state, or federal
administrative agencies, courts, or other administrative bodies and
(2) have had either 1 year of experience characteristic of the next
grade level below that of the position applied for or 2 years of
experience characteristic of the grade level two levels below that of
the position applied for.
OPM rates applicants on the quality of their experience in various
areas, such as analytical and decisionmaking ability, oral
communications, judicial temperament, writing ability, rules of
evidence, and trial procedures as well as on the results of a panel
interview and personal reference inquiries, before placing them on a
register of eligible applicants from which OPM refers them to
agencies wishing to fill vacancies. ALJ appointments are permanent
career appointments, requiring no probationary or conditional
service.
\12 Both ALJs with previous SEC experience are no longer with SEC.
DESCRIPTION OF THE SEC AND CFTC
ADMINISTRATIVE HEARINGS AND
APPEALS PROCESS
========================================================== Appendix II
Historically, SEC and CFTC have used two types of enforcement actions
against those who violate the securities and commodities laws: (1)
civil injunctive action in U.S. District Court or (2) administrative
proceedings before an agency ALJ. Civil injunctions are court orders
that prohibit existing or imminent violations of the securities or
commodities laws and that sometimes provide other equitable relief,
such as a freeze on funds to protect the investing public or an
accounting and disgorgement\13 of illegal profits. Violation of
civil injunctions can result in civil or criminal contempt charges
that subject violators to fines or imprisonment.
Administrative proceedings can be brought against regulated entities
and persons associated with such entities. The Remedies Act of 1990
expanded SEC's authority to bring administrative proceedings against
persons not associated with regulated entities as well. ALJs can
impose cease and desist orders and other types of sanctions, such as
suspension from doing business, monetary penalties, limitations of
activities, bar from doing further business or from participation in
the securities industry, and disgorgement of illegal profits (SEC
only). SEC and CFTC may also refer an investigation to the
Department of Justice for criminal prosecution or to a state or local
agency or a self-regulatory agency for their appropriate action.
SEC and CFTC enforcement staff investigate possible violations of
securities and commodities laws and make recommendations to their
commissions for enforcement action. Staff evaluate information
obtained from many sources to decide whether further investigation is
warranted. These sources include public complaints; inspections of
broker-dealer books and records; review and analysis of market
surveillance and news media data; and referrals from other divisions
within their agencies and federal, state, or local agencies. An
investigation may constitute a routine examination into the conduct
of one person or entity or a complex inquiry into an elaborate scheme
involving many persons and entities. The investigation may or may
not result in enforcement actions seeking sanctions.
Enforcement staff must obtain their respective commission's approval
for each specific enforcement action, such as naming each proposed
respondent and citing alleged violations, after which the staff are
to file the official complaint in the appropriate venue. For
administrative actions, at any time after charges have been issued
and before the ALJ's initial decision, the agency and the respondents
may negotiate a consent agreement whereby the respondents agree to
accept the sanctions and remedies sought by the agency without
admitting or denying the charges. Acceptance of this settlement by
all parties ends the administrative proceedings.
The administrative proceedings processes at SEC and CFTC are similar.
As discussed in appendix 1, these proceedings are governed by the
Administrative Procedure Act of 1946 and by 17 C.F.R. part 201 at
SEC and 17 C.F.R. parts 10 and 3 at CFTC. The regulations cover
procedures such as deadlines and filings. Neither agency has
separate written guidelines for the conduct of proceedings beyond the
applicable C.F.R. requirements. The proceedings process for
enforcement cases is described in the following section.
--------------------
\13 Disgorgements are awards made to return ill-gotten gains to
affected investors or to the Treasury.
HEARINGS PROCEEDINGS
-------------------------------------------------------- Appendix II:1
An administrative adjudicatory proceeding is a judicial-type
proceeding, which leads to the formulation of a final order on the
outcome of the proceeding. The actual parties to an enforcement
adjudicatory proceeding are the Division of Enforcement at SEC or
CFTC and each party named as a respondent in the complaint. The
agency rules on appeals of administrative enforcement cases,
functioning as an appellate adjudicatory body guided by legal
precedents, and considers each commissioner's individual
interpretation of the applicable legal principles.\14 The
commissions' decisions are subject to judicial review by federal
circuit courts of appeal.
Administrative proceedings begin when the agency issues a document,
called "order instituting proceedings" (order) by SEC and "complaint
and notice of hearing" (complaint) by CFTC. The document sets forth
facts that, if proved, would, in the view of the agency, constitute
violations of commodities or securities laws and, where appropriate,
directs a respondent when to file an answer. Enforcement proceedings
as well as proceedings to deny or condition registration as an
industry professional always begin with this order or complaint.
Proceedings in which a hearing will be held are assigned to an ALJ
who will preside over the proceeding and prepare an initial decision
at its conclusion. The order or complaint generally sets forth
alleged violations of commodities or securities laws that are based
upon the results of the Division of Enforcement's investigation or
upon information brought to its attention and the Division's view of
the law. Following receipt of the order or complaint, each
respondent must file an answer stating whether they admit, deny, or
do not have and are unable to obtain sufficient information to admit
or deny each allegation. Failure to file a timely answer can result
in a default judgment.
At SEC, cases are forwarded to the Chief ALJ, who issues the order
designating the time and place of the hearing and determines which
law judge will preside over the case. The CFTC's Director of the
Office of Proceedings assigns the cases to ALJs, who handle all
aspects of the hearing. Both agencies generally assign cases by
"rotation so far as practicable," a standard prescribed by 5 U.S.C.
3105.
The hearing may be held at the respective commission's office in
Washington, D.C., a regional office, or other locations selected by
the ALJ, with due regard for the public interest and the convenience
and necessity of the participants or their representatives. The
hearings are public; however, a respondent or affected witness may
request the ALJ to direct that certain documents or testimony be kept
private to prevent unwarranted disclosure of trade secrets, sensitive
commercial or financial information, or an unwarranted invasion of
personal privacy.
Prehearing motions may be filed and prehearing conferences may be
held to resolve various procedural and/or substantive matters to
facilitate a fair and expeditious hearing. After any motions and
conferences, the ALJ may issue a prehearing memorandum indicating any
agreements reached and any procedural determinations made.
Rules also provide procedures for depositions, requests for
admissions, and issuance of subpoenas. Prehearing discovery, which
involves the production of documents before the hearing, is addressed
by CFTC rules, which require the Enforcement Division to disclose
specified investigatory materials to the respondents unless otherwise
ordered by the ALJ or the commission. Though not required by SEC
rules, the parties may voluntarily exchange documents, or the staff
may turn over relevant portions of the investigative record that are
not privileged or otherwise protected.
Following completion of discovery, the ALJ will ordinarily schedule a
hearing on the merits of the case. SEC rules permit disposition of
the case without a hearing by either a motion for summary judgment or
a shortened procedure for the submission of direct evidence.
At the hearing, the respondents may appear personally or be
represented by counsel. The rules stipulate notification
requirements, rights to legal representation, presentation of
evidence, and the right to request appropriate relief.\15
The ALJ presides over the hearing. The Federal Rules of Evidence
serve as a general guide for the admission of evidence. All
witnesses testify under oath or affirmation administered by the ALJ
and may be cross-examined by adverse parties. The ALJ, at his or her
discretion, may permit cross-examination on any relevant matter
without limitation to the scope of the direct examination. At SEC,
the ALJ also may order witnesses to testify by verified written
statement (deposition), although such witnesses must remain available
for oral cross-examination and redirect examination. CFTC rules
allow expert witnesses to give direct testimony in writing.
Generally, rulings made by the ALJ during the proceeding will not be
reviewed by the commission until the conclusion of the entire
adjudicatory proceeding. However, the CFTC rules do provide for
interlocutory review at the discretion of the commission under
extraordinary circumstances.\16 After the hearing is over, each party
has the opportunity to submit to the ALJ proposed findings of fact
and conclusions of law as well as a brief containing points and
authorities in support of the proposed findings and conclusions.
Following final submissions by the parties, the ALJ prepares the
initial decision on the basis of the record. The initial decision
becomes the final decision of the agency 30 days after service unless
a timely notice of appeal is filed (in which case, the decision would
not be final as to that party) or the commission on its own
initiative decides to review the initial decision. In formulating
the initial decision, the ALJ determines what, if any, violations the
respondents committed and what sanctions would best protect market
integrity and the public interest.
Sanctions available to both commissions' ALJs in enforcement cases
include cease and desist orders, suspension or revocation of
registration and trading privileges, and civil monetary penalties.
SEC ALJs can also limit activities, such as limiting respondents to
not having supervisory or proprietary interest in a firm doing
securities business and impose disgorgements to repay money gained as
a result of violating securities laws and regulations.\17 Certain
violations, such as federal felony convictions, result in statutory
disqualification hearings, in which ALJs determine whether the
respondent should remain registered, with or without restrictions.
The courts have stated that the ALJs should exercise discretion in
individual cases to determine which of the statutory remedies should
be invoked and to what degree, rather than automatically impose
across-the-board penalties for each type of violation.
--------------------
\14 The commission also sits as an appellate adjudicatory body in
reviewing disciplinary cases decided at the securities and futures
exchanges, the National Association of Securities Dealers, and
registered futures associations.
\15 The Equal Access to Justice Act, 5 U.S.C. 504, provides for the
award of attorney fees and other expenses to eligible individuals and
entities who are parties to certain administrative proceedings before
either commission. An eligible party may receive an award when it
prevails over the commission unless the commission's position in the
proceeding was substantially justified or special circumstances make
an award unjust.
\16 The Rules permit interlocutory appeals from rulings: (1) denying
a motion to disqualify an ALJ, (2) suspending any attorney from
participating in a particular proceeding, (3) denying intervention or
limited participation, or (4) requiring the issuance of a subpoena of
an officer or employee of the commission or other government agency
or the production of government records. In all other situations,
review may be permitted upon certification by the ALJ that the ruling
involves a controlling question of law or policy; an immediate appeal
may materially advance the ultimate resolution of the issues and to
avoid the unnecessary delay and expense created by subsequent
reversal of the ruling.
\17 The Remedies Act of 1990 explicitly authorized SEC's practice of
compelling disgorgement of illegal profits by individuals and firms
found to have violated securities laws and regulations. Only one of
the cases we reviewed included these newly authorized sanctions.
APPEAL PROCESS
-------------------------------------------------------- Appendix II:2
To appeal an initial decision, dismissal, or other final disposition
by the ALJ, any, or all, of the parties--the respondents and the
Division of Enforcement--may file a notice of appeal with the agency
within 15 days after service of the initial decision or order. Rules
stipulate time frames for filing briefs and filing for oral argument
(which is authorized only at the respective commission's discretion).
Even if neither party appeals, the respective commission can order
review of all or a portion of the decision on its own initiative. At
SEC, respondents have a statutory right to commission review on
certain issues, such as when the initial decision suspends, denies,
or revokes a broker-dealer registration pursuant to section 15(b) of
the Securities Exchange Act of 1934.
No statutorily prescribed standard exists for commission review of
ALJ decisions. In delegating authority to ALJs to initially decide
cases, neither commission transfers all of its powers, but each
retains the authority to examine all aspects of the administrative
proceedings and to substitute its own judgment for that of the ALJ on
any or all matters of fact, law, or policy. In considering appeals
of ALJ initial decisions, the degree of review of findings of fact
and evidentiary matters by the commissions may differ, depending on
the issues to be addressed and the circumstances. The two
commissions customarily review matters of law and new policy to
retain responsibility for interpreting the law and establishing
policy. A commission's decision may contain any findings and
conclusions based on the record the commission deems proper and may
affirm, reverse, modify, set aside, or remand to the ALJ for further
proceedings, in whole or in part.
If no one files an appeal within the time allowed and the commission
does not order a review, the initial decision becomes the respective
commission's final decision. Rulings of law expressed in initial
decisions submitted to the commission for review have no weight as
precedent in future cases unless the commission adopts the same
rulings.
The commissions have delegated to the Secretary and the General
Counsel at SEC, and to the General Counsel at CFTC, much of the
responsibility for managing cases appealed to them. The staff
members review the record and the briefs and schedule oral arguments
as well as handle requests for postponements or extensions of time to
file.
At SEC, General Counsel staff members review and approve appeal
requests then provide the commission members copies of the record and
briefs. If oral argument is to be held, the staff distributes to
each commission member a summary preargument memorandum describing
the facts and analyzing the issues prior to the argument.
After oral argument, the SEC commission members discuss the case in
executive session, outside the presence of all but those staff
members assisting in the preparation of the opinion. Staff members
write a proposed majority opinion in accord with the Commission's
guidance, which the commission members review and comment on before
voting on the final opinion. Individual commission members may elect
to prepare separate statements of concurrence or dissent. Opinions
in cases where no oral argument was made are handled similarly.
Staff members prepare a draft opinion and explanatory memorandum that
are circulated among the commission members for their review and
vote.
The CFTC's Office of General Counsel assists the Commission in its
adjudicatory role by (1) reviewing the record and the pleadings and
(2) drafting a proposed opinion and order and then submitting it to
each of the commission members for consideration, together with the
ALJ's initial decision and the parties' appeal briefs. Office of
General Counsel staff members then meet with the commissioners' legal
assistants regarding the proposed disposition of a case and discuss
the policy and precedential implications of the draft opinion. After
discussion and any revisions, the draft document is then circulated
among the commission members for final consideration.
At SEC and CFTC, a majority of the commissioners reviewing a case
must agree on whether to affirm or alter an initial decision. If a
vote is tied, an initial decision will be affirmed without opinion.
Any party may petition for reconsideration of a commission's opinion
at either agency within 15 days of the opinion being served. The
petition must specify the relief sought and the supporting grounds
and must be confined to new questions raised in the opinion that the
party did not have the opportunity to argue. The filing of such a
petition does not automatically stay the order of the commission.
ANALYSIS OF SEC AND CFTC ALJ CASES
HEARD DURING FISCAL YEARS 1989
THROUGH 1993
========================================================= Appendix III
RESULTS OF ENFORCEMENT CASES
------------------------------------------------------- Appendix III:1
In response to specific questions on (1) the types of charges filed,
(2) financial activities involved, (3) dollar amounts of cases and
proportion of claims awarded, (4) civil fines assessed or fees
recovered, (5) other disciplinary actions, (6) case- processing
times, and (7) outcomes of appeals, we analyzed the results of
enforcement cases processed by SEC and CFTC during fiscal years 1989
through 1993, which are presented in tables III.1, III.2, and III.3.
Table III.1
Types of Charges Filed for SEC ALJ Cases
Initial
Charges decision Appeal
---------------------------------------- ------------- -------------
Criminal/civil conduct/convictions 16 3
Disclosure/misrepresentation 16 8
Failure to adequately supervise 5 3
Failure to register stock 3 2
Inaccurate/incomplete reports/forms 4 0
Violation of net capital rule 2 1
Failure to register as broker-dealer 2 0
Fraud/misconduct in offer/sale 8 3
Manipulative/deceptive practices 4 2
Wash sales/matched orders 2 0
Excessive trades or mark-ups 5 0
Unsuitable trades 2 0
Failure to segregate funds 1 1
Parking 1 0
Soft dollar payments 1 0
----------------------------------------------------------------------
Table III.2 Types of Charges Filed for
CFTC ALJ Cases
Initial
Charges decision Appeal
---------------------------------------- ------------- -------------
Statutory disqualifications 19 13
Disclosure/misrepresentation 21 14
Failure to report/false or omitted 15 15
information
Not registered/violating registration 2 4
provisions of CEA
Failure to keep complete records 6 6
Failure to adequately supervise 11 7
Fraud in solicitation 8 6
Fraudulent/fictitious transactions 12 17
Unauthorized/unlawful transactions 12 10
Manipulation 0 1
Misappropriation of funds 2 3
Violating a Commission order 3 2
----------------------------------------------------------------------
Note: The charges listed are charges we identified from the
enforcement cases that were either initially decided by ALJs or
appealed during the fiscal year 1989 to 1993 time period. Initial
decisions and appeals were not necessarily the same cases because we
only looked at cases that were decided during the period of our
review. SEC issued 38 initial decisions on enforcement cases and 18
appeals during this period, and CFTC issued 46 initial decisions and
48 appeals. Most cases had more than one charge either on initial
decision or on appeal.
Source: GAO analysis.
Table III.3
Type of Financial Activity Involved
Initial
SEC activities decision Appeal
---------------------------------------------- ---------- ----------
Penny stocks 10 5
Common stocks 4 1
Municipal/government securities 2 2
Limited partnerships 2 1
Revenue bonds 1 1
Pension funds 1 0
Junk bonds 1 0
Options 1 1
Various/unspecified 16 7
======================================================================
Total SEC cases 38 18
CFTC activities
Soybean futures 6 6
Precious metals 1 4
Foreign currencies 5 4
Orange juice 0 1
T-bonds 1 1
Various/unspecified 33 32
======================================================================
Total CFTC cases 46 48
----------------------------------------------------------------------
Source: GAO analysis.
DOLLAR AMOUNTS INVOLVED AND
PROPORTION OF CLAIMS AWARDED
----------------------------------------------------- Appendix III:1.1
Unlike reparations cases, enforcement cases are not based on claims
of specific dollar losses. Instead, the agencies seek to discipline
violators of securities and futures rules and regulations as a
disincentive to would-be violators and to protect the integrity of
the markets. The monetary damages in enforcement cases were
generally not found in the public records we reviewed.
CIVIL FINES ASSESSED OR
DISGORGEMENTS
----------------------------------------------------- Appendix III:1.2
Although CFTC has had the authority to levy civil monetary penalties
against violators in its enforcement cases since its inception, SEC
has had the ability to impose fines in administrative proceedings
only since the passage of the Remedies Act of 1990. Only 1 of the 38
SEC enforcement cases we reviewed--a disgorgement award of
$430,000--included this type of sanction. None of the SEC appeals
awards we reviewed assessed fines or disgorgements.
For CFTC, 20 of the 46 initial decisions we reviewed included civil
monetary penalties totaling $5,196,708. Of the 48 appeal cases we
reviewed, 27 included civil monetary penalties totaling $5,269,600.
On appeal or remand,\18 penalties in three cases were raised by a
total of $175,100; penalties in nine cases were lowered by a total of
$747,000; and penalties in three cases involving a total of $343,100
were still open, pending remand decisions. Excluding the open remand
decisions, the net result was that the total civil monetary penalties
were reduced by $571,900 on appeal and remand.
--------------------
\18 Remanded cases are those that have been returned to the ALJ for
further consideration.
OTHER DISCIPLINARY ACTIONS
TAKEN
----------------------------------------------------- Appendix III:1.3
SEC ACTIONS
--------------------------------------------------- Appendix III:1.3.1
Bar - In 10 appeal cases where ALJs had imposed bars, SEC affirmed
bars against all 12 respondents. In two cases, involving one
respondent each, SEC raised the ALJ imposed sanction of a 120-day and
90-day suspension to a bar.
Suspension - In 8 appeal cases involving 13 respondents, SEC affirmed
suspensions of 2 respondents, lowered suspensions of 5 respondents to
censure, dismissed or vacated suspensions of 2 respondents, raised
suspensions of 2 respondents to bar, and increased the duration of
suspension for 2 respondents.
Registration revoked - In three appeal cases, SEC affirmed the
revocation of registration for all three respondents against whom
this sanction was imposed.
Censure - In two appeal cases involving two respondents, in which
ALJs had imposed censures, SEC affirmed the censure against one
respondent and dismissed the other censure.
Cease and desist orders - Since the passage of the Remedies Act of
1990, SEC has imposed administrative cease and desist orders to halt
improper practices. In the disciplinary actions imposed in the cases
we reviewed, two respondents in initial decisions and no respondents
in appeals cases had cease and desist orders levied against them.
CFTC ACTIONS
--------------------------------------------------- Appendix III:1.3.2
Trading prohibitions or suspensions - In 38 appeal cases in which
ALJs ordered trading prohibitions or suspensions of 69 respondents,
CFTC affirmed or otherwise did not change those sanctions against 29
respondents. CFTC vacated and dismissed sanctions against 15
respondents from 8 cases. CFTC modified the prohibitions or
suspensions against 10 respondents, increasing them for 4 respondents
and decreasing or eliminating them for 6 respondents. CFTC remanded
prohibition or suspension decisions in 15 cases for 15 respondents.
On remand, the ALJ reduced the sanctions against two respondents and
maintained the sanction against one respondent. The remaining 12
remanded cases were still open at the end of fiscal year 1993.
Registration revoked - In 20 appeals of cases in which ALJs revoked
registrations against 41 respondents, CFTC affirmed or otherwise did
not change those sanctions against 23 respondents in 13 cases. The
cases against 11 respondents were vacated. Of five remanded cases
involving seven revoked registrations, there was no change in one
case involving one respondent, and the rest remained open at the end
of fiscal year 1993.
Cease and desist orders - ALJs imposed cease and desist orders
against 98 respondents in 42 appealed initial decisions. CFTC
affirmed or otherwise did not change the orders against 81 of the
respondents, revoked the orders against 10, and raised the sanction
against 1. In addition, CFTC imposed a cease and desist order on an
additional respondent after vacating a monetary fine. Of two
remanded decisions involving two respondents, the charges were not
changed in either. Six remanded cases involving six respondents
remained open at the end of fiscal year 1993.
CASE-PROCESSING TIME
----------------------------------------------------- Appendix III:1.4
SEC
--------------------------------------------------- Appendix III:1.4.1
From the date of the order instituting proceedings to initial
decision, the SEC enforcement cases we reviewed averaged 15 months,
and they averaged 28 months from initial decision date to an appeal
decision. SEC had been concerned about its administrative process
and formed a task force to review ALJ administrative operations. In
its February 1993 report, Fair and Efficient Administrative
Proceedings, the task force recommended that SEC establish guidelines
of no more than 10 months for the average time from instituting
proceedings to rendering an initial decision and no more than 9
months after issuing the order establishing a briefing schedule to
rendering a final decision on an appeal.
The task force recommended other actions regarding the timeliness of
administrative adjudications, such as scheduling status conferences
for those cases that do not progress from stage to stage within
specified periods and improving SEC's case activity tracking system,
with responsibility for the system to be centralized in the Office of
General Counsel. SEC officials claim that by implementing interim
task force recommendations, SEC has improved the productivity of its
administrative process since the task force was created.\19
--------------------
\19 According to SEC, by implementing steps such as (1) increasing
the number of attorneys assigned to the office responsible for
drafting Commission opinions, (2) filling new senior management
positions in that office, and (3) obtaining help from outside that
office to aid in preparing draft opinions, SEC issued 85 percent more
opinions in fiscal year 1992 than in the previous year.
CFTC
--------------------------------------------------- Appendix III:1.4.2
CFTC cases we reviewed took an average of 24 months from issuance of
complaint and notice of hearing to initial decision, and they
averaged 24 months from initial decision date to appeal decision.
Commissioners at each agency modified sanctions levied by ALJs in 7
of 18 SEC appeal decisions (39 percent) and 18 of 48 CFTC appeal
decisions (38 percent). The commissioners made no changes to
ALJ-imposed sanctions for the rest of the appealed decisions.
Seventy-one percent of the modified sanctions at SEC and 78 percent
of the modified sanctions at CFTC resulted in lower sanctions for the
respondents. The uniqueness and complexity of each case preclude
generalizations about the adequacy and consistency of penalties.
Cases typically involved different mixes of abuses occurring over
varying periods of time, with different amounts of customer funds
involved, differing numbers of trades involved in the abuses, and
offenders with varying disciplinary records, whose cooperation during
the conduct of proceedings differed as well. Moreover, differences
in the types of abuses that occur in the futures and securities
markets do not allow for comparisons as to whether similar cases
received consistent penalties.
OUTCOMES OF CASES ACCEPTED
FOR APPEAL
----------------------------------------------------- Appendix III:1.5
SEC
--------------------------------------------------- Appendix III:1.5.1
SEC reported that it had disposed of a total of 846 enforcement cases
during fiscal years 1989 through 1993, for which its ALJs issued 38
initial decisions.\20 SEC commissioners ruled on 18 appeals of ALJ
decisions in cases brought by SEC's Enforcement Division against
individuals and firms alleged to have violated securities acts,
rules, or regulations. SEC made no changes to sanctions in 11 cases
(61 percent) and modified them in 7 cases (39 percent). SEC reduced
the sanction imposed in five of the seven modified cases (71 percent)
and increased the sanctions imposed in the other two cases (29
percent).
--------------------
\20 According to SEC's task force report, over 90 percent of
administrative proceedings authorized by the Commission were settled.
These included enforcement and other types of proceedings.
CFTC
--------------------------------------------------- Appendix III:1.5.2
During fiscal years 1989 through 1993, CFTC reported that it had
disposed of a total of 197 cases brought by the CFTC against
individuals and firms alleged to have violated the CEA or CFTC rules
or regulations. The ALJs issued 46 initial decisions in enforcement
cases during that period. CFTC commissioners ruled on 48 appeals of
ALJ enforcement decisions, modifying sanctions in 18 cases (38
percent), reducing sanctions imposed in 14 cases (78 percent) and
increasing sanctions imposed in 4 cases (22 percent).\21
--------------------
\21 We did not include in our analysis two other appeals cases, which
ruled on remuneration granted the respondents by the ALJs under the
Equal Access for Justice Act, because the cases did not involve
sanctions against the respondents.
*** End of document. ***