First, the bill would permit respondents in one type of SEC administrative proceeding--a proceeding with the potential remedies of a cease and desist order and a penalty--to "terminate" the proceeding. The SEC would then be free to bring the case in federal court.
Second, the bill would also radically change all SEC administrative proceedings by raising the burden of proof to "clear and convincing evidence."
This is a clear attempt to weaken the SEC's enforcement program without any benefit to the investing public. Anyone who has read this blog or knows its author--a former SEC enforcement lawyer known as a "tiger" when on the Staff--knows that there is, at least in this author's view, plenty to criticize the SEC about insofar as its enforcement and regulatory efforts are concerned. First and foremost is the fact that the SEC repeatedly brings enforcement cases where, unbeknownst to senior SEC Staff and Commissioners, the evidence gathered in the investigation does not support the allegations that are made. And, it is evident that, to one extent or another, the playing field in an SEC administrative proceeding could be made more level.
But the solution is not to make the SEC fight with one hand tied behind its back. Rather, it is to make the SEC more accountable by requiring more due process in administrative proceedings and careful review of the factual predicate for authorized enforcement actions.
The most serious problem with H.R. 3798 is its imposition of the "clear and convincing evidence" burden of proof on the SEC in all administrative proceedings. This is a highly problematic requirement. The clear and convincing evidence standard is usually reserved for such issues as proof of actual malice in a libel action, i.e., where there is a need for protection of a constitutional interest or value. And, 33 years ago, the Supreme Court held that the evidentiary burden in an SEC civil action is preponderance of the evidence, rejecting the clear and convincing standard:
Where Congress has not prescribed the appropriate standard of proof and the Constitution does not dictate a particular standard, we must prescribe one. See Steadman v. SEC, 450 U.S. 91, 95, 101 S.Ct. 999, 1004, 67 L.Ed.2d 69 (1981). See generally Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S., at 749, 95 S.Ct., at 1931 (private cause of action under Section 10(b) and Rule 10b-5 must be judicially delimited until Congress acts). In doing so, we are mindful that a standard of proof “serves to allocate the risk of error between the litigants and to indicate the relative importance attached to the ultimate decision.” Addington v. Texas, 441 U.S. 418, 423, 99 S.Ct. 1804, 1808, 60 L.Ed.2d 323 (1979). See also In re Winship, 397 U.S. 358, 370-371, 90 S.Ct. 1068, 1075, 25 L.Ed.2d 368 (1970) (Harlan, J., concurring). Thus, we have required proof by clear and convincing evidence where particularly important individual interests or rights are at stake. See, e.g., Santosky v. Kramer, 455 U.S. 745, 102 S.Ct. 1388, 71 L.Ed.2d 599 (1982) (proceeding to terminate parental rights); Addington v. Texas, supra (involuntary commitment proceeding); Woodby v. INS, 385 U.S. 276, 285-286, 87 S.Ct. 483, 487, 17 L.Ed.2d 362 (1966) (deportation). By contrast, imposition of even severe civil sanctions that do not implicate such interests has been permitted after proof by a preponderance of the evidence. See, e.g., United States v. Regan, 232 U.S. 37, 48-49, 34 S.Ct. 213, 217, 58 L.Ed. 494 (1914) (proof by a preponderance of the evidence suffices in civil suits involving proof of acts that expose a party to a criminal prosecution). Thus, in interpreting a statutory provision in Steadman v. SEC, supra, we upheld use of the preponderance standard in SEC administrative proceedings concerning alleged violations of the antifraud provisions. The sanctions imposed in the proceedings included an order permanently barring an individual from practicing his profession. And in SEC v. C.M. Joiner Leasing Corp., 320 U.S., at 355, 64 S.Ct., at 125, we held that a preponderance of the evidence suffices to establish fraud under Section 17(a) of the 1933 Act.
A preponderance-of-the-evidence standard allows both parties to “share the risk of error in roughly equal fashion.” Addington v. Texas, 421 U.S., at 423, 99 S.Ct., at 1808. Any other standard expresses a preference for one side's interests. The balance of interests in this case warrants use of the preponderance standard. On the one hand, the defendants face the risk of opprobrium that may result from a finding of fraudulent conduct, but this risk is identical to that in an action under Section 17(a), which is governed by the preponderance-of-the-evidence standard. The interests of defendants in a securities case do not differ qualitatively from the interests of defendants sued for violations of other federal statutes such as the antitrust or civil rights laws, for which proof by a preponderance of the evidence suffices. On the other hand, the interests of plaintiffs in such suits are significant. Defrauded investors are among the very individuals Congress sought to protect in the securities laws. If they prove that it is more likely than not that they were defrauded, they should recover.
There is no legitimate reason to believe that respondents in SEC administrative actions need the level of protection of afforded by application of the clear and convincing standard.
Moreover, the bill does not define "clear and convincing evidence," and there is no accepted definition in the law. The Fourth Circuit defines it as "“evidence of such weight that it produces in the mind of the trier of fact a firm belief or conviction, without hesitancy, as to the truth of the allegations sought to be established,” or “evidence that proves the facts at issue to be highly probable.” United States v. Watson, 793 F.3d 416, 420 (4th Cir. 2015). The Seventh Circuit's definition is evidence that “leave[s] no reasonable doubt in the mind of the trier of fact as to the truth of the proposition in question." In re Meyers, 616 F.3d 626, 631 (7th Cir. 2010). In the Tenth Circuit, it means "evidence ... so direct and weighty as to leave the factfinder with a firm belief in the truth of the facts of the case." Crowe v. Smith, 261 F.3d 558, 563 (5th Cir. 2001).
H.R. 3798 is a radical solution in quest of a problem. May it die a natural death.
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