The SEC’s Other ‘Hotel California’ Docket

In an op-ed published last fall by Law360, I called out the Securities and Exchange Commission (SEC) for its appalling dereliction of duty in refusing to decide administrative appeals from enforcement sanctions imposed by the agency’s administrative law judges (ALJs). To summarize, more than two years ago the SEC simply stopped deciding those appeals, trapping the beleaguered appellants in an interminable state of regulatory limbo at the final step of the agency’s administrative process—and worse yet indefinitely blocking their access to judicial review in a real court. I dubbed this atrocity the SEC’s “Hotel California” docket—where appellants can check out but never leave.

Last month NCLA challenged this Hotel California docket in the U.S. Court of Appeals for the Fifth Circuit. Our client Marian Young is asking the court to issue a writ of mandamus that would direct the SEC to dismiss her SEC administrative case—which has been dragging on for more than six years, with her appeal before the SEC commissioners stalled since late 2019—or at least to issue a final decision she can challenge in court. You can read all about Marian’s case here.

But in my research for both last fall’s op-ed and last month’s court filing, I largely ignored a parallel appellate docket at the SEC: Appeals from enforcement sanctions imposed by the so-called self-regulatory organizations (SROs), primarily the Financial Industry Regulatory Authority (FINRA). I naively assumed this parallel docket was still operating business as usual. After all, appeals from SRO decisions are typically far less complicated than decisions from SEC ALJs, with less egregious conduct alleged, less paperwork in the administrative record, and lighter sanctions imposed.

Upon closer look, however, it turns out that SEC appeals from SRO sanctions are nearly as stalled as those from ALJ sanctions, with decisions almost as sporadic. Since the start of its 2020 fiscal year, the SEC’s docket of pending SRO appeals has nearly doubled (from 48 to 89), according to semi-annual reports published on the SEC website.

This increase is not attributable to any sudden spike in the number of SRO appeals being filed each year. Forty-three SRO appeals were filed in fiscal year 2019, 24 in fiscal year 2020, 27 in fiscal year 2021, and 32 in fiscal year 2022, and only six in the first half of the 2023 fiscal year. And keep in mind that typically about a quarter of these appeals are later dismissed or otherwise resolved—for example, through settlements, voluntary withdrawals, and failures to prosecute—before the SEC needs to decide them on the merits.

The main problem is that, just as with appeals from ALJ sanctions, the SEC seems no longer in any hurry to decide SRO appeals. Of the 83 SRO appeals pending on the SEC’s docket as of September 30, 2022 (the end of its 2022 fiscal year), a whopping 71 (85%) were already fully briefed and ready for decision. For comparison, only 14 of the SEC’s 85 pending SRO appeals (17%) were fully briefed just four years earlier (i.e., the beginning of the SEC’s 2019 fiscal year).

As with appeals from ALJ sanctions, SEC rules purport to assure relatively swift appellate justice to those appealing from SRO sanctions. Section 900 of the agency’s Rules of Practice provides that such appeals should “ordinarily” be decided within eight months of the completion of appellate briefing, or within 10 months if the case is unusually complex. But just as with ALJ appeals, the SEC observes this rule mostly in the breach, and the deadline cannot be enforced by litigants.

In most of these cases, again just as with ALJ appeals, every few months the SEC issues a perfunctory order granting itself another 90 days to decide the appeal (or, more likely, another 90 days to not decide it). The only explanation provided each time is that the SEC has determined, “[i]n its discretion,” that another 90-day reprieve is “appropriate.” In recent years the SEC has granted itself multiple 90-day extensions across many cases, effectively postponing its decision deadline for at least a year or more. In one egregious example, the agency recently granted itself its 17th extension dating back to August 2020.

With its adjudicative burdens temporarily lifted by these unilateral extensions, the SEC apparently is able to devote its full attention to matters well beyond its legitimate regulatory remit, such as saddling the securities industry and publicly traded companies with reams of red tape on environmental, social, and governance (ESG) disclosures and bullying settling litigants into surrendering their First Amendment right to criticize the agency. Meanwhile, like Kafka’s man from the country endlessly awaiting admittance to the Law, those appealing their SRO sanctions endlessly wait for a final SEC decision that will at long last allow them to appeal to a real court after so many years in the administrative regulatory vortex:

[T]he doorkeeper says that he cannot admit the man at the moment. The man, on reflection, asks if he will be allowed, then, to enter later. ‘It is possible,’ answers the doorkeeper, ‘but not at this moment.’… The doorkeeper gives him a stool and lets him sit down at the side of the door. There he sits waiting for days and years.

It turns out the SEC’s Hotel California is even more capacious than my previous column suggested—more rooms, more staff, and more administrative dithering. And, tragically, more litigants interminably blocked by federal bureaucrats from finally having their cases reviewed by real courts of law.

May 18, 2023