Fair Game: At the S.E.C., a Question of Home-Court Edge

The S.E.C. has many weapons in its arsenal. One that is not so well known is its internal court system, overseen by administrative law judges. This is the place where the S.E.C. brings civil enforcement suits that it has not, for various reasons, filed in federal district courts. Because of a recent change in the law, these tribunals are likely to hear more cases.

“Our expectation is that we will be bringing more administrative proceedings given the recent statutory changes,” Mr. Ceresney said last week. “But we evaluate the appropriate forum in each case and make the decision based on the particular facts and circumstances.”

The enforcement matters taken to these venues are heard by judges employed by the S.E.C. and housed at the agency but who are charged with being impartial triers of fact. These judges — there are now three — hold public hearings, issue decisions and impose sanctions, including revoking brokers’ or investment advisers’ licenses and ordering monetary penalties. (The S.E.C. is still operating, despite the government shutdown.)

The S.E.C. is not alone in using administrative law judges to decide legal disputes. Some 30 federal agencies — including the National Transportation Safety Board and the Social Security Administration — do so as well. S.E.C. officials like the system.

“Administrative law judges have a sophisticated understanding of the securities laws and markets, which is very helpful in cases involving complicated securities issues and technical violations,” said George Canellos, co-director of enforcement at the S.E.C., in an interview last week. “In addition, the A.L.J. process tends to work much more quickly than a district court adjudication, given the prescribed time limits.”

But some legal experts say these proceedings suffer from potential bias because the judges operate within the agency bringing them. The possibility of a home-court advantage or a sympathetic adjudicator, critics say, raises questions of fairness, especially for individuals defending themselves in these matters.

“If you get caught up in the web of an agency investigation, you’re investigated, prosecuted and judged by agency personnel,” said Ronald J. Riccio, former dean of the Seton Hall Law School and a professor of constitutional law there. “Even if it doesn’t create actual bias, it doesn’t look good.”

S.E.C. officials reject the notion that the judges are biased. “Our experience has shown us that administrative law judges are very fair and unbiased adjudicators,” Mr. Canellos said. (Brenda P. Murray, the S.E.C.’s chief administrative judge, declined to comment on the record for this column.)

STILL, questions of fairness are likely to resonate, given that a legal change under the Dodd-Frank law means that more securities law cases are likely to be brought before these tribunals. Under previous law, the agency could bring cases in an administrative forum only against individuals associated with regulated entities; cases against people who were not employees of brokerage firms or investment advisers had to be heard in district court. The new law changed that. And because some cases can be heard only before an administrative law judge, it’s worth exploring their workings and whether there is a better alternative.

“As a securities lawyer, I’ve been involved in these administrative proceedings for many years and have been struck by the unfairness and lack of neutrality in the system,” said Lewis D. Lowenfels, an expert in securities law in New York City. “The judges’ mind-set reflects the agenda of the agency, which in this arena is enforcement.”