Facing Discipline Under SEC Rule 102(e): What Professionals Need to Know
While the U.S. Securities and Exchange Commission (SEC) has substantial resources at its disposal, it cannot fully monitor the domestic securities markets and enforce companies’ obligations under the Securities Act of 1933 and the Securities Exchange Act of 1934 on its own. As a result, it relies on so-called “gatekeepers”—attorneys, accountants, and other professionals whose role is, in part, to help companies comply with the law.
However, while the SEC relies on these professionals to help indirectly regulate the securities markets in the United States, the Commission has also come to understand that this reliance needs to be checked. Although attorneys, accountants, and other professionals can help to prevent fraudulent market activities, they can help to facilitate these activities as well.
This is why we have SEC Rule 102(e). Adopted in 1935, Rule 102(e) authorizes the Commission to discipline professionals who violate the law or otherwise engage in “unethical or improper professional conduct.” In recent years, the SEC has increased the number of disciplinary actions pursued under Rule 102(e); and, as a result, attorneys, accountants, and other professionals need to have a clear understanding of what to do when faced with a Rule 102(e) inquiry.
Understanding the Scope and Intent of SEC Rule 102(e)
1. Conduct Subject to Discipline Under SEC Rule 102(e)
Rule 102(e) gives the SEC the authority to pursue disciplinary action against attorneys, accountants, and other professionals who participate in, ignore, or otherwise facilitate violations of the laws and regulations that fall within the Commission’s enforcement jurisdiction. The Rule allows the SEC to, “censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person,” who either:
- Does not “possess the requisite qualifications to represent others;”
- Lacks “character or integrity;”
- Has engaged in “unethical or improper professional conduct;” or,
- Has “willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.”
While Rule 102(e) applies to any “person” who violates the Rule’s requirements, in practice disciplinary actions under the Rule tend to target attorneys, accountants, and other securities professionals. Notably, the Rule defines “improper professional conduct” within the accounting profession, but does not otherwise specify the types of acts and omissions that can give rise to disciplinary action. With respect to accountants, “improper professional conduct” includes:
- “[I]ntentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards;”
- “[A] single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted;” or,
- “[R]epeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.”
2. The SEC’s Disciplinary Authority Under Rule 102(e)
Whether a professional is subject to censure or suspension is entirely within the purview of the SEC, although SEC determinations under Rule 102(e) are subject to challenge in the federal appellate courts. With that said, as with most agency enforcement matters, the courts tend to defer to the SEC’s authority unless presented with clear evidence that the Commission has exceeded the scope of its self-granted authority.
Given the breadth and general nature of the conduct subject to censure under Rule 102(e), and given the courts’ general deference to the SEC’s authority, the Rule presents a significant – and potentially career-threatening – risk for professionals who advise and represent companies in matters involving the SEC. Additionally, as discussed in greater detail below, the Sarbanes-Oxley Act of 2002 contains language that mirrors portions of Rule 102(e), and professionals targeted under Rule 102(e) can potentially face civil or criminal enforcement action as well.
3. When a Professional is Considered to Be “Practicing Before” the Commission
Another key aspect of SEC Rule 102(e) is its application to professionals “practicing before” the Commission. This term is defined in Rule 102(f), which provides that, “practicing before the Commission shall include, but shall not be limited to: (1) transacting any business with the Commission; and (2) the preparation of any statement, opinion or other paper by any attorney, accountant, engineer or other professional or expert, filed with the Commission in any registration statement, notification, application, report or other document with the consent of such attorney, accountant, engineer or other professional or expert.”
Court decisions analyzing SEC rulings under Rule 102(e) have provided some clarity with regard to the scope of Rule 102(f). Here, too, the courts have largely sided with the SEC in allowing the Commission to impose discipline for a broad range of activities—including activities that have not involved direct interaction or direct filing with the agency. For example, acts determined to involve “the preparation of any statement, opinion or other paper . . . filed with the Commission” have included:
- Reviewing and commenting on drafts of public filings;
- Drafting or recommending language to be included in public filings; and,
- Discussing the contents of public filings with company personnel.
This, of course, is in addition to direct interaction with the SEC and the filing of 10-Ks, 10-Qs and other corporate disclosure documents. As a result, while Rule 102(e) on its face applies to all types of professionals, in practice most disciplinary proceedings under the Rule involve attorneys and accountants who prepare and provide advice regarding companies’ public filings.
Preparing for a Hearing on Disciplinary Action Under Rule 102(e)
Prior to imposing discipline under Rule 102(e), the SEC is required to conduct an evidentiary hearing according to the Commission’s administrative procedures. While professionals facing discipline under Rule 102(e) have the ability to request a continuance if they need additional time to prepare, the courts have held that the Commission, “enjoys broad discretion in deciding when to grant a continuance;” and, as a practical matter, the SEC disfavors delaying hearings in Rule 102(e) matters.
In administrative proceedings under Rule 102(e), professionals have the right to review the SEC’s investigative files. The SEC must provide these files within seven days of service, but otherwise very little discovery is permitted.
Hearings under Rule 102(e) take place before an administrative law judge (ALJ); and, although these proceedings follow a trial format, neither the federal rules of evidence nor the federal rules of procedure apply. Hearsay is generally admissible (i.e. in the form of sworn testimony secured from witnesses during the SEC’s investigation); and, when there is any question as to whether evidence is admissible, it will generally be admitted.
Challenging SEC Disciplinary Action Under Rule 102(e)
If a hearing under Rule 102(e) results in disciplinary action, the professional’s first recourse is to file an appeal—with the SEC. The SEC reviews ALJs’ decisions de novo, meaning that it reviews the entire factual record and the parties’ arguments rather than solely examining the hearing record for procedural deficiencies. After conducting its review, the SEC can affirm or modify the ALJ’s decision, it can reverse the ALJ’s decision, or it can remand the case for further proceedings.
Once the SEC issues a final order, the professional then has the option of filing an appeal in court. Appeals of Rule 102(e) determinations can be heard by the U.S. Court of Appeals for the D.C. Circuit or the U.S. Court of Appeals for the circuit in which the professional resides. In reviewing Rule 102(e) determinations, the federal appellate courts examine whether the SEC’s final order is supported by “substantial evidence,” and they will generally uphold the Commission’s determination unless it reflects an abuse of discretion, is arbitrary or capricious, or otherwise violates federal law.
Rule 102(e) Inquiries Can Also Lead to Civil and Criminal Securities Fraud Investigations
Crucially, in many cases Rule 102(e) disciplinary proceedings can lead to (or flow from) civil and criminal securities fraud investigations. Accountants, attorneys, and other professionals can face charges under the Sarbanes-Oxley Act of 2002, Securities Act of 1933, Securities Exchange Act of 1934, and various other federal statutes. These charges can stem from all types of alleged “unethical or improper professional conduct,” and in many cases professionals can face federal conspiracy charges for participating in alleged insider trading schemes, ERISA violations, and efforts to manipulate the markets.
Due to the significant risks involved in facing SEC scrutiny under Rule 102(e), professionals who are facing potential discipline need to promptly engage experienced federal defense counsel. By proactively addressing the SEC’s allegations and seeking to achieve a favorable resolution before the SEC initiates formal proceedings under Rule 102(e), professionals can often protect themselves against the risk of an unfavorable ALJ decision. This can help mitigate against the risk of facing civil or criminal charges as well, and it can also help to avoid unfavorable publicity for the professional’s client or company.
Speak with a Securities Fraud Defense Lawyer at Oberheiden P.C.
If you are a professional facing SEC scrutiny, we encourage you to contact us promptly for a complimentary case assessment. To speak with one of our senior securities fraud defense lawyers in confidence, call 888-680-1745 or tell us how we can help online now.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.