Is Administrative Summary Judgment Unlawful?

AuthorPlatt, Alexander I.

When the Securities and Exchange Commission (SEC) files an administrative enforcement action, the respondent is ordinarily entitled to present their case orally at an in-person hearing before one of the agency's Administrative Law Judges. But, in hundreds of administrative proceedings over the past twenty-five years, the agency has skipped over this in-person hearing, instead resolving actions on motions for "summary disposition."

This is illegal. Most SEC administrative proceedings are governed by the Administrative Procedure Act's (APA) provisions governing "formal" adjudications. One of those provisions--long overlooked or misinterpreted by scholars and courts--can only be reasonably interpreted as granting respondents an absolute right to an oral hearing in cases where the agency is seeking to impose "sanctions" like those the SEC imposes in administrative proceedings. The 1946 Congress that enacted the APA declined to follow the trans-substantive summary judgment rule that had been recently adopted as part of the Federal Rules of Civil Procedure, and instead followed the alternative model of the many American states that permitted summary judgment only in specifically enumerated categories of cases. The legislative history and contemporaneous interpretations confirm that the APA prohibits summary process for formal adjudications leading to "sanctions."

Administrative summary judgment is also questionable on policy grounds. Proponents argue that administrative summary judgment promotes administrative efficiency, but have overlooked how the procedure may distort agency enforcement priorities, undermine congressional control of administrative agencies, be subject to systematic abuse by agencies, and unfairly deprive some individuals of important procedural rights.

This paper provides an empirical study of SEC summary disposition from its promulgation in 1995 through 2019, examines the text and history of the APA to demonstrate the illegality of this procedure, and challenges the conventional policy justifications for the procedure.

TABLE OF CONTENTS Introduction I. The Rise of SEC Summary Disposition A. SEC Administrative Proceedings B. SEC Administrative Proceedings and APA Formal Adjudication C. SEC Summary Disposition II. The Legal Case Against SEC Summary Disposition A. The Text of the APA Bars Summary Disposition in Formal Adjudications Culminating in "Sanctions" B. Legislative History Confirms That The APA Bars Summary Disposition In Formal Adjudications Leading To Sanctions C. Historical Context: The Persistence of Subject-Limited State Summary Judgment Rules After the Enactment of the FRCP D. Courts and Commentators Widely Confirmed This Understanding After Enactment of the APA E. Three Modern Courts Have Considered and Upheld SEC Summary Disposition, but All Three Ignored the Text and History of Section 556(d) III. Illegal Administrative Summary Judgment Across The Enforcement Bureaucracy A. Department of Health and Human Services B. Federal Mine Safety and Health Review Commission C. Commodity Futures Trading Commission D. Nuclear Regulatory Commission E. Administrative Conference of the United States IV. Explaining The Persistence of Illegal Administrative Summary Judgment A. The Myth of the Trans-Substantive APA B. A New Paradigm of Judicial Review of Agency Action V. The Uncertain Policy Case For Administrative Summary Judgment A. Conventional Justifications for Administrative Summary Judgment B. Some Doubts About the Conventional Justification For Administrative Summary Judgment C. Some Open Questions On Administrative Summary Judgment Conclusion Introduction

When the Securities and Exchange Commission (SEC) launches an enforcement action in its administrative forum, the respondent is ordinarily entitled to an oral in-person hearing before an Administrative Law Judge (ALJ). But, in hundreds of cases, the agency has dispensed with this time-consuming hearing, instead resolving the matter on a motion for "summary disposition," analogous to the motion for summary judgment under Federal Rule of Civil Procedure 56. (1)

This is illegal. (2) Virtually all of the cases where the SEC obtains summary dispositions are covered by the Administrative Procedure Act's (APA) provisions governing "formal" adjudications. (3) One of those provisions--long overlooked or misinterpreted by scholars, courts, and litigants--grants respondents an absolute right to an oral hearing in formal adjudications where the agency is seeking to impose "sanctions" like those at stake in the SEC cases. (4) In these cases, a respondent is entitled to an in-person hearing even if the government can demonstrate that there is no genuine dispute as to any material fact.

As I show below, (5) the text of the APA provision at issue (6) can only be reasonably read as permitting agencies to skip over oral hearings in three specifically enumerated classes of formal proceedings--those involving "rule making or determining claims for money or benefits or applications for initial licenses" (7)--and impliedly prohibits this procedure in all other cases, including those involving "sanctions." The legislative history of the provision at issue confirms this interpretation: shortly before enactment, the Senate Judiciary Committee rejected a proposal to expand the operative provision to apply to "'accusatory' proceedings," explaining that such proceedings "are traditionally the type of proceeding in which seeing and hearing the witnesses is required. ..." (8)

Contemporary lawyers may find it impossible to believe that Congress would have wanted to force an agency to waste time on a hearing where there was no genuine dispute as to any material fact. But such an absolute guarantee would have been quite familiar to the legislators who enacted the APA in 1946. (9) At the time, many state courts allowed for summary judgment only in a narrow subset of cases; for cases outside the specified categories, it was unavailable. (10) Congress evidently followed the model of these jurisdictions when it drafted the summary judgment provision of the APA, limiting an agency's ability to take away a defendant's right to an in-person hearing to certain types of formal administrative adjudications just as many states limited summary judgment to certain types of actions. (11)

Although three federal courts have upheld SEC summary disposition, none of them even considered the key provision or its history (likely because it was not pressed by the parties), and so the decisions cannot be regarded as probative. (12)

This legally suspect procedure has not only been used by the SEC to resolve hundreds of individual enforcement actions, it has also skewed the agency's enforcement priorities at times toward bringing the type of cases that are amenable to resolution using the technique. The controversial "broken windows" enforcement program that the agency pursued under the leadership of Chair Mary Jo White rested very heavily on summary dispositions and might not have been possible without it. (13) And many other federal agencies have been relying on administrative summary judgment in formal administrative proceedings resulting in sanctions. (14)

The agencies, courts, and commentators who have promoted and embraced administrative summary judgment have generally relied on a very simple appeal to the concept of administrative efficiency--the procedure allows agencies to reduce procedural costs without sacrificing meaningful procedural rights. (15) But this conventional justification fails to confront the possibility that the procedure as it is actually used on the ground may distort agency enforcement priorities, undermine congressional control of administrative agencies, be subject to systematic abuse by agencies, and unfairly deprive some individuals of important procedural rights. (16) Below, I illustrate these concerns using SEC summary disposition as a case study. But the scope of these (and other) problems with the administration of summary judgment across the enforcement bureaucracy is unknown. The last comprehensive study of the practice was sponsored by the Administrative Conference of the United States (ACUS) and was completed over fifty years ago. (17) In this paper, I outline some key open questions for future researchers regarding how administrative summary judgment is being used across the federal government. (18)

This paper proceeds in five parts. Part I reviews the structure of SEC administrative enforcement including its relation to the APA. It also reviews the origins of SEC summary disposition and provides an empirical examination of how the SEC has used the tool from its creation through the first three years of the Clayton SEC. Part II shows why this procedure is illegal under the APA-examining the text of that statute, its legislative history, the historical context, early post-enactment interpretations, and then modern judicial decisions. Part III reviews other agencies across the federal government that have used administrative summary judgment in formal adjudications leading to sanctions. Part IV offers some additional explanations for why this apparently illegal procedure has survived. Part V presents and criticizes the conventional policy justification for administrative summary judgment, and outlines important open questions about how it is actually being used to shape administrative adjudication and enforcement.

  1. The Rise of SEC Summary Disposition

    The SEC's mission is "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." (19) The SEC's Enforcement Division "primarily supports the SEC's mission by investigating and bringing actions against those who violate the federal securities laws." (20) Following an investigation, the Enforcement Division can refer a matter to the U.S. Department of Justice (DOJ) for consideration of criminal charges, (21) file a civil lawsuit in federal district...

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