TheCorporateCounsel.net

Wow. As reported last week by Reuters, the SEC has moved to dismiss all active misconduct proceedings against accountants that had been pending before administrative law judges – 8 in total. This Jones Day memo gives more detail:

The Supreme Court recently held in SEC v. Jarkesy that the SEC’s in-house administrative proceedings violate the Seventh Amendment’s right to jury trial to the extent they adjudicate claims that are “legal in nature,” such as fraud charges and civil penalties. Jarkesy did not directly address, however, other kinds of enforcement actions the SEC historically adjudicates in-house, including proceedings under Rule 102(e) of the SEC Rules of Practice, which is the SEC’s primary tool for regulating the professionals appearing before it. Among other things, Rule 102(e) empowers the SEC to censure or bar professionals found to have engaged in “improper professional conduct,” which, for accountants, can include repeated violations of applicable professional standards. But Rule 102(e) proceedings can only be brought administratively.

The SEC seems now to believe that Jarkesy precludes litigating Rule 102(e) proceedings administratively. In August 2024, the SEC dismissed two contested Rule 102(e) proceedings against accountants who allegedly failed to conduct audits in accordance with professional standards. The SEC previously had moved to stay each case pending a decision in Jarkesy. Notably, while one of the cases involved a claim for civil penalties thus plainly implicating Jarkesy the other sought only remedial and cease-and-desist relief. It may also be significant that each accountant had sued the SEC in federal court to challenge its use of administrative proceedings.

Jones Day goes on to note that the SEC hasn’t publicly announced any policy against using ALJs for disciplinary proceedings. But the dismissal of all pending cases is a pretty big deal! It remains to be seen whether cases pending before the PCAOB will also be dropped. Interestingly, this move by the Enforcement Division came at the same time as the SEC approved PCAOB rule standards that lower the liability standard for individual auditors’ contributory liability (from recklessness to negligence) – which Commissioners Peirce and Uyeda opposed.

– Liz Dunshee