SEC Administrative Proceeding
An SEC administrative proceeding is an enforcement action brought by the Securities and Exchange Commission before an administrative law judge (ALJ) or directly before the Commission itself, rather than in federal district court, to adjudicate alleged violations of federal securities laws and impose remedies including disgorgement, civil monetary penalties, cease-and-desist orders, and industry bars.
The SEC has authority to bring enforcement actions through two procedural vehicles: federal district court civil actions and administrative proceedings before the Commission. The choice of forum is a significant tactical and strategic decision that affects procedural rights, the available remedies, and the applicable evidentiary standards.
Administrative proceedings before an SEC ALJ are governed by the Administrative Procedure Act and the SEC's own Rules of Practice. The respondent in an administrative proceeding receives an order initiating proceedings (OIP) that sets out the allegations and the proposed sanctions, and then has an opportunity to answer and request a hearing before an ALJ. ALJ hearings are adjudicative proceedings in which both sides present evidence and testimony, though the discovery rights and procedural protections are more limited than in federal court.
ALJ decisions are subject to review by the full Commission, which may affirm, reverse, or modify the ALJ's initial decision. Commission decisions are in turn subject to review in federal circuit courts of appeals. This multi-layer review process makes administrative proceedings a long and resource-intensive path for both the SEC and respondents.
The Commission may also issue an order of settlement — resolving an administrative proceeding without a hearing — when the respondent agrees to settle the allegations, pay disgorgement and penalties, and accept the specified sanctions. Most SEC enforcement actions are resolved through settlements rather than contested hearings.
Remedies available in administrative proceedings differ in part from those in federal district court. The Commission may impose civil money penalties, disgorgement and prejudgment interest, cease-and-desist orders, and industry bars (permanently or temporarily prohibiting the respondent from associating with registered entities). The 2010 Dodd-Frank Act expanded the SEC's administrative authority, allowing it to seek civil penalties against any person — not just regulated entities — in administrative proceedings, reducing the need to go to district court for certain types of cases.
The constitutionality of SEC ALJ proceedings was challenged in the landmark Supreme Court case Lucia v. SEC (2018), which held that SEC ALJs are Officers of the United States subject to the Appointments Clause of the Constitution and must therefore be appointed by the President, courts, or heads of departments. The SEC ratified the appointment of its existing ALJs following the Lucia decision to cure the constitutional defect.