TheCorporateCounsel.net

In recent years, it seems that the Commission has tried to be more transparent about its own control deficiencies. This week, the Commission issued a statement providing details regarding its latest control deficiency, which this time took place in the Adjudication and Enforcement function.

One job that the Commission has which does not receive a great deal of attention is that the Commission itself serves an administrative “court,” serving in an adjudication role on certain matters. For example, if someone wishes to appeal the ruling of one of the SEC’s Administrative Law Judges, then they would go to the Commission itself as the appellate body. The Commission is supported by the Adjudication staff in the Office of General Counsel, who generally manage the process and prepare recommendations for the Commission on the matters. When I first started at the SEC I worked for the agency’s Administrative Law Judges and became familiar with this administrative process, and then worked closely with the Adjudication staff when I served as Chief Counsel of Corp Fin.

The Commission’s control deficiency related to the separation of the Adjudication staff and the staff in the Division of Enforcement. A level of separation is important to be maintained in order to preserve the integrity of the process, because the Division of Enforcement is always a party to the appellate process the plays out before the Commission. The control deficiency involved access by staff in the Division of Enforcement to certain memoranda prepared by the Adjudication Staff through databases maintained by the Office of Secretary, which the Commission described as follows:

The Commission has determined that, for a period of time, certain databases maintained by the Commission’s Office of the Secretary were not configured to restrict access by Enforcement personnel to memoranda drafted by Adjudication staff. As a result, in a number of adjudicatory matters, administrative support personnel from Enforcement, who were responsible for maintaining Enforcement’s case files, accessed Adjudication memoranda via the Office of the Secretary’s databases. Those individuals then emailed Adjudication memoranda to other administrative staff who in many cases uploaded the files into Enforcement databases.

The good news here is that, while the internal memos from the Adjudication staff were available to all of the staff in the Division of Enforcement for a period of time, the Enforcement staff attorneys who were working on the two matters identified in the Commission’s statement did not actually access those memos while they were investigating and prosecuting the matters. The Commission indicates that it is taking remedial steps to prevent this sort of thing from happening again. It is obviously a serious control lapse, given that there is already a perception (whether right or wrong) that the deck is stacked against the individuals and entities that have their cases litigated through the administrative process rather than in a court of law.

– Dave Lynn