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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 201

[Release No. 34-78319; File No. S7-18-15]

RIN 3235-AL87

Amendments to the Commission’s Rules of Practice

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting

amendments to its Rules of Practice. These changes concern, among other things, the timing of

hearings in administrative proceedings, depositions, summary disposition, and the contents of an

answer.

DATES:

Effective Date: The final rules are effective September 27, 2016.

Applicability Dates: The applicability dates for proceedings pending as of July 13, 2016, are

discussed in Section Q of this release.

FOR FURTHER INFORMATION CONTACT: Adela Choi, Senior Counsel, and Sarit

Klein, Attorney Advisor, Office of the General Counsel, (202) 551-5150, Securities and

Exchange Commission, 100 F Street, NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to Rules

141, 154, 161, 180, 220, 221, 222, 230, 232, 233, 234, 235, 250, 320, 360, 410, 411, 420, 440,

450 and 900 of its Rules of Practice [17 CFR 201.141, 201.154, 201.161, 201.180, 201.220,

201.221, 201.222, 201.230, 201.232, 201.233, 201.234, 201.235, 201.250, 201.320, 201.360,

201.410, 201.411, 201.420, 201.440, 201.450 and 201.900].

I. Introduction

II. Description of the Final Rules

A. Rule 360 (Initial Decision of Hearing Officer and Timing of Hearing)

1. Proposed Rule

2. Comments Received

3. Final Rule

B. Rule 233 (Depositions Upon Oral Examination)

1. Proposed Rule

2. Comments Received

3. Final Rule

C. Rule 232 (Subpoenas)

1. Proposed Rule

2. Comments Received

3. Final Rule

D. Rule 141 (Orders and Decisions; Service of Orders Instituting Proceedings and

Other Orders and Decisions)

E. Rule 161 (Extensions of Time, Postponements and Adjournments)

F. Rule 180 (Sanctions)

G. Rule 220 (Answer to Allegations)

1. Proposed Rule

2. Comments Received

3. Final Rule

H. Rule 221 (Prehearing Conference)

I. Rule 222 (Prehearing Submissions)

1. Proposed Rule

2. Comments Received

3. Final Rule

J. Rule 230 (Enforcement and Disciplinary Proceedings: Availability of Documents for

Inspection and Copying)

1. Proposed Rule

2. Comments Received

3. Final Rule

K. Rule 234 (Depositions Upon Written Questions)

L. Rule 235 (Introducing Prior Sworn Statements or Declarations)

1. Proposed Rule

2. Comments Received

3. Final Rule

M. Rule 250 (Dispositive Motions)

N. Rule 320 (Evidence: Admissibility)

1. Proposed Rule

2. Comments Received

3. Final Rule

O. Amendments to Appellate Procedure in Rules 410, 411, 420, 440 and 450

1. Proposed Rule

2. Comments Received

III.

IV.

3. Final Rule

P. Amendments to Rule 900 Guidelines

1. Proposed Rule

2. Comments Received

3. Final Rule

Q. Effective Date, Applicability Dates and Transition Period

1. Proposed Rule

2. Comments Received

3. Final Rule

Economic Analysis

Administrative Law Matters

Statutory Basis

Introduction

On September 24, 2015, the Commission proposed for comment amendments to its Rules

of Practice. Among other things, we proposed to update the Rules of Practice, adjust the timing

of hearings and other deadlines in administrative proceedings, and provide parties in

administrative proceedings with the ability to take depositions. 1 We also proposed to clarify and

amend certain other rules, including the admissibility of hearsay and the requirements for the

contents of an answer. In addition, we proposed amendments to certain procedures that govern

appeals to the Commission. The proposed amendments were intended to update the Rules of

Practice and introduce additional flexibility into administrative proceedings, while continuing to

provide for the timely and efficient disposition of proceedings. 2

Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 75976 (Sept.

24, 2015), 80 FR 60091 (Oct. 5, 2015), available at https://www.gpo.gov/fdsys/pkg/FR-2015-1005/pdf/2015-24707.pdf (last visited July 8, 2016).

Promoting timeliness and efficiency in administrative proceedings has been a longstanding goal

of the Commission. See Rules of Practice, Exchange Act Release No. 48018 (June 11, 2003), 68

FR 35787 (June 17, 2003), available at https://www.gpo.gov/fdsys/pkg/FR-2003-06-17/pdf/0315262.pdf (last visited July 8, 2016) (“2003 Release”) (amending Rules of Practice “to improve

the timeliness of [the Commission’s] administrative proceedings”); Rules of Practice, Exchange

Act Release No. 35833 (June 9, 1995), 60 FR 32738 (June 23, 1995), available at

https://www.gpo.gov/fdsys/pkg/FR-1995-06-23/pdf/95-14750.pdf (“1995 Release”) (last visited

July 8, 2016) (amending Rules of Practice to “better facilitate full, fair and efficient

proceedings…”); see also id., 60 FR at 32753, Comment to Rule 161 (“Extensions of Time,

Postponements and Adjournments”) (“The rule requires the hearing officer to consider explicitly

the efficient and timely administration of justice when determining whether to grant a

postponement, adjournment or extension of time for filing of papers. The need for delay must be

balanced against the need to bring each case to a timely conclusion, consistent with the public

interest.”).

We received 13 comment letters in response to the proposal. 3 Commenters generally

supported the Commission’s efforts to update the rules, expand the discovery process and

enlarge the timetables in administrative proceedings, and in some instances suggested additional

changes. Some commenters argued that the proposed amendments were too incremental. 4

Others focused on the legitimacy of the Commission’s administrative forum, and in so doing

offered suggestions that went beyond the scope of the proposed amendments. 5 After carefully

considering the comments, we are adopting amendments to our Rules of Practice as described

below.

II.

Description of the Final Rules

As with the proposing release, we begin with a discussion of the amendments to Rule

360, which sets forth the framework and timing for the stages of an administrative proceeding.

Next, we discuss Rule 233 governing depositions, followed by Rule 232, which prescribes

The comment letters are located at http://www.sec.gov/comments/s7-18-15/s71815.shtml (last

visited July 8, 2016).

See, e.g., David M. Zornow, Christopher J. Gunther and Chad E. Silverman letter dated

December 4, 2015 (“Zornow/Gunther/Silverman”).

These comments generally expressed opposition to the administrative forum. See, e.g., Joseph

A. Grundfest letter dated December 4, 2015 (“Grundfest”) (recommending the adoption of a

mechanism to allow respondents in certain cases to remove a proceeding filed administratively to

federal court); id. (arguing that the ability to proceed in an administrative forum creates the

possibility that the Commission will choose to shield controversial cases from the full scrutiny of

federal district and appellate courts); Zornow/Gunther/Silverman (asserting that conflicts of

interest preclude the Commission from being perceived as a neutral arbiter). Because these

comments are outside the scope of the proposed amendments, we have not addressed them in the

adopting release.

standards for the issuance of subpoenas and motions to quash. The remaining rule amendments

are discussed in numerical order.

A. Rule 360 (Initial Decision of Hearing Officer and Timing of Hearing)

1. Proposed Rule

Rule 360 6 governs the time period for the filing of an initial decision by the hearing

officer and establishes the timing for the stages of an administrative proceeding, which include a

prehearing period, a hearing, a period for reviewing hearing transcripts and submitting posthearing briefs, and a deadline for the hearing officer to file an initial decision with the Office of

the Secretary of the Commission (the “Secretary”). Rule 360(a)(2) currently designates the

timeframes for each of these stages based on the date of service of an order instituting

proceedings (“OIP”). Initial decisions must be filed within the number of days prescribed by the

Commission in the OIP: 120, 210, or 300 days from the date of service of the OIP. The

prehearing period, start date of the hearing, and period for review of the transcript and posthearing briefing are, in turn, determined by the date of the OIP and time periods corresponding to

the applicable initial decision deadline. Should the hearing officer determine that it is not

possible to issue the initial decision within the period specified in the OIP, the Chief

Administrative Law Judge is authorized, under current Rule 360(a)(3), to request an extension of

time from the Commission.

We proposed to modify three aspects of the timing of a proceeding under Rule 360. First,

the proposal modifies the calculation of the initial decision deadline by changing the trigger date

for the time to file an initial decision from the OIP service date to the date of completion of post6

17 CFR 201.360.

hearing or dispositive motion briefing or a finding of a default. This modification divorces the

deadline for the completion of an initial decision from other stages of the proceeding, and is

reflected in an amendment separating current Rule 360(a)(2) into two paragraphs, proposed Rule

360(a)(2)(i) covering the initial decision deadline and proposed Rule 360(a)(2)(ii) covering the

prehearing period. Under proposed Rule 360(a)(2)(i), the OIP designates the time period for

preparation of the initial decision as 30, 75 or 120 days from the completion of post-hearing or

dispositive motion briefing or a finding of a default.

Second, proposed Rule 360(a)(2)(ii) provides a range of time during which the hearing

must begin. For proceedings with an initial decision deadline of 120 days, the proposal doubles

the maximum length of the prehearing period from the current approximately four months to no

more than eight months after service of the OIP. Pursuant to the proposal, under the 75-day

timeline, the hearing would begin approximately two and one-half months (but not more than

six months) from the date of service of the OIP, and for 30-day proceedings, the hearing would

begin approximately one month (but no more than four months) from the date of service of the

OIP. Consistent with current practice, the hearing officer would issue an order setting the

hearing dates following a prehearing conference with the parties pursuant to Rule 221. The

proposed extensions of time were designed to accommodate deposition discovery in 120-day

cases and generally allow for additional time for prehearing preparation and review of

documents, while retaining an outer time limit to promote timely and efficient resolution of the

proceedings.

Proposed Rule 360(a)(2)(ii), like current Rule 360(a)(2), contemplated an initial schedule

allowing approximately two months for review of transcripts and submission of post-hearing

briefs.

Third, the proposal adds a procedure for the hearing officer to extend the initial decision

deadline. Under proposed Rule 360(a)(3)(ii), the hearing officer is permitted to certify to the

Commission the need to extend the initial decision deadline by up to 30 days for case

management purposes. This certification must be issued at least 30 days before the expiration of

the initial decision deadline, and the proposed extension would take effect absent a Commission

order to the contrary issued within 14 days after it receives the certification.

2. Comments Received

Commenters generally supported extensions of the prehearing period under Rule 360, but

some suggested that longer or more flexible periods be adopted. Several commenters advocated

longer prehearing periods of, for instance, twelve months or eighteen months, 7 and one

commenter argued against any “pre-determined limit[s]” on the timing of proceedings. 8 A

number of commenters argued that hearing officers should be given the discretion to set the

prehearing period or to authorize extensions of the period on a case-by-case basis. 9 Several

commenters suggested alternative methods for calculating the prehearing period, for instance,

See, e.g., Financial Services Roundtable letter dated December 4, 2015 (“FSR”); New Jersey

State Bar Association letter dated December 1, 2015 (“NJSBA”).

See Zornow/Gunther/Silverman.

See, e.g., Susan E. Brune letter dated November 24, 2015 (“Brune”); Grundfest; Calfee, Halter

& Griswold, LLP letter dated November 30, 2015 (“Calfee”); Gibson, Dunn & Crutcher LLP

letter dated December 4, 2015 (“Gibson”).

based on the length of the Division of Enforcement (the “Division”) investigation 10 or the date

the Division completes production of the investigative file. 11

In urging longer prehearing periods, commenters argued that respondents need longer

discovery periods to review and address evidence gathered by the Division during the

investigation that precedes the institution of proceedings. These commenters generally cited the

size of the Division's investigative files (including electronic document productions) to be

reviewed by respondents during the period, the time required for respondents to receive the

complete investigative file during the prehearing period, and the need to counter lengthy and

extensive Division investigations. 12 Commenters also offered comparisons to the length of

discovery and flexible scheduling procedures in federal courts and in the administrative

proceedings of some other agencies. 13

Most commenters who addressed this proposed rule focused on the maximum prehearing

period for proceedings designated as 120-day matters. But one commenter urged further

extensions to the prehearing period for all administrative proceedings and to other time periods

designated under Rule 360(a)(2)(ii). 14 This commenter supported the proposal to divorce the

deadline for the initial decision from the other stages of the proceeding but argued that the

See Stephen E. Hudson letter dated December 3, 2015 (“Hudson I”).

See Gibson; Calfee.

See, e.g., Navistar International Corporation letter dated December 3, 2015 (“Navistar”).

See Brune; Gibson; Navistar.

NJSBA.

Commission should extend the period for post-hearing briefing to three months, rather than the

two months allocated under both the current and proposed rules. The commenter also suggested

modifying the certification process for 30-day extensions under Rule 360 to require the hearing

officer’s certification to be issued 45 or 60 days before the deadline, and an order from the

Commission expressly granting or rejecting the proposed extension. 15

3. Final Rule

We are adopting Rule 360(a)(2)(i) substantially as proposed, with non-substantive

modifications intended to clarify that multiple events (i.e., completion of post-hearing briefing

where a hearing has been completed, completion of briefing on a dispositive motion where there

is no hearing, or the determination of a default) may trigger the running of the 30, 75 or 120-day

deadline for the initial decision. 16

In addition, we believe it is appropriate, consistent with the view of commenters

suggesting a longer prehearing period under the 120-day timeline, to modify the proposed

amendments to Rule 360(a)(2)(ii) to extend by an additional two months the maximum

prehearing period for proceedings in this category. As adopted, Rule 360(a)(2)(ii) provides that

under the 120-day timeline, the hearing officer shall issue an order scheduling the hearing to

begin approximately four months (but no more than ten months, instead of the proposed eight)

Id.

We emphasize that, as provided for in current Rule 360(a)(1), unless the Commission directs

otherwise, the hearing officer shall prepare an initial decision in any proceeding in which the

Commission directs a hearing officer to preside at a hearing, provided, however, that an initial

decision may be waived by the parties with the consent of the hearing officer pursuant to Rule

202.

from the date of service of the OIP. 17 The longer prehearing period is intended to provide

parties, in appropriate cases, additional time to review the investigative record, conduct

depositions under amended Rule 233, and prepare for a hearing. 18

While we recognize that some might view the maximum ten-month prehearing period as

not long enough, the Commission believes that the final rule strikes the appropriate balance

between the time needed to conduct discovery and prepare for a hearing and the Commission’s

goal of timely and efficiently resolving administrative proceedings.

In response to commenters urging open-ended prehearing periods as determined by

hearing officers, we note that the Commission amended Rule 360 in 2003 to impose mandatory

deadlines for completion of initial decisions because of concerns about adherence to the Rule’s

then-existing non-binding goals. 19 We continue to believe that timely completion of proceedings

can be achieved more successfully with express deadlines for completion of the various steps in

The prehearing periods in this rule do not affect the statutory hearing requirements in ceaseand-desist proceedings. In such proceedings, the Commission is required to set a hearing date

not earlier than 30 days nor later than 60 days after service of the OIP, unless an earlier or later

date is set by the Commission with the consent of any respondent so served. See, e.g., Securities

Exchange Act of 1934 (“Exchange Act”) Section 21C(b), 15 U.S.C. 78u–3(b).

By lengthening the prehearing period, the Commission does not suggest that every 120-day

matter will qualify for the maximum ten-month period. Proceedings designated for the 120-day

timeline will range from routine matters involving a single violation of the securities laws to

matters involving, for example, multiple and distinct alleged violations, a particularly

voluminous investigative record, or a complex set of factual allegations. In setting the hearing

date, the hearing officer should assess whether the proceeding at issue warrants the maximum

prehearing period or whether a shorter prehearing period would provide the parties with adequate

preparation time. In keeping with the goal of resolving administrative proceedings in an

expeditious manner, the maximum prehearing period should be the exception rather than the

norm.

See 2003 Release, 68 FR at 35787.

the administrative proceeding. In designating timeframes for proceedings in the OIP, the

Commission considers “the nature, complexity, and urgency of the subject matter,” with due

regard for the public interest and the protection of investors. 20

We are amending Rule 360(a)(2)(ii) in one additional respect to resolve an apparent

discrepancy with existing Rule 340, which governs the timeframes for filing post-hearing briefs.

Specifically, we are amending Rule 360(a)(2)(ii) to remove the approximately two-month

timeframe for obtaining transcripts and submitting post-hearing briefs. The Commission

included these internal timeframes when it amended Rule 360 in 2003 to address concerns that

setting only an outside deadline for the issuance of an initial decision by the hearing officer could

incentivize the hearing officer to curtail the parties’ prehearing preparation time and post-hearing

briefing time while reserving the majority of the overall time period for the hearing officer to

draft the initial decision. 21 This should not be a concern under amended Rule 360, because under

the amended rule the deadline for filing the initial decision is triggered not by the date of service

of the OIP, but by the completion of post-hearing briefing (or, if there is no hearing, the

completion of briefing on a dispositive motion or the determination of a default). The

“approximately 2-month” language contained in current and proposed Rule 360 for submission

of post-hearing briefs also may create unnecessary ambiguity in the post-hearing briefing

requirements set forth in Rule 340, which provides that the hearing officer shall by order set the

17 CFR 201.360(a)(2)(i).

See 2003 Release, 68 FR at 35787.

deadlines for post-hearing briefing for a period that shall not exceed 90 days after the close of the

hearing, unless the hearing officer, for good cause shown, permits a different period. 22

We are adopting Rule 360(a)(2)(ii) as proposed with respect to the scheduling of hearings

in 75-day and 30-day proceedings, with a conforming change to remove the approximate

timeframes set forth in the rule for obtaining a transcript and submitting post-hearing briefs, for

the reasons discussed above. The final amendment provides for an outer limit of six months for

the hearing to commence under the 75-day timeline, and an outer limit of four months for the

hearing to commence in 30-day proceedings. Proceedings in the 75-day category typically

involve “follow-on” proceedings following certain injunctions or criminal convictions. 23 The 30day designation typically is reserved for proceedings under Section 12(j) of the Exchange Act. 24

We continue to believe that the proposed prehearing periods for these cases is appropriate since

they are by their nature more routine than 120-day proceedings, and are sometimes uncontested.

We therefore believe that the prehearing periods for these cases, which we are adopting as

We did not propose, and are not now amending, Rule 340. However, given that one of the

overall purposes of these amendments is to promote efficiency in the adjudication of

administrative proceedings, the “good cause” standard for granting extensions beyond the 90-day

timeframe set forth in Rule 340 should continue to be rarely granted, limited to truly unusual

circumstances, and not introduce undue delay in the resolution of proceedings.

The Commission is authorized to institute administrative proceedings following certain

injunctions or convictions of persons associated with or seeking to associate in the securities

industry. See, e.g., Exchange Act Section 15(b), 15 U.S.C. 78o(b); Section 203(f) of the

Investment Advisers Act of 1940, 15 U.S.C. 80b-3(f).

Section 12(j) of the Exchange Act authorizes the Commission, among other things, to revoke

the registration of a security if the issuer fails to comply with the federal securities laws. See 15

U.S.C. 78l(j).

proposed, will provide adequate preparation time for the parties while balancing the need for

efficient resolution of administrative proceedings.

We are adopting Rule 360(a)(3) as proposed. The final rule permits the hearing officer

presiding over the proceeding to certify to the Commission a need to extend the initial decision

deadline by up to 30 days for case management purposes. This certification must be issued no

later than 30 days prior to the expiration of the initial decision deadline. One commenter

supported the proposed certification procedure but suggested requiring the certification to be

issued 45 or 60 days prior to the expiration of the initial decision deadline. The Commission

continues to believe that a 30-day period provides sufficient notice to the parties of the hearing

officer’s certification. In response to the comment suggesting the Commission issue an order

expressly granting or rejecting the hearing officer’s proposed extension, we do not believe this

added procedure is necessary. As adopted, the rule provides that if the Commission has not

issued an order to the contrary within 14 days after receiving the certification, the extension

sought in the hearing officer’s certification shall take effect. In the Commission’s view, the final

rule provides sufficient clarity on whether the proposed extension has been granted.

B. Rule 233 (Depositions Upon Oral Examination)

1. Proposed Rule

Current Rule 233 permits any party to move for permission to take the deposition of a

witness who likely will be unavailable to attend or testify at the hearing. We proposed to amend

Rule 233 to permit a limited number of additional depositions. As proposed, amended Rule 233

permits the respondent and the Division in a single-respondent proceeding designated as a 120day proceeding each to notice the depositions of three persons. In a multi-respondent 120-day

proceeding, the Division is permitted to notice five depositions, and the respondents collectively

can also notice five depositions. Under the proposal, the parties could also request that the

hearing officer issue a subpoena for documents in conjunction with the deposition. Proposed

Rule 233 also sets forth procedures for deposition practice, including a six-hour time limit for

depositions, contents of the notice of deposition, and other matters.

2. Comments Received

Most commenters urged that the final rule provide respondents the ability to conduct

more depositions than the Commission proposed. Commenters appeared to be animated by two

principal concerns. First, commenters believed that the Commission’s proposal to limit parties

to a fixed number of depositions did not accommodate respondents’ potential need for additional

depositions depending on the facts and circumstances of the individual case, particularly in

complex or multi-party proceedings. 25 Second, commenters argued that the Division’s

investigation before the Commission initiates proceedings creates an information imbalance that

warrants providing respondents with additional opportunities to conduct depositions. 26

Commenters suggested a variety of possible parameters for additional depositions. Most

commenters urged that hearing officers be granted discretion to approve requests for additional

depositions, similar to the practice under Rule 30 of the Federal Rules of Civil Procedure. 27

Center for Capital Market Competitiveness, U.S. Chamber of Commerce letter dated

December 4, 2015 (“CCMC”); Calfee; NJSBA; Navistar; Hudson I; Zornow/Gunther/Silverman;

FSR; Gibson; Grundfest.

Aegis J. Frumento and Stephanie Korenman letter dated December 4, 2015

(“Frumento/Korenman”); Brune; Navistar; Hudson I; Zornow/Gunther/Silverman; FSR; CCMC.

Brune; Calfee; NJSBA; Navistar; Hudson I; Gibson; Frumento/Korenman; CCMC. One of

these commenters further pointed out that the adjudication rules of the Federal Trade

Commission do not limit the number of discovery depositions. Gibson (citing 16 CFR 3.31(a)).

Commenters criticized the “one size fits all” approach of the proposed rule, 28 and argued that

hearing officer discretion in the matter of depositions is necessary because each case presents

unique facts and circumstances. Three commenters suggested guidelines for exercising such

discretion based on limitations found in Rule 26 of the Federal Rules of Civil Procedure. 29

Commenters differed on the number of depositions they believed the rule should permit

as a matter of right (i.e., before a party would be required to seek leave from the hearing officer

to notice the deposition). A number of commenters pointed the Commission to Rule 30(a)(2) of

the Federal Rules of Civil Procedure as an appropriate model. 30 Rule 30(a)(2) requires leave of

court for a deposition if the deposition would result in plaintiffs as a group or defendants as a

group taking more than ten depositions. 31 Two of these commenters further urged that ten

depositions be permitted to each party 32 or each respondent, 33 rather than to each side. One

commenter suggested five depositions for each respondent in either a single-respondent or multi-

However, one commenter believed that a limit of ten depositions per party would be reasonable.

FSR.

Stephen E. Hudson letter dated December 4, 2015 (“Hudson II”, incorporating anonymous

blog); Zornow/Gunther/Silverman.

NJSBA (citing Fed.R.Civ.P. 26(b)(2)(C)); Hudson I (same); Gibson (citing Fed.R.Civ.P.

26(b)(1)).

Brune; Navistar; Hudson I; FSR; CCMC.

Fed.R.Civ.P. 30(a)(2)(A)(i).

FSR.

CCMC.

respondent proceeding as an appropriate starting point, coupled with hearing officer discretion to

enlarge the number. 34

Three commenters supported the Commission’s proposal of three depositions in a singlerespondent proceeding and five depositions in a multi-respondent proceeding, subject, again, to

hearing officer discretion to enlarge the number, and with certain other caveats. 35 One of these

commenters suggested that the three- and five-deposition limits proposed by the Commission

should be limited to fact witnesses, and not include experts. 36 A second commenter proposed

that hearing officers be required to grant a party in a single-respondent proceeding leave to take

more than three depositions, and a party in a multi-respondent proceeding leave to take more

than five depositions. 37 Another of these commenters added that that the Division should not be

permitted to notice any depositions at all. 38 Two commenters urged that the rule not set any

predetermined limits, but rather that the number of depositions be left entirely to the discretion of

the hearing officer. 39

Gibson.

Calfee; NJSBA; Frumento/Korenman.

Calfee; see also CCMC (proposing ten depositions of right for each respondent, not including

expert depositions, which would be separately authorized by the hearing officer).

NJSBA.

Frumento/Korenman.

Zornow/Gunther/Silverman; Grundfest.

A number of commenters took issue with the Commission’s proposal that the respondents

in a multi-respondent proceeding share a fixed number of depositions. 40 These commenters

generally argued that, because respondents may have divergent interests, each respondent should

be entitled to take the same number of depositions. 41 In addition, several commenters – citing

the ability of the Division to develop an extensive investigative record before the initiation of the

proceeding – argued that the Division should not be permitted to take any depositions, or that its

right to do so should be limited in various ways. 42

Finally, two commenters urged that the Commission permit seven hours for each

deposition, consistent with the practice in federal courts, rather than the proposed six hours. 43

3. Final Rule

We are adopting the proposed amendments to Rule 233 with certain modifications. The

proposed amendments to Rule 233, in conjunction with increasing the maximum prehearing time

period under Rule 360, were intended to provide parties with the potential benefits of deposition

discovery without sacrificing the public interest or the Commission’s goal of resolving

Calfee; Hudson II (incorporating anonymous blog); FSR; Gibson; CCMC.

FSR; CCMC.

Brune (Division should be permitted to depose only respondents’ experts, or fact witnesses

with leave); Hudson I (same); FSR (Division should not be able to depose witnesses whose

testimony was taken during the investigation); Frumento/Korenman (no depositions at all for

Division); CCMC (Division should only be permitted to take depositions based upon proffer to

hearing officer explaining why the staff were unable to take testimony during the investigation,

or that the deposition is needed because of new information obtained after the completion of the

investigation).

Calfee; FSR; see Fed.R.Civ.P. 30(c).

administrative proceedings promptly and efficiently. We have weighed commenters’ concerns

against the need to maintain this balance.

There are sound justifications for limiting the availability of depositions in Commission

administrative proceedings as compared with litigation under the Federal Rules of Civil

Procedure. Typically, in a federal civil action a complaint is filed, and, because neither party can

compel testimony prior to the filing of the complaint, oral depositions thereafter play a critical

role in gathering preliminary and background discovery, in addition to gathering evidence for use

at trial. However, in a Commission enforcement action, the complaint (in a federal court action)

or the OIP (in an administrative proceeding) is premised on an evidentiary record developed

through the staff’s pre-filing investigation. The Division produces to respondents various

materials from the investigative file—i.e., non-privileged documents gathered by the Division,

transcripts of investigative testimony, and disclosure of material, exculpatory facts (Brady

material)—that provide significant guidance to respondents in determining the most important

witnesses to depose. 44 Thus, as some commenters appeared to acknowledge, a principal goal of

oral depositions in our administrative proceedings would be to supplement the record, not create

it. 45 Given these different starting points, the fact that rules that govern discovery in federal court

Rule 230 requires early production by the Division of non-privileged documents and

transcripts of testimony obtained during the investigation. Under Rule 230, which incorporates

certain criminal process rights derived from criminal cases and statutes, respondents receive

documents that contain material exculpatory evidence under Brady v. Maryland, 373 U.S. 83, 87

(1963). No analogous provision is present in the Federal Rules of Civil Procedure.

See Brune (transcripts of investigative testimony “can reflect no meaningful exploration of

important areas….”); Hudson I (same); FSR (“[R]espondents did not have an opportunity to ask

[investigative] witnesses questions or to choose which witnesses to examine.”).

also apply to Commission federal court enforcement actions does not provide a compelling

reason for incorporating the same deposition discovery rules into our administrative practice, in

particular given the Commission’s strong interest in establishing a timely and efficient

administrative forum. 46 Accordingly, we do not agree with commenters who advocated further

expanding the proposed oral deposition rights in our administrative proceedings commensurate

with Rule 30 of the Federal Rules of Civil Procedure, including ten depositions per side (or per

party) as of right.

At the same time we recognize, as many commenters noted, that some cases may present

unique issues or challenges that warrant affording the parties additional opportunities to conduct

prehearing depositions. While the Commission’s expectation is that such circumstances will

rarely be present, we agree that our rules should be flexible enough to accommodate reasonable

requests for a limited number of additional depositions. For this reason, the final rule includes a

new provision, Rule 233(a)(3), that permits either side to move the hearing officer for leave to

notice up to two additional depositions.

Paragraphs (a)(1) and (2) of amended Rule 233 retain the proposed rule’s limitations on

depositions as a matter of right. They provide that, in a single-respondent proceeding under the

120-day timeframe set forth in Rule 360, the respondent and the Division may each file written

notices to depose up to three persons; and, in a multi-respondent 120-day proceeding, the

See supra note 2. In response to the commenter who also pointed us to the adjudication rules

of the FTC, we note that agency practice is varied on this issue. See Gibson. A number of

agencies do not permit prehearing discovery depositions except with respect to witnesses who

will be unavailable at the hearing. See, e.g.,12 CFR 1081.209 and 77 FR 39057, 39073 (June 29,

2012) (Consumer Financial Protection Bureau); 17 CFR 10.44 and 41 FR 2508, 2509 (Jan. 16,

1976) (Commodity Futures Trading Commission); 12 CFR 308.27 (Federal Deposit Insurance

Corporation).

respondents collectively may file joint written notices to depose up to five persons and the

Division may file written notices to depose up to five persons. 47 However, because we are

persuaded that a seven-hour limit to depositions, rather than the six-hour limit we proposed,

balances the Commission’s goal of timely and efficient administrative proceedings and the

benefits of allowing parties more time to depose witnesses, we have revised paragraph (j)(1) of

Rule 233 to provide for a seven-hour limit to depositions. 48 Amended paragraph (a)(5) further

makes clear that the fact that a witness testified during an investigation does not preclude the

deposition of that witness. 49

The final rule limits depositions to 120-day proceedings as proposed. Thus, parties will

not be permitted to notice depositions in proceedings where the initial decision is placed on

either the 30- or 75-day timeline under amended Rule 360. As adopted, Rule 360 provides for

the hearing in proceedings placed on the 120-day timeline to commence between four and ten

months from the date of service of the OIP. We anticipate that this extended period will provide

sufficient time for parties to take the allotted number of depositions, along with any additional

depositions that may be permitted under new paragraph (a)(3) of the Rule (discussed below), and

to complete their other prehearing preparation. Further, as discussed below, and as reflected in

amended Rule 221, we expect that the depositions each party plans to notice, including the

Federal Rule of Civil Procedure 30(a)(2)(A) similarly sets a deposition limit per side, not per

party. See 8A Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and

Procedure section 2104 (3d ed.).

This is consistent with the Federal Rules of Civil Procedure. See Fed.R.Civ.P. 30(d)(1).

This provision has been renumbered from the proposed rule, where it was numbered paragraph

(a)(4).

identities of the proposed deponents, will be one of the topics discussed at any initial prehearing

conference. 50

We disagree with commenters who urged that the Division not be permitted to notice

depositions (or have its deposition rights limited) in view of the Division’s ability to take

investigative testimony before the proceedings are instituted. Investigative testimony generally

is directed at ascertaining facts in order for the staff to determine whether to recommend that the

Commission authorize an action for violations of the federal securities laws. Once the

investigative record has been sifted through and the Commission has instituted an administrative

proceeding, issues relevant to a claim or defense may become clarified and warrant new or

additional focus in discovery. 51 Thus, the prehearing discovery context is sufficiently different

from the investigation such that the Division should be entitled to the same discovery rights as

respondents in order to prepare its case for the hearing. 52 Moreover, information gathered from

depositions taken by the respondents might reveal the need for the Division to depose other

persons. Also, in some instances, witnesses decline to answer questions in investigative

testimony based upon assertion of attorney-client privilege or the Fifth Amendment, but those

See infra discussion at section H.

As just one example, the Commission’s experience has been that issues relating to possible

reliance on professionals are not always clarified during the investigation. Today the

Commission is also amending Rule 220 to require that respondents state in an answer whether

they relied on professionals. This early statement will enable the Division to consider this issue

in formulating its deposition plan.

See SEC v. Saul, 133 F.R.D. 115 (N.D. Ill. 1990); SEC v. Espuelas, 699 F. Supp. 2d 655

(S.D.N.Y. 2010). “There is no authority which suggests that it is appropriate to limit the SEC’s

right to take discovery based upon the extent of its previous investigation into the facts

underlying the case.” SEC v. Sargent, 229 F.3d 68, 80 (1st Cir. 2000) (relying on Saul).

protections might no longer apply by the time of depositions in an administrative proceeding.

Thus, many reasons support the need for the Division to have the same rights as respondents to

conduct depositions.

New paragraph (a)(3) of amended Rule 233 permits the hearing officer in a 120-day

proceeding to grant either side leave to take up to two additional depositions beyond those

permitted under paragraphs (a)(1) and (2). This means that, in proceedings involving a single

respondent, the hearing officer may permit up to a maximum of five depositions for the

respondent and five depositions for the Division. In proceedings involving multiple respondents,

the hearing officer may permit up to a maximum of seven depositions for all respondents,

collectively, and seven depositions for the Division.

Paragraph (a)(3) is intended to permit a limited number of additional depositions in

compelling circumstances without significantly increasing the burdens for all the parties or

undermining the goal of providing a prompt and efficient administrative forum. As discussed

above, we have increased the prehearing period in 120-day proceedings to a maximum of ten

months. As amended, Rule 233 will now permit parties to notice up to seven depositions of

witnesses from among the categories set forth in amended Rule 232(e), compared with no

depositions permitted under the current rule (except for witnesses likely to be unavailable at the

hearing). We believe that these new deposition opportunities will afford respondents and the

Division additional opportunities to develop the record without compromising the hearing

schedule.

A motion for additional depositions under paragraph (a)(3) must be filed no later than 90

days prior to the hearing date. We anticipate that this deadline will give the parties sufficient

time at the outset of a proceeding to identify additional witnesses they wish to depose, and to

confer with other parties to determine whether they intend also to file a motion and, in a multirespondent proceeding, whether there are any common putative deponents, before moving the

hearing officer for leave. This deadline should also enable any motions to be resolved and

additional depositions to be taken in a timely manner, consistent with the needs of the parties to

prepare for the hearing.

To support a prompt determination on a motion for additional depositions, paragraph

(a)(3)(i) establishes a simplified motion practice leading to an expedited decision from the

hearing officer. Any party opposing the motion must file its opposition, if any, within five days;

the motion and any oppositions are each limited to seven pages; and neither separate points and

authorities nor replies are permitted. 53 The proceeding will not automatically be stayed during

the pendency of a motion. Further, under paragraph (a)(3)(iii), if the moving party proposes to

take the additional depositions upon written questions, as provided for in Rule 234, the motion

must state that fact, and the written questions must be submitted with the motion for additional

depositions.

Paragraph (a)(3)(ii) establishes two requirements for a grant of additional depositions.

First, the additional depositions must satisfy the requirements of Rule 232(e). Amended Rule

232(e), among other things, requires the hearing officer, upon application, to quash or modify a

deposition if the deposition would be unreasonable, oppressive, unduly burdensome, would

unduly delay the hearing, or if the proposed deponent does not fall within one of the three

We have made separate conforming amendments to Rule 154 (Motions), whereby the

requirements of that rule do not apply where another rule expressly applies to a particular

motion.

categories of witnesses authorized for depositions under Rule 232(e)(3). By requiring that any

additional depositions satisfy the requirements of Rule 232(e), we intend to incorporate the

standards under that Rule into the motion practice under paragraph (a)(3); opposing parties do

not need to file a separate application to quash. 54 However, for any depositions a party may take

as a matter of right, the Commission or a hearing officer may quash such a deposition notice

following the filing of a motion made pursuant to Rule 232(e).

If the requested additional depositions satisfy the threshold requirements of Rule 232(e),

the moving side must also demonstrate that it has a compelling need to take the additional

depositions. To make this showing the moving side must, in its motion, identify each witness

that it intends to depose as of right and the additional witnesses that it seeks to depose; describe

the role of each witness and each proposed additional witness; describe the matters concerning

which each witness and each proposed additional witness is expected to be questioned and why

each deposition is necessary to the side’s arguments, claims, or defenses; and show that the

additional depositions requested will not be cumulative or duplicative.

Paragraph (b) of amended Rule 233 retains the existing procedure whereby a party may

seek leave of the hearing officer to take the deposition of a witness who will likely be

unavailable to attend or testify at the hearing. A deposition granted under paragraph (b) does not

count against the moving side’s permissible number of depositions by right or additional

depositions under paragraph (a). Nothing in the rules as amended changes the current practices

or standards for obtaining leave to depose individuals under paragraph (b). As before, a

This does not preclude proposed deponents or other persons described in Rule 232(e)(1) from

filing an application under that rule to quash or modify a notice of deposition or a subpoena.

deposition under Rule 233(b) is available only upon a showing that the prospective witness will

likely give testimony that is material to the hearing; that it is likely the prospective witness will

be unable to attend or testify at the hearing because of age, sickness, infirmity, imprisonment,

other disability, or absence from the United States (unless it appears that absence of the witness

was procured by the moving party); and that the taking of the deposition will serve the interests

of justice. These standards should prevent this provision from being used as a means to

circumvent the number of depositions allowed under Rule 233(a).

We received no comments on the remaining proposed amendments to Rule 233, with the

exception, as noted above, of the six-hour length of depositions. The final rule changes this to

seven hours. 55

C. Amendments to Rule 232 (Subpoenas)

1. Proposed Rule

Current Rule 232 addresses the availability of, and standards for issuing, subpoenas

requiring the attendance of witnesses at hearings and the production of documents. We proposed

amendments to Rule 232 to correspond with the new provisions on depositions in Rule 233. As

proposed, amended Rule 232(e)(1) permits a person who is subject to a deposition notice, or a

party, to move to quash or modify the notice. This proposed amendment is intended to promote

efficiency in the discovery process by allowing persons to move at the notice stage, rather than

We note that we have made certain other minor changes to this rule from the proposed rule,

including: (1) deleting the requirement that a notice of deposition describe the scope of the

testimony to be taken; (2) requiring that each party bear its own transcription costs; (3) clarifying

that the deposition officer must furnish a copy of the transcript to any party or the deponent, as

directed by the party or person paying the charges; and (4) providing that any party may seek

relief from the hearing officer with respect to disputes over the conduct of a deposition. These

changes are generally intended to simplify the rule text or to clarify minor procedural matters.

waiting for a party to request the issuance of a subpoena to compel attendance. Proposed

paragraphs (e)(2) and (3) of the rule establish additional standards governing the hearing

officer’s decision on an application to quash or modify a notice of deposition or subpoena.

Proposed paragraph (e)(2) adds undue delay of the hearing as a ground for quashing or

modifying a deposition notice or subpoena (to the existing grounds that compliance would be

unreasonable, oppressive, or unduly burdensome). This amendment requires the hearing officer

or the Commission to consider the delaying effect of compliance with a subpoena or notice of

deposition, and is intended to promote the efficient use of time for discovery during the

prehearing period.

Proposed paragraph (e)(3) requires that the hearing officer or the Commission quash or

modify the subpoena unless the requesting party demonstrates that the proposed deponent is a

fact witness (except that those witnesses whose only knowledge of relevant facts arose from the

Division’s investigation or the proceeding may not be deposed), an expert witness designated

pursuant to Rule 222(b), or a document custodian (except those Division or Commission

personnel who have custody of documents or data that were produced by the Division to the

respondent), and that the notice or subpoena otherwise satisfies the requirements of Rule 233(a).

This provision is intended to foster use of depositions where appropriate and promote

meaningful discovery, within the limits of the number of depositions provided per side pursuant

to proposed Rule 233(a).

Proposed Rule 232(f) requires each party to pay the fees and expenses of its own expert

witnesses.

2. Comments Received

One commenter submitted for our consideration several links to a securities blog that

criticized many of the proposed changes to our Rules of Practice. 56 With respect to Rule 232, the

author of the blog made two principal comments. The author took issue with the requirement of

Rule 232 that a subpoena be issued by the hearing officer, as compared with Rule 45 of the

Federal Rules of Civil Procedure, which permits parties to issue subpoenas without the judge

acting as a “gatekeeper.” The author asserted that hearing officers, “at the prodding of” the

Division, permit only limited discovery in administrative proceedings, and criticized the

proposed changes to Rule 232 for not addressing this situation. The author also objected to the

requirement of proposed Rule 232(e)(3) that a subpoena be quashed or modified unless the

requesting party demonstrates that the proposed deponent is a fact witness, an expert witness, or

a document custodian. The author argued that, instead, respondents should be permitted to use

their allotted number of depositions to notice persons they deem important to their defense

irrespective of such limitations.

3. Final Rule

We are adopting amended Rule 232 substantially as proposed, with one change to correspond

to changes we have made to Rule 220 (“Answer to Allegations”). As is discussed below, we

have adopted an amendment to Rule 220 that requires respondents to state in the answer whether

they relied on professionals. In conjunction with this change, we have amended Rule

232(e)(3)(i) to clarify that a proposed deponent may include a fact witness relative to any claim

Hudson II.

of the Division, any defense, or anything else required to be included in an answer pursuant to

Rule 220(c).

With regard to the one comment referenced above, we note, first, that Rule 232 is based on

Section 555(d) of the Administrative Procedure Act (“APA”), 57 which does not contemplate that

parties to agency proceedings would themselves issue subpoenas. 58 The grounds for a hearing

officer denying a request to issue a subpoena under Rule 232 – that it is “unreasonable,

oppressive, excessive in scope, or unduly burdensome” – are also consistent with wellestablished judicial standards, 59 and we have no evidence that hearing officers are not acting

diligently and in good faith in their consideration of current requests for subpoenas, or that they

would not do so in implementing the standards for quashing or modifying deposition subpoenas

set forth under the amended rule.

Second, depositions impose costs and burdens not just on the party taking the deposition but

on all other parties to the proceeding and upon the deponent. The proposed rule was based on

the Commission’s experience that fact witnesses, expert witnesses, and document custodians are

1995 Release, 60 FR at 32764.

5 U.S.C. 555(d); Attorney General’s Manual on the Administrative Procedure Act, section 6(c)

(1947) (“Attorney General’s Manual”).

Attorney General’s Manual, section 6(c) (“[A]gencies may refuse to issue to private parties

subpoenas which appear to be so irrelevant or unreasonable that a court would refuse to enforce

them.”); Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812 (5th Cir. 2004) (under Federal Rule

of Civil Procedure 45, a court has the power to quash or modify a subpoena if it is unreasonable

and oppressive, and subjects a party to undue burden).

the individuals most likely to have information relevant to the issues to be decided. 60 We are not

aware of, nor did any commenter suggest, any other categories of witnesses whose deposition

would be necessary in administrative proceedings. If there are instances in which a party

requires the testimony of a witness who does not fit within the three categories to testify, the

party may seek to call that witness at the hearing, either by voluntary appearance or by subpoena

of the witness, if otherwise permitted under the Rules.

D. Rule 141 (Orders and Decisions; Service of Orders Instituting Proceedings

and Other Orders and Decisions)

1. Proposed Rule

Rule 141(a)(2)(iv) 61 contains the requirements for serving an OIP on a person in a foreign

country. The current rule allows for service of an OIP on persons in foreign countries by any

method specified in the rule, or “by any other method reasonably calculated to give notice,

provided that the method of service used is not prohibited by the law of the foreign country.”

We proposed to amend this rule so that service reasonably calculated to give notice includes

any method authorized by the Hague Convention on the Service Abroad of Judicial and

Extrajudicial Documents; methods prescribed by the foreign country’s law for service in that

country in an action in its courts of general jurisdiction; or as the foreign authority directs in

response to a letter rogatory or letter of request. In addition, under the proposed rule, unless

prohibited by the foreign country’s law, service can be made by delivering a copy of the OIP to

In contrast to Federal Rule of Civil Procedure 30(b)(6), neither current Rule 232(e)(3) nor

Rule 233 permits depositions of a public or private corporation, partnership, association,

governmental agency, or other entity. Such depositions are not permitted under the amended

Rules of Practice.

17 CFR 201.141(a)(2)(iv).

the individual personally, or using any form of mail that the Secretary or the interested division

addresses and sends to the individual and that requires a signed receipt. The proposed rule also

allows service by any other means not prohibited by international agreement, as the Commission

or hearing officer orders. Like the similar provision in the Federal Rules of Civil Procedure, this

provision covers situations where existing agreements do not apply, or efforts to serve under

such agreements are or would be unsuccessful.

We also proposed to amend Rule 141(a)(3), which requires the Secretary to maintain a

record of service on parties, to make clear that in instances where a division of the Commission

(rather than the Secretary) serves an OIP, the division must file with the Secretary either an

acknowledgement of service by the person served or proof of service.

2. Final Rule

We did not receive comments on this aspect of the proposal and are adopting the

amendments as proposed. In addition to clarifying that proper service on persons in foreign

countries may be made by any of the above methods, the rule provides certainty regarding

whether service of an OIP has been effected properly and allows the Commission to rely on

international agreements in which foreign countries have agreed to accept certain forms of

service as valid. The final amendment provides that a division that serves an OIP must file with

the Secretary either an acknowledgement of service by the person served or proof of service

consisting of a statement by the person who made service certifying the date and manner of

service; the names of the persons served; and their mail or electronic addresses, facsimile

numbers, or the addresses of the places of delivery, as appropriate for the manner of service.

E. Rule 161 (Extensions of Time, Postponements and Adjournments)

Rule 161 62 governs extensions of time, postponements, and adjournments requested by

parties. Under current Rule 161(c)(2), a hearing officer may stay a proceeding pending the

Commission’s consideration of offers of settlement under certain limited circumstances, but that

stay does not affect any of the deadlines in Rule 360. In recognition of the important role of

settlement in administrative proceedings, we proposed to amend Rule 161(c)(2) to allow a stay

pending Commission consideration of settlement offers to also stay the timelines set forth in

Rule 360. 63 All the other requirements for granting a stay under the current rule would remain

unchanged. The Commission did not receive any comments on this aspect of the proposal. We

are adopting the amendments as proposed.

F. Rule 180 (Sanctions)

Current Rule 180 allows the Commission or a hearing officer to exclude a person from a

hearing or conference, or summarily suspend a person from representing others in a proceeding,

if the person engages in contemptuous conduct before either the Commission or a hearing

officer. The exclusion or summary suspension can last for the duration or any portion of a

proceeding, and the person may seek review of the exclusion or suspension by filing a motion to

vacate with the Commission. We proposed to amend Rule 180 to allow the Commission or a

hearing officer to exclude or summarily suspend a person for any portion of a deposition, as well

as the proceeding, a conference, or a hearing. The person would have the same right to review of

17 CFR 201.161.

We are also adopting a conforming amendment to Rule 360(a)(2)(ii) to include a crossreference to amended Rule 161(c)(2).

the exclusion or suspension by filing a motion to vacate with the Commission. We did not

receive any comments on this aspect of the proposal and are adopting the rule as proposed, with

the addition of one ministerial edit to Rule 180(c).

As currently drafted, Rule 180(c) provides that the Commission or hearing officer may

enter a default pursuant to Rule 155, dismiss the case, decide the particular matter at issue

against that person, or prohibit the introduction of evidence or exclude testimony concerning that

matter if a person fails to (1) make a filing required under the Rules of Practice; or (2) cure a

deficient filing within the time specified by the Commission or the hearing officer pursuant to

Rule 180(b). 64 We are amending the Rule to substitute the phrase “one or more claims” for the

phrase “the case,” and to substitute the word “claim” for the word “matter.” These nonsubstantive changes are designed to more accurately reflect the terminology used in

administrative proceedings but are not intended to, and do not, change the substance of the Rule.

G. Rule 220 (Answer to Allegations)

1. Proposed Rule

Current Rule 220 sets forth the requirements for filing answers to allegations in an OIP. 65

Among other things, it requires a respondent to state in the answer whether the respondent is

asserting any defenses, including res judicata and statute of limitations. 66 We proposed

amendments to Rule 220 to emphasize that a respondent must affirmatively state in an answer

Emphasis added.

17 CFR 201.220.

Id.

whether the respondent is asserting any avoidance or affirmative defenses, including but not

limited to res judicata, statute of limitations or reliance even if such theories are “not technically

considered affirmative defenses.” 67 Timely assertion of such theories, we explained, “would

focus the use of prehearing discovery, foster early identification of key issues and, as a result,

make the discovery process more effective and efficient.” 68

2. Comments Received

Commenters generally opposed the proposed amendment and requested that it be

withdrawn. Commenters’ principal contention was that “reliance on counsel is not a defense

required to be raised in an answer, but simply goes to the evidence of whether a respondent acted

in good faith.” 69 Commenters also argued that the proposed amendment prejudices respondents,

provides an unfair advantage to Division staff in administrative proceedings, improperly requires

respondents to disclose their trial strategy, and infringes on the attorney work-product privilege. 70

80 FR at 60095. Compare Fed. R. Civ. P. 8(c) (“In responding to a pleading, a party must

affirmatively state any avoidance or affirmative defense.”) “Generally speaking,” Federal Rule

of Civil Procedure 8(c)’s reference to “an avoidance or affirmative defense” “encompasses two

types of defensive allegations: those that admit the allegations of the complaint but suggest

some other reason why there is no right of recovery, and those that concern allegations outside of

the plaintiff’s prima facie case that the defendant therefore cannot raise by a simple denial in the

answer.” 5 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and

Procedure section 1271 (3d ed.). As discussed below, in the final rule we have clarified the

reference to “reliance” in the proposed rule.

80 FR at 60095.

NJSBA (citing Howard v. SEC, 376 F.3d 1136, 1147 (D.C. Cir. 2004) (holding that “reliance

on the advice of counsel need not be a formal defense”)); see also Hudson II (citing anonymous

blog post) and infra note 72.

NJSBA; Hudson II.

3. Final Rule

We continue to believe that timely assertion of reliance would focus the use of prehearing

discovery and foster early identification of key issues, so that they may be explored in discovery

and depositions, and, as a result, make the discovery process more effective and efficient. We

therefore are adopting the amended Rule substantially as proposed, with one clarifying

modification. The final rule is not intended to change the substantive law regarding reliance or

any of the securities laws. The Commission recognizes that, in cases involving scienter-based

misconduct, the Division bears the burden of proof on demonstrating that the respondent acted

with scienter.

However, we have modified the final rule to give more content to and clarify the requirement

that respondents disclose “reliance.” As adopted, the final rule now requires a respondent to

state in the answer “whether the respondent relied on the advice of counsel, accountants,

auditors, or other professionals, in connection with any claim, violation alleged, or remedy

sought.” The reference to accountants, auditors, and other professionals reflects that, in addition

to arguing that they relied on the advice of counsel, respondents in Commission administrative

proceedings (and defendants in Commission civil enforcement actions) often assert that the

respondent (or defendant) relied on such professionals in connection with the conduct alleged. 71

The amended rule therefore requires respondents to state in their answer whether they intend to

See, e.g., Answer of Respondent Jim Hopkins at 25, ¶ 4, In re Flannery, No. 3-14081 (Oct. 26,

2010); Answer of John Patrick (“Sean”) Flannery to Order Instituting Administrative and Ceaseand-Desist Proceedings at 12, ¶¶ 5, 6, In re Flannery, No. 3-14081 (Oct. 26, 2010); Answer of

Defendant Samuel E. Wyly, Doc. 58 at 29, SEC v. Wyly, 10-cv-5760 (S.D.N.Y.) (Apr. 28, 2011)

(“Plaintiff’s claims are barred in whole or in part because Defendant relied in good faith upon the

judgment, advice, and counsel of professionals.”); see also NJSBA.

raise the issue of reliance on professional advice in the proceeding, whether as part of an

assertion of a formal affirmative defense or an argument in response to the claims alleged in the

OIP on which the Division retains the burden of proof. The amended rule provides that failure to

do so may be deemed a waiver.

Contrary to the comments discussed above, the Commission believes this change will not

materially alter current practice and will not unfairly advantage the Division because, as noted,

even in the absence of this clarification, respondents often assert reliance in their answers to

Commission OIPs. 72 Finally, this amendment would align administrative proceedings with civil

litigation in generally aiming to eliminate surprise and identifying the issues for the hearing. 73

H. Rule 221 (Prehearing Conference)

Rule 221 permits a hearing officer to direct the parties to meet for an initial prehearing

conference and includes a list of subjects to be discussed. 74 We proposed amendments to Rule

221(c) to add depositions and expert witness disclosures or reports to the list of subjects to be

discussed at the prehearing conference. We received no comments on this aspect of the

proposal.

Whether, and to what extent, the assertion of reliance on advice or involvement of counsel in

the answer to the OIP results in the waiver of the attorney-client privilege depends on the facts of

any given proceeding. As a general matter, “the attorney-client privilege cannot at once be used

as a shield and a sword.” United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991). In

determining whether the privilege is waived, hearing officers should consider how respondents

have framed their reliance on counsel in the answer, the allegations in the OIP, and the facts and

circumstances underlying the assertion of reliance. The parties may discuss these issues at the

prehearing conference pursuant to Rule 221.

See Pierce v. Pierce, 5 F.R.D. 125 (D.D.C. 1946); cf. Fed.R.Civ.P. 1.

17 CFR 201.221(b).

We are adopting the amendment as proposed with respect to depositions and expert

witness disclosures. The addition of depositions to certain proceedings will potentially raise

issues, including the identity of the persons to be deposed and the timing of any depositions, that

will benefit from early discussion between the parties and with the hearing officer. At a

prehearing conference, the parties and the hearing officer may discuss the timing of depositions,

the proposed deponents, whether any party will be making a motion seeking leave to conduct

additional depositions pursuant to amended Rule 233, and any issues any party foresees arising

in connection with the proposed depositions.

In addition, we are modifying Rule 221(c) in two other respects. First, in response to

comments advocating amendments that would require a date certain by which the Division

should complete its document production under Rule 230, 75 we are amending Rule 221(c) to

include in the list of subjects to be discussed at a prehearing conference the timing for

completion of production of documents as set forth in Rule 230. The Commission expects that

the Division will continue its practice of timely producing documents, and any potential concerns

surrounding the completion of document production should be discussed with the hearing officer

at a prehearing conference. 76

See Calfee (suggesting rule should require production to be completed not later than seven

days prior to the deadline for filing an answer); Gibson (suggesting a time period of 45 days

from initiation of a proceeding).

Rule 230(d) provides, inter alia, unless otherwise ordered by the Commission or the hearing

officer, the Division shall commence making documents available to a respondent for inspection

and copying pursuant to the section no later than 7 days after service of the order instituting

proceedings. 17 CFR 201.230(d).

Second, we are amending Rule 221(c)(8) to clarify that the subjects to be discussed at the

prehearing conference include the filing of any motion pursuant to Rule 250. As amended, Rule

250 contemplates the filing of various types of dispositive motions (i.e., motion for a ruling on

the pleadings, motion for summary disposition, and motion for a ruling as a matter of law

following completion of a case in chief). Parties may discuss at a prehearing conference whether

they anticipate filing any motions pursuant to amended Rule 250, and the timing of such

motions. 77

I. Rule 222 (Prehearing Submissions)

1. Proposed Rule

Rule 222(b) 78 provides that a party who intends to call an expert witness shall disclose

information related to the expert’s background, including qualifications, prior testimony, and

publications. We proposed amendments to current Rule 222(b)’s requirement that parties submit

a list of other proceedings in which their expert witness has given expert testimony and a list of

publications authored or co-authored by their expert witness. As proposed, Rule 222(b) limits

the list of proceedings to the previous four years, and limits the list of publications to the

previous ten years.

The proposed amendment requires disclosure of a written report for a witness retained or

specially employed to provide expert testimony in the case, or for an employee of a party whose

duties regularly involve giving expert testimony. The proposed amendment outlines the

elements of that written report, including a complete statement of all opinions the witness will

See infra discussion of Rule 250 at Section M.

17 CFR 201.222.

express and the basis and reasons for them, the facts or data considered by the witness in forming

them, any exhibits that will be used to summarize or support them, and a statement of the

compensation to be paid for the expert’s study and testimony in the case.

As proposed, the amendment provides for two categories of information protected from

discovery: (1) drafts of any report or other disclosure required to be submitted in final form; and

(2) communications between a party’s attorney and the party’s expert witness who would be

required to submit a report under the rules, unless the communications related to the expert’s

compensation, or certain facts, information, or assumptions provided by the attorney to the

expert.

2. Comments Received

We received one comment on this aspect of the proposal. The commenter generally

supported the amendment in light of the similarity of the proposed rule to Rule 26(b) of the

Federal Rules of Civil Procedure but urged the Commission to adopt a rule allowing the parties

to present direct expert testimony at all hearings. 79

3. Final Rule

We are adopting the rule substantially as proposed, with one ministerial edit. As proposed,

the rule text provided that communications between a party’s attorney and the party’s expert

witness who is identified under this section need not be furnished, subject to certain exceptions.

Consistent with the requirements for expert witness disclosures and expert reports in the Federal

Rules of Civil Procedure, and to align the rule text with the description of the amendments in the

Gibson.

proposing release, we have revised the rule to clarify that the protections afforded to

communications between a party’s attorney and the party’s expert witness under section (b)(2)

apply to communications with experts who are required to provide a report under the rule. 80

We believe the amendments to Rule 222 will promote efficiency in both prehearing

discovery and the hearing. 81 Moreover, the final rule comports with current practices of some

hearing officers, who have required such expert reports in proceedings before them. 82

The final rule requires each party who intends to call an expert witness to submit a

statement of the expert’s qualifications, a listing of other proceedings in which the expert has

given expert testimony during the previous four years, and a list of publications authored or coauthored by the expert in the previous ten years. Additionally, if the witness is one retained or

specially employed to provide expert testimony in the case or one whose duties as the party’s

employee regularly involve giving expert testimony, then the party must include in the disclosure

a written report—prepared and signed by the witness. The report must contain: (i) a complete

statement of all opinions the witness will express and the basis and reasons for them; (ii) the

facts or data considered by the witness in forming them; (iii) any exhibits that will be used to

summarize or support them; and (iv) a statement of the compensation to be paid for the study and

Section (b) only addresses experts whom a party intends to call at the hearing. The rule does

not cover consulting experts, i.e., experts who have been retained or specially employed in

anticipation of litigation or to prepare for the hearing, but who are not expected to be called as

witnesses at the hearing.

See Fed.R.Civ.P. 26(b)(4), (a)(2), respectively.

See, e.g., ZPR Investment Management, Inc., Admin Proc. Ruling Rel. No. 775 (Aug. 6, 2013),

available at http://www.sec.gov/alj/aljorders/2013/ap-775.pdf (last visited July 11, 2016)

(general prehearing order stating that “expert reports should be as specific and detailed as those

presented in federal district court pursuant to Federal Rule of Civil Procedure 26.”).

testimony in the case. Consistent with the proposal, amended Rule 222 protects from disclosure

(1) draft reports or other disclosure required to be submitted in final form, and (2)

communications between a party’s attorney and the party’s expert witness required to provide a

report under the rule, except if the communications relate to compensation for the expert’s study

or testimony, identify facts or data that the party’s attorney provided and that the expert

considered in forming the opinions to be expressed, or identify assumptions that the party’s

attorney provided and that the expert relied on in forming the opinions to be expressed.

We disagree with the comment suggesting that the rule be altered to require that expert

witnesses testify at the hearing in all cases. Hearing officers currently use expert reports as

evidence and permit direct examination as necessary, 83 a practice that we understand comports

with the practice followed by a number of district judges in federal court bench trials. We

believe that the final rule furthers the goal of efficiency without compromising a respondent’s

ability to present direct expert testimony.

See, e.g., Leslie A. Arouh, Admin Proc. File No. 3-10884, 2003 SEC LEXIS 3210 (Feb. 19,

2003) (ordering production of respondent’s expert report as evidence, “to be fleshed out as

needed by further direct testimony, and subject to cross examination.”); Reliance Financial

Advisors, LLC, Admin Proc. Ruling Rel. No. 2627, 2015 SEC LEXIS 1703 (May 4, 2015)

(order following prehearing conference stating that a hearing officer “will accept the Division’s

expert report as testimony but will expect brief direct testimony by the expert during the hearing

as well”); Ambassador Capital Management, LLC, Admin Proc. Ruling Rel. No. 1149 n.1, 2014

SEC LEXIS 45 (Jan. 7, 2014) (order setting prehearing schedule stating, “[a]t the prehearing

conference, it was established that any party offering expert testimony shall be prepared to

conduct direct examination of the expert for no more than forty-five minutes at the hearing”).

J. Rule 230 (Enforcement and Disciplinary Proceedings: Availability of Documents

for Inspection and Copying)

1. Proposed Rule

After the institution of proceedings, Rule 230(a) 84 requires the Division to make available

to respondents certain documents obtained by the Division in connection with an investigation.

Rule 230(b) 85 provides a list of documents that may be withheld from this production. We

proposed to amend Rule 230(b) to provide that the Division may redact certain sensitive personal

information from documents that will be made available, unless the information concerns the

person to whom the documents are being produced. We also proposed to amend Rule 230(b) to

clarify that the Division may withhold or redact documents that reflect settlement negotiations

with persons or entities who are not respondents in the proceeding at issue.

2. Comments Received

One commenter supported the proposal but advocated additional amendments to Rule

230. 86 The commenter argued that, in addition to the categories of documents listed in Rule

230(a)(1)(i), the rule should require disclosure by the Division of all persons that the Division

interviewed or took testimony from during the investigation, including a summary of the factual

topics covered in each interview. 87 The commenter also advocated amendments to Rule 230(b)

that would preclude Division staff from introducing, as evidence in administrative proceedings,

17 CFR 201.230(a).

17 CFR 201.230(b).

CCMC.

Id.

any Wells submissions, pre-Wells submissions and white papers submitted by a party to the

proceeding. This commenter argued that the same policy arguments supporting an exclusion of

settlement negotiations from disclosure also apply to the content of Wells submissions. 88

3. Final Rule

We are adopting Rule 230 as proposed, with one ministerial change unrelated to the

proposal. 89 The final rule permits the Division to redact an individual’s social security number,

an individual’s date-of-birth, the name of an individual known to be a minor, or a financial

account number, taxpayer-identification number, credit card or debit card number, passport

number, driver’s license number, or state-issued identification number other than the last four

digits of the number. We believe this amendment provides an important safeguard that should

enhance the protection afforded to sensitive personal information. It is also consistent with

privacy rules of some federal district courts. 90 In addition, final Rule 230(b) provides that the

Division may withhold or redact documents that reflect settlement negotiations with persons or

entities who are not respondents in the proceeding at issue. As we explained in the proposal, this

amendment is consistent with the important public policy interest in candid settlement

negotiations, 91 and we believe it will help to preserve the confidentiality of settlement

Id.

Specifically, we are amending the reference in current Rule 230(a)(1)(vi) to the Division of

Market Regulation to reflect the current name of the Division—i.e., the Division of Trading and

Markets.

See, e.g., Fed.R.Civ.P. 5.2(a); DDC Local Civ. R. 5.4(f).

See generally, Federal Rule of Evidence 408 (“Compromise Offers and Negotiations”),

Advisory Committee Notes; 2 McCormick on Evid. section 266 (7th ed.).

discussions and safeguard the privacy of potential respondents with whom the Division has

negotiated.

We decline to expand Rule 230 to require the Division to disclose all persons interviewed

during the investigation, or to require the staff to produce summaries of all such interviews, as

suggested by one commenter. Rule 230(a) generally requires the Division to make available for

inspection and copying documents obtained by the Division from persons not employed by the

Commission during the course of its investigation prior to the institution of proceedings. 92 This

includes each subpoena issued during the investigation, all other written requests to persons not

employed by the Commission to provide documents or to be interviewed, the documents turned

over in response to any such subpoenas or other written requests, all transcripts and transcript

exhibits, and any other documents obtained from persons not employed by the Commission. 93

Rule 232 permits a party to request the issuance of subpoenas requiring the production of

documents and subpoenas compelling the testimony of witnesses. The Commission believes

that, taken together, these discovery tools will enable the parties to identify witnesses who may

possess relevant information and to determine who should be deposed prior to the hearing. 94

See 17 CFR 201.230(a).

17 CFR 201.230(a)(1)(i) – (v).

We do not believe it is necessary or appropriate to require disclosure by the Division of every

person interviewed or deposed during an investigation, or to require the Division to prepare

summaries of all such interviews, as suggested by the commenter. In its fact-gathering role,

Division staff may interview dozens of potential witnesses in the course of an investigation that

can span many months. Such interviews often serve to narrow the scope of an investigation, and

the persons interviewed ultimately may bear no relevance to the proceedings instituted by the

Commission.

With the exception of certain final inspection or examination reports that the Division

intends to use at the hearing, documents prepared by Commission staff are treated as attorney

work-product, and are not required to be produced pursuant to Rule 230. 95 The Commission

believes it appropriate to continue the current practice of allowing the hearing officer to evaluate

attorney work-product production disputes on a case-by-case basis. 96 This comports with federal

district court practice for resolving discovery disputes concerning the production of attorney

work-product under Federal Rule of Civil Procedure 26(b). 97

The final rule will not, as one commenter suggested, prohibit the use of Wells

submissions and white papers as evidence in administrative proceedings. A Wells notice

provided to a respondent by the Division states that the Commission may use the information

contained in such a submission as an admission, or in any other manner permitted by the Federal

See 17 CFR 201.230 (b)(1)(ii); see also 1995 Release, 60 FR at 32762 (comments (a) and (b)

to Rule 230). Work product includes any notes, working papers, memoranda or other similar

materials, prepared by an attorney in anticipation of litigation. See Hickman v. Taylor, 329 U.S.

495 (1947); see also Fed. R. Civ. P. 26(b)(3) and (b)(5).

Rule 230(c) authorizes the hearing officer to review any documents withheld by the Division

pursuant to Rule 230(b)(1)(i) – (iv). See, e.g., Piper Capital Management, Inc. et al., Admin.

Proc. Rel. No. 577, 1999 SEC LEXIS 301 at *20 (Jan. 15, 1999) (granting motion for in camera

inspection of documents comprising, reflecting or summarizing off-record interviews which

Division conducted with one witness”); Jeffrey R. Patterson, et al. Admin. Proc. File No. 310936, 2003 SEC LEXIS 3217 (finding, following in camera review, that staff’s handwritten

notes of witness’s interview did not contain exculpatory evidence and thus were not required to

be made available under Rule 230).

See, e.g., SEC v. NIR Group, 283 F.R.D. 127; 2012 U.S. Dist. LEXIS 116062 at *21, *23

(E.D.N.Y. Aug. 17, 2012) (denying, in part, defendant’s motion to compel following in camera

review of sample Division interview notes and memoranda relating to same); SEC v. Treadway,

et al., 229 F.R.D. 454, 455-56, 2005 U.S. Dist. LEXIS 15167, at *4-5 (S.D.N.Y. July 26, 2005)

(following in camera review, upholding Magistrate Judge determination that proffer session

notes prepared by Division attorneys were protected attorney work-product).

Rules of Evidence, or for any of the Routine Uses of Information described in Form 1662,

“Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed

to Supply Information Pursuant to a Commission Subpoena.” 98 A respondent is therefore given

notice prior to providing any Wells submissions of the various uses the Division may make of

the information included therein.

The Commission does not treat Wells submissions as settlement materials. 99 The

procedures for submitting offers of settlement to the Commission are governed by Rule 240. 100

Those procedures require, among other things, an offer of settlement signed by the person

making the offer, as well as a waiver by the person of, among other things, the right to claim bias

or prejudgment by the Commission based on the consideration of or discussions concerning

settlement of all or any part of the proceeding. 101 In contrast, the Wells submission process is

governed by Rule 5(c) of the Commission’s Informal and Other Procedures, which provides

persons who become involved in preliminary or formal investigations the opportunity to

voluntarily submit “a written statement to the Commission setting forth their interests and

position in regard to the subject matter of the investigation.” 102

Form 1662 can be found at: http://www.sec.gov/about/forms/sec1662.pdf.

Cf. In re IPO Securities Litig., 2003 U.S. Dist. LEXIS 23102 at *13 (S.D.N.Y. Jan 12, 2004)

(“Wells submissions are not in themselves settlement materials, although they may sometimes

contain offers of settlement”).

100

17 CFR 201.240.

101

17 CFR 201.240(b) and (c)(5).

102

17 CFR 202.5(c).

The Commission’s longstanding view has been that Wells submissions “will normally

prove most useful in connection with questions of policy, and on occasion, questions of law,

bearing upon the question of whether a proceeding should be initiated, together with

considerations relevant to a particular prospective defendant or respondent that might not

otherwise be brought clearly to the Commission’s attention.” 103 We believe this approach

remains sound because it furthers the Commission’s goal of having before it the position of

persons under investigation at the time it is asked to consider initiating an enforcement action. In

addition, we believe that the credibility of a respondent’s Wells submission could be diminished

if the final rule restricted the use of such submissions in subsequent administrative proceedings.

Such a rule could enable a potential respondent to freely deny, or make arguments fundamentally

inconsistent with, statements or claims made in prior Wells submissions. We therefore believe it

is appropriate not to treat Wells submissions as settlement materials. Rather, hearing officers

may continue the current practice of determining whether, under the facts and circumstances, a

Wells submission should be excluded from a proceeding.

K. Rule 234 (Depositions Upon Written Questions)

Current Rule 234 contains procedures for taking depositions through written questions.

Under Rule 234, a party may make a motion to take a deposition on written questions by filing

the questions with the motion. We proposed to amend the rule to provide that the moving party

may take a deposition on written questions either by stipulation of the parties or by filing a

motion demonstrating good cause. We did not receive any comments on this aspect of the

103

See Procedures Relating to the Commencement of Enforcement Proceedings and Termination

of Staff Investigations, Securities Act Rel. No. 5310, 1972 SEC LEXIS 238 (Sept. 27, 1972)

(emphasis added).

proposal and are adopting the amendment as proposed, with one ministerial change to paragraph

(a), which in the proposal inadvertently referred to Rule 232 instead of Rule 233. The

amendment is intended to provide a clear standard under which the hearing officer or

Commission would review such a motion. The amendment replaces the standard under the

current rule, which references current Rule 233(b)’s limit on depositions to witnesses unable to

appear or testify at a hearing.

L. Rule 235 (Introducing Prior Sworn Statements or Declarations)

1. Proposed Rule

Current Rule 235 104 allows the introduction of certain prior sworn statements into the record.

Current Rule 235(a) sets forth the standards for persons making a motion to introduce prior

sworn statements of non-party witnesses. We proposed to amend Rule 235(a) to include in the

list of prior sworn statements depositions taken pursuant to Rules 233 or 234, as well as

investigative testimony and declarations taken under penalty of perjury pursuant to 28 U.S.C.

1746. In addition, we proposed to add new paragraph (b) to Rule 235 to permit the use of

statements made by a party or a party’s officers, directors, or managing agents, and to clarify that

such statements may be used by an adverse party for any purpose. Consistent with the proposed

amendments to Rule 235(a), the amendments to new Rule 235(b) included depositions taken

pursuant to Rules 233 or 234, as well as investigative testimony and declarations taken under

penalty of perjury pursuant to 28 U.S.C. 1746.

104

17 CFR 201.235.

2. Comments Received

We received one comment on this aspect of the proposal. A securities blog entry cited by the

commenter objected to the introduction of sworn statements under current Rule 235. 105 The

author of the blog asserted, without providing support, that hearing officers currently admit

unreliable investigative testimony into the record and that the proposal endorses this practice.

The author opposed the admission of investigative testimony and declarations and argued that

the proposal would unfairly benefit the Division.

3. Final Rule

We are adopting the amendments as proposed. We believe that current Rule 235 contains

sufficient safeguards to prevent the introduction of unreliable testimony. For instance, to

introduce a prior sworn statement under current Rule 235(a), a person must make a motion

setting forth reasons for introducing the statement. The standard for granting such a motion

focuses on the admissibility and relevance of the statement, the availability of the witness for the

hearing, and the presumption favoring oral testimony of witnesses in an open hearing. The

statements that will be admissible pursuant to amended Rule 235(a)—including statements made

pursuant to 28 U.S.C. 1746, deposition testimony, investigative testimony, and other sworn

statements—will be subject to these standards.

Amended Rule 235(b) will permit an adverse party to seek the admission of statements

made by a party or the party’s officer, director, or managing agent. A party opposing the

105

See Hudson II (citing anonymous blog).

introduction or use of such statements may still object to their admission under amended Rule

320 to the extent such evidence is “irrelevant, immaterial, unduly repetitious, or unreliable.” 106

Rule 250 (Dispositive Motions)

Rule 250 currently provides that a party may move for summary disposition after a

respondent’s answer is filed and documents have been made available to the respondent and sets

forth the procedures and standards governing such a motion. If the “interested division,” e.g., the

Division of Enforcement, has not completed its case in chief, a motion for summary disposition

may be made only with leave of the hearing officer. Rule 250 has been used by parties in our

proceedings in a manner analogous to the summary judgment procedure in the Federal Rules of

Civil Procedure. It also has been used as a means of seeking a ruling on the pleadings or seeking

dismissal as a matter of law either early in a proceeding or following the Division’s completion

of its evidentiary presentation at the hearing.

A principal purpose of Rule 250 is to facilitate the efficient resolution of proceedings by

disposing of issues prior to the hearing, where appropriate, without introducing unnecessary

delays or costs into the proceeding. As we have previously explained, the rule “balances the

potential efficiency gained by allowing the hearing officer to eliminate unnecessary hearings in

some cases against the costs of allowing additional motions, prehearing procedures and the

106

See infra discussion at Section N.

attendant delay in cases where a hearing in which all evidence can be presented and witness

demeanor can be observed is warranted.” 107

We did not propose to amend Rule 250. However, one commenter suggested that the

Commission modify the current rule to permit a respondent to challenge the Division’s “legal

theories . . . as of right” 108 prior to the hearing. As discussed below, we are amending Rule 250

both to respond to the commenter’s suggestion and to clarify how summary disposition motions

will operate in conjunction with the amendments to Rules 233 and 360 that permit parties to take

depositions and that provide for a longer maximum prehearing period in 120-day proceedings.

Consistent with the Commission’s prior commentary on Rule 250, these amendments are

intended to maintain the balance between encouraging more streamlined proceedings while

protecting against unwarranted delays and costs. 109

Amended Rule 250 provides that three types of dispositive motions may be filed at

different stages of an administrative proceeding and sets forth the standards and procedures

governing each type of motion. These motions – described in paragraphs (a) – (d) of the

amended rule – generally correspond to certain dispositive motions that may be filed in federal

court under the Federal Rules of Civil Procedure.

107

See 1995 Release, 60 FR at 32767-68; see also id. at 32767 (“Summary disposition is a

procedure that can resolve issues prior to hearing, thereby reducing the costs of hearing and

expediting resolution of the proceeding.”).

108

Gibson.

109

As noted supra at n.16 and pursuant to current Rule 360(a)(1), unless the Commission directs

otherwise, the hearing officer shall prepare an initial decision in any proceeding in which the

Commission directs a hearing officer to preside at a hearing, provided, however, that an initial

decision may be waived by the parties with the consent of the hearing officer pursuant to Rule

202. These amendments do not alter this requirement.

Paragraph (a) of amended Rule 250 governs the filing of motions for a ruling on the

pleadings. It provides that, no later than 14 days after a respondent’s answer has been filed, any

party may move for a ruling on the pleadings on one or more claims or defenses, asserting that,

even accepting all of the non-movant’s factual allegations as true and drawing all reasonable

inferences in the non-movant’s favor, it is entitled to a ruling as a matter of law. Paragraph (a)

thus permits a respondent to seek a ruling as a matter of law based on the factual allegations in

the OIP and permits either party to seek a ruling as a matter of law after the filing of an

answer. 110 Consistent with the commenter’s suggestion, we believe that obtaining leave of the

hearing officer prior to filing such a motion is unnecessary; a motion under paragraph (a) is,

therefore, available to any party as a matter of right. Additionally, paragraph (a) provides that a

hearing officer shall promptly grant or deny the motion. This is intended to help ensure that such

motions do not serve to delay proceedings. 111

110

This is analogous to Rules 12(b)(6) and 12(c) of the Federal Rules of Civil Procedure. See

Fed.R.Civ.P. 12(b)(6) (failure to state a claim upon which relief can be granted); 12(c) (judgment

on the pleadings).

111

The same commenter suggested that the Commission be required to promptly hear and

resolve all appeals from hearing officer denials of prehearing motions for summary disposition

that attack the statutory or regulatory basis for the proceeding, or that challenge the

constitutionality thereof. See Gibson. The Commission has not adopted this suggestion because

we believe the existing mechanism for review is appropriate and is consistent with the overall

goal of ensuring an efficient resolution of proceedings. See generally Gary L. McDuff, Exchange

Act Release No. 78066, 2016 WL 3254513 (June 14, 2016). Under Rule 400(a), we “may, at

any time, on [our] own motion, direct that any matter be submitted to [us] for review.”

Consistent with Rule 400(a), a respondent may seek review of issues such as those raised by the

commenter at any point in an administrative proceeding. We have likewise not adopted the

commenter’s suggestion that we adopt a rule providing that an administrative proceeding will be

automatically stayed pending final resolution of a respondent’s challenge to the legality of the

proceeding. See Gibson. We decline to adopt such a blanket rule because, among other things, it

would unduly delay proceedings where the underlying legal challenge lacks merit. Moreover,

Paragraph (b) of amended Rule 250 governs the filing of motions for summary

disposition in proceedings designated as 30- and 75-day proceedings pursuant to amended Rule

360. It provides that after a respondent’s answer has been filed and documents have been made

available to that respondent pursuant to Rule 230, any party may move for summary disposition

on one or more claims or defenses, asserting that the undisputed pleaded facts, declarations,

affidavits, documentary evidence or facts officially noted pursuant to Rule 323 show (1) that

there is no genuine issue with regard to any material fact and (2) that the movant is entitled to

summary disposition as a matter of law. 112 If it appears that a party, for good cause shown,

cannot present prior to the hearing facts essential to oppose the motion, paragraph (b) provides

that the hearing officer shall deny or defer the motion. Leave of the hearing officer is not

required to file such a motion in 30- and 75-day cases. This is consistent with existing practice

any respondent may seek a stay of the administrative proceeding and, where appropriate, the

Commission in its discretion may issue such a stay.

112

This is analogous to Federal Rule of Civil Procedure 56. See Fed.R.Civ.P. 56 (summary

judgment). To streamline amended Rule 250, we have deleted the portion of current Rule 250(a)

that provided that, the facts of the pleadings of the party against whom the motion is made shall

be taken as true, except as modified by stipulations or admissions made by that party, by

uncontested affidavits, or by facts officially noted pursuant to Rule 323. This is not intended to

be a substantive change. Consistent with current Commission opinions regarding summary

disposition motions, the facts should be construed in the light most favorable to the non-moving

party. See, e.g., Jay T. Comeaux, Exchange Act Release No. 72896, 2014 WL 4160054, at *2

(Aug. 21, 2014). Importantly, a non-moving party “may not rely on bare allegations or denials

but instead must present specific facts showing a genuine issue of material fact for resolution at a

hearing.” Id.; see also Kornman v. SEC, 592 F.3d 173, 182 (D.C. Cir. 2010) (finding that

summary disposition was properly granted where the respondent “proffered no evidence to

contradict either his admissions or the Division’s evidence”); Conrad P. Seghers, Advisers Act

Release No. 2656, 2007 WL 2790633 at *4 n.25 (Sept. 26, 2007) (“[Respondent] must set forth

specific facts establishing a genuine issue of material fact and may not rely upon mere

allegations in his pleadings to the law judge to create a genuine issue.”), petition denied, 548

F.3d 129, 136 (D.C. Cir. 2008).

in the proceedings we have designated for shorter timeframes—including, for example,

proceedings pursuant to Exchange Act Section 12(j) 113 as well as follow-on proceedings 114—

where we have repeatedly observed that summary disposition is typically appropriate because the

issues to be decided are narrowly focused and the facts not genuinely in dispute.

Paragraph (c) of amended Rule 250 governs the filing of motions for summary

disposition in proceedings designated as 120-day proceedings pursuant to amended Rule 360. It

provides that after a respondent’s answer has been filed and documents have been made

available to that respondent pursuant to Rule 230, any party may make a motion for summary

disposition on one or more claims or defenses, asserting that the undisputed pleaded facts,

declarations, affidavits, deposition transcripts, documentary evidence or facts officially noted

pursuant to Rule 323 show (1) that there is no genuine issue with regard to any material fact and

113

See, e.g., China Biotics, Inc., Exchange Act Release No. 70800, 2013 WL 5883342, at *16

(Nov. 4, 2013) (explaining that summary disposition in a proceeding pursuant to Section 12(j)

was appropriate when the respondent “still has not identified any evidence demonstrating a

genuine issue of material fact”); Citizens Capital Corp., Exchange Act Release No. 67313, at 16

(June 19, 2012) (“We have found that summary disposition is appropriate in proceedings like

this one brought pursuant to Exchange Act Section 12(j), where the issuer has not disputed the

facts that constitute the violation.”).

114

See, e.g., Jeffrey L. Gibson, Exchange Act Release No. 57266, 2008 SEC LEXIS 236, at *1920 (Feb. 4, 2008) (“Use of the summary disposition procedure has been repeatedly upheld in

cases such as this one where the respondent has been enjoined or convicted, and the sole

determination concerns the appropriate sanction.”) petition denied, 561 F.3d 548, 555 (6th Cir.

2009); Adoption of Amendments to the Rules of Practice and Related Provisions and Delegations

of Authority of the Commission, Exchange Act Release No. 52846 (Nov. 29, 2005), 70 FR

72566, 72567 (Dec. 5, 2005), available at http://www.sec.gov/rules/final/34-52846.pdf (last

visited July 8, 2016) (“Motions for summary dispositions are often made in cases where a

respondent has been criminally convicted or an injunction has been entered and the conviction or

injunction provides the basis for an administrative order against the respondent.”).

(2) that the movant is entitled to summary disposition as a matter of law. 115 If it appears that a

party, for good cause shown, cannot present prior to the hearing facts essential to justify

opposition to the motion, paragraph (c) provides that the hearing officer shall deny or defer the

motion.

Leave of the hearing officer must be obtained in order to file a Rule 250(c) motion.

Leave may be granted only if the moving party establishes good cause and if consideration of the

motion will not delay the scheduled start of the hearing. Paragraph (c) further provides that the

hearing officer shall promptly grant or deny the motion for summary disposition or shall defer

decision on the motion.

The requirement that leave be obtained to make a motion under paragraph (c) is

consistent with the Commission’s long-held view that because “[t]ypically, Commission

proceedings that reach litigation involve basic disagreement as to material facts . . . [t]he

circumstances when summary disposition prior to hearing could be appropriately sought or

granted will be comparatively rare.” 116 In contrast to matters like 12(j) proceedings that are

amenable to resolution on summary disposition, 117 we have noted that the proceedings designated

for the longest timeline may not be “appropriate vehicle[s]” for summary disposition. 118 This is

115

This is analogous to Federal Rule of Civil Procedure 56 (summary judgment); see also supra

note 112.

116

1995 Release, 60 FR at 32768.

117

See supra note 113.

118

Comeaux, 2014 WL 4160054, at *4 n.30 (“We urge parties in the future to consider whether,

if the Commission has determined that a particular matter is not an appropriate vehicle for the

so because, as a general matter, hearings are necessary in 120-day proceedings for evidence to be

taken on fact-intensive issues such as a respondent’s state of mind that generally are not

susceptible to summary disposition.

Consequently, we have previously stated in discussing Rule 250 that “leave to file such a

motion shall be granted only for good cause shown, and if consideration of the motion will not

delay the scheduled start of the hearing.” 119 We now codify this as the two-part standard for a

hearing officer to grant leave for a party to file a motion for summary disposition under amended

Rule 250(c). 120 It is the Commission’s view that good cause may generally be demonstrated

where there is a substantial likelihood that the party seeking leave to file a motion under

paragraph (c) will be successful on the merits of the motion. 121 Additional factors the hearing

officer generally should consider in assessing whether a party has demonstrated good cause

include, but are not limited to, whether (1) there is agreement among the parties on the operative

facts that are the basis of the motion; (2) the motion, if granted, would obviate the need to

conduct a substantial portion, or all, of the final hearing; and (3) the motion would not impose

undue expense or harassment on the opposing party. Consideration of these factors is intended

120- or 210-day time periods [under current Rule 360], it is an appropriate vehicle for a motion

for summary disposition.”).

119

See 1995 Release, 60 FR at 32768.

120

Hearing officers have cited to this standard in assessing whether to grant leave to file a

summary disposition motion under current Rule 250. See, e.g., Arthur F. Jacob, CPA, Admin.

Proc. Ruling No. 3370, 2015 SEC LEXIS 4945, at *3 (Dec. 4, 2015).

121

See 1995 Release, 60 FR at 32768, Comment to Rule 250 (“Where a genuine issue as to

material facts clearly exists as to an issue, it would be inappropriate for a party to seek leave to

file a motion for summary disposition or for a hearing officer to grant the motion.”).

to further the goal of Rule 250 to promote efficient resolution of proceedings, without

introducing unnecessary costs or delays. Consistent with the Commission’s prior statements

regarding summary disposition in proceedings designated for the longest timeframe, we believe

that the good cause standard under paragraph (c) will rarely be satisfied. 122 Granting leave to file

a motion for summary disposition only in exceptional cases where good cause is established, and

limiting summary disposition to the rare cases where it is appropriate, promotes efficiency by

avoiding the attendant delays that may ensue if a hearing officer grants summary disposition and

the Commission subsequently remands the case for an evidentiary hearing. 123

Paragraph (d) of amended Rule 250 governs the filing of motions for a ruling following

completion of the Division’s case in chief at a hearing. It provides that following the interested

division’s presentation of its case in chief, any party may make a motion, asserting that it is

entitled to a ruling as a matter of law on one or more claims or defenses. 124 Leave from the

122

We note that we have removed the provision in current Rule 250(b) stating that denial of

leave to file a summary disposition motion “is not subject to interlocutory appeal.” The denial of

leave to file a motion pursuant to paragraph (c) in amended Rule 250 is subject to Commission

review, consistent with the Commission’s plenary authority over our administrative proceedings.

See supra note 111.

123

See, e.g., Diane M. Keefe, Exchange Act Release No. 61928, 2010 SEC LEXIS 1122, at *4 5 (Apr. 16, 2010) (reversing grant of summary disposition, remanding for a hearing, and noting

“[w]e have reviewed the limited record before us and believe that the record would benefit from

direct and cross-examination of any relevant witnesses and the fact-finding determinations of a

law judge” and “that amplification of the current record with facts supporting either party’s

position on the issue of materiality would aid any decisional process”); Joseph P. Doxey,

Exchange Act Release No. 77773, 2016 WL 2593988 (May 5, 2016) (finding evidence did not

support grant of summary disposition as to Division’s allegations of antifraud and registration

violations and remanding claims to the law judge).

124

This is analogous to Federal Rule of Civil Procedure 50(a) (judgment as a matter of law).

hearing officer is not required to file such a motion. But as with the motion for summary

disposition discussed in paragraph (c), it is the Commission’s view that proceedings designated

for the longest timeframe will rarely be amenable to resolution based solely on the Division’s

case in chief, and prior to the respondent’s presentation of evidence, and therefore we believe

that Rule 250(d) motions should be granted in only the rarest of cases. 125

Paragraph (e) of amended Rule 250 provides the length limitations applicable to

dispositive motions under paragraphs (a) – (d) of amended Rule 250. 126 It provides that

dispositive motions, together with any supporting memorandum of points and authorities

(exclusive of any declarations, affidavits, deposition transcripts or other attachments), shall not

exceed 9,800 words and that requests for leave to file motions and accompanying documents in

excess of 9,800 words are disfavored. 127 A party should not circumvent this length limitation by

filing or appending a separate document, incorporated by reference into the supporting

125

In Rita Villa, Exchange Act Release No. 39518, 1998 WL 4530 (Jan. 6, 1998), the

Commission stated that it did not favor an “abbreviated procedure” in which a hearing officer

orally granted a motion for summary disposition following the presentation of the Division’s

case in chief. We clarify today that Rita Villa, which interpreted a prior Rule of Practice, should

not be read to apply to amended Rule 250(d) to suggest that a party may never make a motion for

summary disposition after a hearing has begun. Such a motion is available as of right: under

amended Rule 250(d), a party may move for a ruling as a matter of law following completion of

the Division’s case in chief.

126

Motions made pursuant to amended Rule 250(d) may be made orally, or in writing, but such

motions should not be used as a means of delaying completion of the hearing. Should the

hearing officer decide that a motion made pursuant to Rule 250(d) requires briefing, the hearing

officer may require the parties to brief the motion while the hearing continues to proceed.

127

We note that paragraph (e) of amended Rule 250 contains the same length limitations as were

applicable to summary disposition motions under current Rule 250(c). We have added the term

“deposition transcripts” to the list of documents excluded from the page count to comport with

the language of amended Rule 250(d) and the amendments to Rule 233.

memorandum, that contains a recitation of any allegedly undisputed facts. To the extent that a

party does incorporate a separate statement of facts by reference in its memorandum, such a

document counts towards the length limitations in paragraph (e). A motion that does not,

together with any accompanying memorandum of points and authorities, exceed 35, doublespaced pages in length, inclusive of pleadings incorporated by reference (but excluding any

declarations, affidavits, deposition transcripts or attachments) is presumptively considered to

contain no more than 9,800 words. Any motion that exceeds this page limit must include a

certificate by the attorney, or an unrepresented party, stating that the brief complies with the

word limit set forth in this paragraph and stating the number of words in the motion. The person

preparing the certificate may rely on the word count of a word-processing program to prepare the

document.

Paragraph (f) of amended Rule 250 provides the length limitations and response times for

opposition and reply briefs pertaining to motions under paragraphs (a) – (d) of amended Rule

250. Paragraph (f)(1) provides that the length limitations in paragraph (e) apply to any

opposition to a motion under paragraphs (a) – (d) of amended Rule 250. This reflects the

Commission’s belief that, in the context of summary disposition motions, affording the

responding party the same page limitation as the moving party should help to ensure that the

responding party has a sufficient opportunity to respond to all of the positions advanced in the

motion. Paragraph (f)(1) further provides that the length limitations in Rule 154(c) apply to any

reply; this is consistent with current practice. Paragraph (f)(2)(i) provides that the response times

in Rule 154(b) apply to all opposition and reply briefs pertaining to motions under paragraphs

(a), (b), and (d) of amended Rule 250. Paragraph (f)(2)(ii) provides that, for any motion for

which leave has been granted consistent with the standard in paragraph (c), any opposition must

be filed within 21 days after service of a Rule 250(c) motion and that any reply shall be filed

within seven days after the service of any opposition. These expanded response times for

oppositions and replies pertaining to summary disposition motions pursuant to paragraph (c) are

intended to provide sufficient time to respond to the motion in those rare instances where good

cause to file such a motion has been established.

Rule 320 (Evidence: Admissibility)

Proposed Rule

Rule 320 provides the standards for admissibility of evidence. Under the current rule, the

Commission or hearing officer may receive relevant evidence and shall exclude all evidence that

is irrelevant, immaterial, or unduly repetitious. We proposed to amend the rule to add

“unreliable” to the list of evidence that shall be excluded. In addition, we proposed adding new

Rule 320(b) to clarify that hearsay may be admitted if it is relevant, material, and bears

satisfactory indicia of reliability so that its use is fair.

2. Comments Received

Commenters raised a number of concerns about the admissibility of hearsay under

proposed Rule 320(b). Most commenters argued that the Commission should incorporate

Federal Rules of Evidence governing hearsay into the Commission’s administrative

proceedings. 128 Commenters, focusing on the importance of cross-examination to test

“credibility, memory, [and] bias,” argued for limiting the admission of hearsay. 129 Commenters

128

FSR; Gibson; Hudson II (citing anonymous blog); Brune; Grundfest; NJSBA.

129

Gibson; CCMC.

also argued that applying the federal court hearsay rules would ensure consistency and

objectivity in administrative proceedings, 130 and suggested that allowing hearsay evidence in

administrative proceedings incentivizes forum selection based on the quality and nature of the

evidence and witnesses rather than other more appropriate considerations. 131 Some commenters

contended that the Commission had not, or could not, “establish a principled basis for adopting a

different standard” than the federal rules or other rules requiring “greater scrutiny of hearsay

evidence.” 132

Other commenters acknowledged the longstanding admissibility of hearsay in

administrative proceedings, 133 but argued that the proposed hearsay standards are nevertheless

insufficient. 134 One such commenter argued that the Commission should be bound by the federal

rules, and advocated the exclusion of hearsay evidence in proceedings involving civil monetary

penalties or bars from association in the securities industry. 135 The other commenter advocated

various other limitations on hearsay, including heightened standards for admitting hearsay;

130

Calfee.

131

Gibson.

132

FSR; see also Brune; NJSBA.

133

Gibson; CCMC.

134

Gibson; CCMC.

135

Gibson.

notice requirements; and provisions allowing additional depositions to counter proposed

hearsay. 136

A number of the commenters argued that the proposed standards provide insufficient

guidance and are prone to unfair application. 137 One commenter argued that hearing officers

currently “err on the side of admitting hearsay” and apply the reliability standard

inconsistently. 138 Commenters further objected that the proposed standards will “fail to offer any

meaningful protection” or improve current practices. 139 Commenters claimed that the absence of

more bright-line guidance or procedural hurdles to introducing hearsay creates an undue burden

on hearing officers and parties. 140

3. Final Rule

We are adopting the amendments to Rule 320 as proposed. As the proposing release

explained, the standard for excluding unreliable evidence is consistent with the APA. The

admission of hearsay evidence that satisfies a threshold showing of relevance, materiality, and

reliability also is consistent with the APA, and the “indicia of reliability” standard for admitting

such evidence is grounded in well-established interpretations of administrative law. 141

136

CCMC.

137

FSR; Brune.

138

Gibson.

139

Gibson; Grundfest.

140

Brune; FSR.

141

See 5 U.S.C. 556(d) (stating that any oral or documentary evidence may be received, but the

agency as a matter of policy shall provide for the exclusion of irrelevant, immaterial or unduly

We are not persuaded of the need to incorporate federal court hearsay rules or the other

suggested standards for pre-emptively excluding or challenging hearsay. 142 We believe that Rule

320(b) appropriately focuses on the relevance, materiality, reliability and fairness of proposed

hearsay evidence. Nor are we persuaded that the proposed admissibility standards provide

insufficient guidance or impose an undue burden on hearing officers or the parties. Hearsay

evidence is currently evaluated on a case-by-case basis in light of, among other things, the

motives or potential bias of the declarant; the availability and credibility of the declarant;

whether the statements are contradicted or consistent with direct testimony; the type of hearsay

(e.g., sworn, written, attributable to an identified person); the availability of the missing witness

and any attempts to compel witness testimony; and whether or not the hearsay is corroborated by

other evidence in the record. 143 We continue to believe that a case-by-case determination of the

repetitious evidence); see, e.g., J.A.M. Builders, Inc. v. Herman, 233 F.3d 1350, 1354 (11th Cir.

2000) (hearsay admissible in administrative proceedings if “reliable and credible”); Calhoun v.

Bailar, 626 F.2d 145, 148 (9th Cir. 1980) (hearsay admissible if “it bear[s] satisfactory indicia of

reliability” and is “probative and its use fundamentally fair”). Courts also have held that hearsay

can constitute substantial evidence that satisfies the APA requirement. See, e.g., Echostar

Communications Corp. v. FCC, 292 F.3d 749, 753 (D.C. Cir. 2002) (hearsay evidence is

admissible in administrative proceedings if it “bear[s] satisfactory indicia of reliability” and “can

constitute substantial evidence if it is reliable and trustworthy”); see generally Richardson v.

Perales, 402 U.S. 389, 407-08 (1971) (holding that a medical report, though hearsay, could

constitute substantial evidence in social security disability claim hearing); cf. Federal Rule of

Evidence 403 (stating that relevant, material, and reliable evidence shall be admitted).

142

The Supreme Court has stated that “…it has long been settled that the technical rules for the

exclusion of evidence applicable in jury trials [the Federal Rules of Evidence] do not apply to

proceedings before federal administrative agencies in the absence of a statutory requirement that

such rules are to be observed.” Opp. Cotton Mills v. Administrator, 312 U.S. 126, 155 (1941).

143

See, e.g., Guy P. Riordan, Exchange Act Release No. 61153, 2009 WL 4731397, at *14 (Dec.

11, 2009); Edgar B. Alacan, Exchange Act Release No. 49970, 2004 WL 1496843, at *6 (July 6,

2004); Wheat, First Securities, Inc., Exchange Act Release No. 48378, 2003 WL 21990950, at

admissibility of hearsay evidence is more appropriate than the broad exclusionary rules and

procedures proposed by the commenters, and therefore adopt the rule as proposed.

O. Amendments to Appellate Procedure in Rules 410, 411, 420, 440, and 450

1. Proposed Rules

We proposed amendments to Rules 410 (Appeal of Initial Decisions by Hearing

Officers), 144 411 (Commission Consideration of Initial Decisions by Hearing Officers), 145 420

(Appeal of Determinations by Self-Regulatory Organizations), 146 440 (Appeal of Determinations

by the Public Company Accounting Oversight Board), 147 and 450 (Briefs Filed with the

Commission), 148 which govern appeals to the Commission.

*12 (Aug. 20, 2003); Harry Gliksman, Exchange Act Release No. 42255, 1999 WL 1211765

(Dec. 20, 1999); Carlton Wade Fleming, Jr., Exchange Act Release No. 36215, 1995 WL

539462 (Sept. 11, 1995). The Commission and hearing officers have declined to credit hearsay

evidence based on these standards. See, e.g., Wheat, 2003 WL 21990950, at *12 (noting that

hearing officer declined to admit statements that “had no bearing on” the relevant issue and

concluding they were “unreliable,” were not “written, signed, or made under oath” and “[t]here

was no showing that any of the officials was unavailable to testify at the hearing”); Mark James

Hankoff, Exchange Act Release No. 30778, 1992 WL 129520, at *3 (finding an affidavit and

hearsay statement an unreliable basis for the NASD’s finding of fact); Gary L. Greenberg,

Exchange Act Release No. 28076, 1990 WL 1104065, at *3 (June 1, 1990) (noting that the

record as a whole did not provide “sufficient assurance” of the truthfulness or reliability of

hearsay evidence to “justify [] crediting it over the first-hand testimony” of the respondent).

144

17 CFR 201.410.

145

17 CFR 201.411.

146

17 CFR 201.420.

147

17 CFR 201.440.

148

17 CFR 201.450.

Rule 410(b) currently requires petitioners to set forth all the specific findings and

conclusions of the initial decision to which exception is taken, and provides that an exception

that is not stated in the notice may be deemed to have been waived by the petitioner. 149 We

proposed to amend Rule 410(b) to state, instead, that a petitioner is required to set forth only a

summary statement of the issues presented for review. 150 In addition, we proposed to amend

Rule 410(c) to limit the length of petitions for review to three pages and to bar incorporation of

pleadings or filings by reference. 151 We reasoned that these changes would be consistent with

Federal Rule of Appellate Procedure 3(c), which requires only notice pleading and filing where

an appellant may appeal as of right. 152

To help effectuate the amendments to Rule 410(b), we also proposed an amendment to

Rule 411(d). 153 Current Rule 411(d) provides that Commission review of an initial decision is

limited to the issues specified in the petition for review and any issues specified in the order

scheduling briefs. 154 We proposed to amend Rule 411(d) to state that Commission review of an

initial decision is limited to the issues specified in an opening brief and that any exception to an

149

17 CFR 201.410(b).

150

80 FR at 60096.

151

Id.

152

Id. at n.36.

153

Id. at 60096.

154

17 CFR 201.411(d).

initial decision not supported in an opening brief may be deemed to have been waived by the

petitioner. 155

We also proposed to amend Rule 450(c) to no longer allow parties to incorporate

pleadings or filings by reference. 156 We explained that, as a practical matter, it is difficult to

enforce a word count that allows for incorporation by reference. 157 In addition, we reasoned that

current Rule 450(c) encouraged parties to rely on pleadings or filings from the hearing below,

rather than addressing the relevant evidence or developing the arguments central to the appeal

before the Commission. 158 We explained that prohibiting incorporation by reference was

intended to sharpen the arguments and require parties to provide specific support for each

assertion. 159

Finally, we proposed amendments to Rules 420(c) and 440(b) to make them consistent

with the proposed amendments to Rules 410(b) and 450(b). 160 Rule 420 governs appeals of

determinations by self-regulatory organizations (SROs), and Rule 440 governs appeals of

determinations by the Public Company Accounting Oversight Board (PCAOB). 161 We proposed

155

80 FR at 60096.

156

Id.

157

Id. at 60097.

158

Id.

159

Id.

160

Id. at 60097.

161

Id.

to amend Rule 440(b) to include a two-page limit for the application for review from a PCAOB

decision, which is consistent with the current page limit under Rule 420(c) for applications from

SROs. 162 We also proposed to amend both Rule 420(c) and Rule 440(b) to include a provision

stating that any exception to a determination that is not supported in an opening brief may be

deemed to have been waived by the applicant. 163 We explained that these proposed amendments

to Rules 420 and 440 would align these rules with the rules governing appeals from initial

decisions issued by Commission hearing officers. 164

2. Comments Received

Two commenters generally supported the proposed amendment to Rule 410(b) insofar as

the amended rule would adopt a notice standard for filing appeals with the Commission. 165 But

both commenters opposed the proposed limit of the notice of appeal to three pages. 166

One of the commenters argued that, because the notice of appeal will provide for a

caption and other identifying information, three pages may not be sufficient to accurately

describe the issues even in a summary format. This commenter suggested that the Commission

increase the page limit for notices to five pages. 167

162

Id.

163

Id.

164

Id.

165

FSR; NJSBA.

166

FSR; NJSBA.

167

NJSBA.

The second commenter argued that the Commission’s analogy to Federal Rule of

Appellate Practice 3(c) was misplaced because, the commenter reasoned, appeals of initial

decisions are not as of right. 168 This commenter suggested that, if the Commission were to limit

petitions for review to three pages, it should also adopt one or more of the following proposals:

(i) extend the word limit to opening briefs to 16,000 words; (ii) permit pleadings to be

incorporated by reference, without counting their contents against any word limit; or (iii) remove

language in Rule 450(c) providing that motions to file oversized briefs are disfavored. 169

3. Final Rules

We are adopting the rules as proposed. We continue to believe that a three-page limit for

petitions for review is sufficient to allow petitioners to provide notice of the issues that they are

appealing. Based on the Commission’s experience with appeals from initial decisions, we

continue to believe that a default limit of 14,000 words is reasonable, that allowing briefs to

incorporate pleadings by reference would be impractical, and that motions to file oversized briefs

should be disfavored.

Finally, and in response to the comment regarding appeals from initial decisions not

being as of right, we note that we are unaware of any case in which the Commission has declined

to grant a procedurally proper petition for review. 170 As we explained when we eliminated the

filing of oppositions to petitions for review, such oppositions are “pointless” because “‘the

168

FSR.

169

FSR.

170

See David F. Bandimere, Exchange Act Release No. 76308, 2015 WL 6575665, at *20, n.110

(Oct. 29, 2015).

Commission has long had a policy of granting petitions for review, believing that there is a

benefit to Commission review when a party takes exception to a decision.’” 171 We therefore do

not find persuasive the argument that “the content and length of a petition for review should be

compared to that described by Federal Rules of Appellate Practice Rule 5 (governing

discretionary appeals).” 172

Amendments to Rule 900 Guidelines

1. Proposed Rule

Rule 900 sets forth guidelines for the timely completion of proceedings, and provides for

status reports to the Commission on pending cases and the publication of information concerning

the pending case docket. 173 As noted in the proposing release, these guidelines are examined

periodically for readjustment in light of changes in the pending caseload and staff resources.

Consistent with such examination, we proposed to amend Rule 900(a) to state that a decision by

the Commission with respect to an appeal from the initial decision of a hearing officer, a review

of a determination by an SRO or the PCAOB, or a remand of a prior Commission decision by a

court of appeals ordinarily will be issued within eight months from the completion of briefing on

the petition for review, application for review, or remand order. Under the proposed rule, if the

Commission determines that the complexity of the issues presented in an appeal warrant

additional time, the decision of the Commission may be issued within ten months of the

171

Id. (quoting Exchange Act Release No. 48832, 2003 WL 22827684, at *13 (Nov. 23, 2003)).

172

FSR.

173

17 CFR 201.900.

completion of briefing. If a decision cannot be issued within the specified eight or ten-month

period, the proposed rule provides that the Commission may issue orders extending the period as

it deems appropriate in its discretion.

We also proposed to amend Rule 900(c), which sets forth the information to be included

in a semi-annual published report concerning the pending case docket. The current rule requires

that the report show, among other things, the number of pending cases before the administrative

law judges and the Commission, changes in the caseload, the median age of cases at resolution,

and the number of cases decided within the guidelines. Proposed Rule 900(c) provides that the

report for each time period would include, in addition to the information currently provided, the

median number of days from the completion of briefing to the Commission’s decision for each

appeal resolved.

2. Comments Received

One commenter objected to the proposed changes to the Commission review timeframes

under Rule 900(a), arguing that the length of Commission review undermines the efficiency of

administrative proceedings. 174 This commenter argued that the proposed amendments

improperly relaxed the guidelines. Another commenter raised similar concerns about the length

of time required to resolve Commission appeals. 175

3. Final Rule

We are adopting the amendments as proposed. We believe that the amendments

174

CCMC.

175

Grundfest.

appropriately balance the public interest in efficient resolution of litigated matters with the public

interest in carefully considered decision-making, particularly in resolving complex matters.

Moreover, we believe that the final amendments balance these revised timeframes with

mechanisms for enhancing the efficiency, transparency, and oversight of administrative

proceedings, including through the mechanism for Commission orders extending periods for

review in individual cases under Rule 900(a)(1)(iv) and the enhanced disclosure required under

Rule 900(c).

Q. Effective Date, Applicability Dates and Transition Period

1. Proposed Rule

We proposed that amendments govern any proceeding commenced after the effective

date of the final rules. 176 We solicited comments as to whether the amendments as proposed

should be applied, in whole or in part, to proceedings that are pending or have been docketed

before or on the effective date, and, if so, the standard for applying any amended rules to such

pending proceedings. 177

2. Comments Received

Commenters generally agreed that certain of the amended rules should apply to at least

some pending proceedings. But commenters offered different standards for determining when

and how the amended rules should apply.

176

80 FR at 60097.

177

Id.

One commenter, for instance, suggested that the amended rules apply “in whole to cases

pending as of the effective date where possible.” 178 Another commenter proposed that any

changes that “enhance the rights of respondents, no matter how small, should apply to

proceedings pending on their effective date.” 179 A third commenter, citing the general practice in

federal court, argued that “[i]nstead of implementing a uniform prospective application,” the

Commission should require that the amendments apply to pending cases “insofar as just and

practicable”—that is, to “pending cases which have yet to proceed to an evidentiary hearing.” 180

Finally, one commenter suggested that the amended rules apply to pending matters “to

the fullest extent possible,” and provided specific examples of how the various rules would apply

to pending proceedings, depending on the phase of the proceeding. 181 Specifically, this

commenter suggested that “the new rules for timing and depositions should apply at least to

proceedings for which the prehearing conference has not yet taken place, and the new

evidentiary rules should apply to any matter for which no hearing has yet taken place.” 182

178

Navistar.

179

Zornow/Gunther/Silverman.

180

Hudson I (citing Landgraf v. USI Film Prods., 511 U.S. 244, 275 n.29 (1994)).

181

Gibson.

182

Gibson.

3. Final Rule

The amended rules will become effective 60 days after publication in the Federal

instituted on or after the date of these amended rules 184 but before the effective date, there will be

a transition period. The parties may elect to have these amended rules apply to such

proceedings. Specifically, in proceedings that are instituted on or after the date of these amended

rules but before the effective date, all of the amended rules (except the amendments to Rule 141,

governing service of OIPs) shall apply to such proceedings if, within 14 days of service of the

OIP, every party to the proceeding, including the Division, submits a request in writing to the

Secretary that the proceedings be conducted under the amended rules. This approach is similar

to the approach we took in the 1995 amendments to the Rules of Practice. 185 If any party does

not submit such a request, the former rules shall apply, except as provided below.

For all other proceedings instituted before the effective date of these rules, the

applicability of the amended rules is described more fully below.

There are many rational ways to implement amendments to procedural rules. When we

amended the Rules of Practice in 1995, the new rules became effective one month after

183

See 5 U.S.C. 553(d).

184

For purposes of this section, the “date of these amended rules” means the date on the last page

of this release.

185

See 1995 Release, 60 FR at 32738 (“Any proceeding docketed by the Commission after the

date of this Federal Register publication but prior to the effective date shall be conducted under

the former Rules of Practice unless, within 30 days of the effective date, each respondent in the

proceeding submits a request in writing to the Secretary that the proceeding be conducted under

the Rules of Practice adopted today.”).

publication in the Federal Register, and the former rules continued to apply in full to pending

administrative proceedings. 186 Other agencies take varying approaches; sometimes they apply

amendments to rules prospectively, 187 and at other times they apply such amendments to pending

proceedings. 188 Finally, as commenters observed, amendments to the Federal Rules of Civil

Procedure generally apply to pending proceedings “insofar as just and practicable.” 189

We conclude that the amended evidentiary rules should apply to proceedings where the

hearing has not begun as of the effective date, and that other amended rules should sometimes

apply, depending on the stage of the proceeding, as set forth in detail below. 190 For example,

amended Rules 221, 233, and 360 shall apply to proceedings where the prehearing conference

has not been held as of the effective date of these rules, as well as to proceedings that are stayed

(other than pursuant to consideration of a settlement offer under Rule 161(c)(2)(i)), 191 whether by

186

See 1995 Release, 60 FR at 32738.

187

See, e.g., Department of Labor, Rules of Practice and Procedure for Administrative Hearings

Before the Office of Administrative Law Judges, 80 FR 28767 (May 19, 2015), providing that the

rules would be effective 30 days after publication.

188

See, e.g., Federal Trade Commission, Revisions to Rules of Practice, 80 FR 25940 (May 6,

2015), providing that the rules would generally apply to pending proceedings, as well as to

newly instituted proceedings.

189

Federal Rules of Civil Procedure, 2015 Amendments.

190

Gibson.

191

Under current Rule 161(c)(2)(i), proceedings may be stayed upon notification by the parties

that they have agreed in principle to a settlement on all major terms. In the interest of prompt

resolution of such proceedings, we are excluding such proceedings from the application of

amended Rules 221, 233 and 360. Such proceedings would have been operating under the

current rules, and should a stay in such a proceeding be lifted, we believe that application of

these amended rules could result in unnecessary delays.

court or Commission order, as of the effective date. Based on the Commission’s experience with

administrative proceedings, we believe that applying the amended rules in such proceedings

would not unduly disrupt pending proceedings.

With respect to a commenter’s suggestion of using a “just and practicable” standard to

determine whether the amended rules should apply in a given proceeding, the tables below

reflect the Commission’s determinations of what is just and practicable.

The tables below provide whether and how the amended rules apply: 192

Rules regarding initial filings—apply to proceedings instituted on or after the

effective date of these amendments

Rule 141

Requirements for serving OIP

Rule 220

Requirements for answers to OIP

Rule 230

Documents that may be withheld or redacted by the Division

Rule 221

Rule 222

Rule 233

Rule 234

Rule 250

Rule 360

Rules regarding depositions, timing of proceedings and dispositive motions—apply

to those proceedings where, as of the effective date of these amendments: (i) the

initial prehearing conference pursuant to Rule 221 has not been held; or (ii) the

proceedings have been stayed, except for proceedings stayed pursuant to Rule

161(c)(2)(i)

Rule amended to add depositions, expert witness disclosures or reports, and

timing for completion of production of documents by the Division to the list of

subjects to be discussed at the prehearing conference

Rule amended to change information that is required to be submitted in

conjunction with expert reports

Rule amended to expand use of depositions

Rule amended to provide that moving party may take a deposition on written

questions either by stipulation of the parties or by filing a motion demonstrating

good cause

Dispositive motions

Rule amended to change timing of proceedings

192

All of the amended rules apply to proceedings instituted on or after the effective date of these

amendments.

Rule 180

Rule 232

Rule 235

Rule 320

Evidentiary rules and rules governing hearings—apply to all proceedings where

hearing has not begun as of the effective date of these amendments

Rule amended to allow the Commission or a hearing officer to exclude or

summarily suspend a person for any portion of a deposition if the person engages

in contemptuous conduct before either the Commission or a hearing officer

Rule amended to clarify standards for the issuance of subpoenas and motions to

quash

Standard for granting a motion to introduce prior sworn statement of a non-party

witness

Standard for admissibility of evidence

Rule governing motions—apply to all proceedings pending as of the effective date

of these amendments

Rule 154

Rule governing motions and related filings, except where another rule expressly

governs

Rule governing extensions of time, postponements, and adjournments—apply to all

proceedings pending as of the effective date of these amendments

Rule 161

Rule governing extensions of time, postponements, and adjournments requested

by parties – amended to allow a stay pending Commission consideration of

settlement offers to also stay timelines set forth in Rule 360

Rule 410

Rule 411

Rule 420

Rule 440

Rule 450

Rule 900

III.

Amendments to appellate procedure rules—apply to appeals filed on or after the

effective date of these amendments

Procedure for filing petition for review

Standards for granting petition for review and limitation on matters reviewed

Appeals from SRO determinations

Appeals from PCAOB determinations

Briefs filed with the Commission

Guidelines for timely completion of proceedings

Economic Analysis

The Commission is sensitive to the economic effects that could result from the final rules,

including the benefits and costs of the final rules, as well as effects on efficiency, competition,

and capital formation. These quantitative and qualitative economic effects are discussed below.

In adopting these amendments, we seek to enhance flexibility in the conduct of

administrative proceedings while maintaining the ability to timely and efficiently resolve

administrative proceedings. The amendments include changes or clarifications to, among other

things, the timing of hearings, the use of depositions, the filing of motions for summary

disposition, and the submission of expert reports. The current rules governing administrative

proceedings serve as the baseline against which we assess these final rules.

We continue to believe that there will not be significant economic consequences

stemming from the amendments to Rules 141, 154, 161, 220, 230, 235, 320, 410, 411, 420, 440,

450, and 900. Thus, those sections are not discussed below. As explained in further detail

below, we expect the amendments to Rules 222, 232, 233, 250, and 360 will have an impact on

the costs and efficiency of administrative proceedings, but we do not expect them to significantly

affect the efficiency of securities markets, competition, or capital formation.

Benefits, Costs, and Effects on Efficiency, Competition, and Capital

Formation

As discussed in further detail above, the amendments to Rule 360 concern the timing for

the various stages of an administrative proceeding, providing additional time for discovery. The

amendments to Rule 233 permit a limited number of depositions, while the amendments to Rule

232 support this change by providing standards governing motions to quash or modify deposition

notices or subpoenas. The amendments to Rule 222 concern requirements for a written report for

expert witnesses. The amendments to Rule 250 clarify how dispositive motions will operate

with the amendments to Rules 233 and 360 and provide the procedures and standards governing

the various types of dispositive motions.

Current Commission rules set the prehearing period of a proceeding at approximately

four months for a 300-day proceeding and do not permit parties to take depositions solely for the

purpose of discovery. In addition, rules governing the testimony of expert witnesses have not

previously been formalized, but some hearing officers require expert reports in proceedings

before them.

We continue to believe that the aggregate benefits and costs of the final rules will depend,

among other things, on the expected volume of administrative proceedings. For example, Rule

360 adjusts the potential timing of administrative proceedings, and an increase or a decrease in

the number of administrative proceedings will scale up or down, respectively, the total

magnitude of costs and benefits of the new timeline for administrative proceedings. Similarly,

Rules 232 and 233 provide the framework for expanded use of depositions in administrative

proceedings, and an increase or a decrease in the number of administrative proceedings may

scale up or down, respectively, the total magnitude of the costs and benefits of the expanded use

of depositions.

However, we are unable to precisely predict the economic effect of the final rules on

administrative proceedings, as the number and type of proceedings can vary based on many

factors unrelated to the Rules of Practice. Over the last three completed fiscal years, the number

of new administrative proceedings initiated and not immediately settled has ranged from

approximately 170 to approximately 230 proceedings, only a portion of which would be

impacted by certain of the amended rules. 193 As a result, we are unable to quantify the overall

costs and benefits expected to flow from the amended rules.

Amendments to Rules Governing Depositions and the Timing of

Hearings in Administrative Proceedings

The amendments to Rules 232, 233, and 360, as described above, may benefit both

respondents and the Division by providing them with additional time and tools to potentially

discover additional relevant facts. Specifically, the amendments to Rule 233 permit respondents

and the Division to notice the oral depositions of fact witnesses, expert witnesses and document

custodians. The amendments to Rule 232 correspond with the new provisions for depositions in

Rule 233 and establish the requirement that a proposed deponent be a fact witness, an expert

witness, or a document custodian. The amendments to Rule 360 enlarge the potential maximum

prehearing period. We anticipate that the potential for a longer maximum prehearing period

would allow, in appropriate cases, additional time to review investigative records, conduct

depositions under amended Rule 233, and prepare for a hearing.

These amendments may facilitate information acquisition during the prehearing stage,

ultimately resulting in more focused hearings. We are unable to quantify these benefits,

however, because any potential cost savings would depend on multiple factors, including the

specific claims, facts, and defenses in a particular proceeding.

193

The total number of administrative proceedings initiated and not immediately settled each

fiscal year encompasses various types of proceedings. These include proceedings under Section

12(j) of the Exchange Act and “follow-on” proceedings following certain injunctions or criminal

convictions, which constitute the vast majority of all proceedings instituted. On average,

approximately 20% of all administrative proceedings initiated over the last three completed fiscal

years were designated as 300-day proceedings.

The depositions and a longer prehearing period will, however, impose additional costs

compared to the current practice in administrative proceedings where, with limited exception,

depositions are not permitted and maximum prehearing periods are shorter. We continue to

believe that the costs of the adopted amendments will be borne by the Division as well as by

respondents and deponents who provide deposition testimony. These costs will primarily stem

from the potential costs of depositions and the extension of the maximum prehearing period.

Aggregate costs stemming from depositions depend on the number of depositions that

respondents and the Division take and assume they attend depositions of third parties noticed by

another party to the proceeding. Costs of depositions may include travel expenses, attorney’s

fees, and reporter and transcription expenses. Based on Commission staff experience, we

estimate the cost to a respondent of conducting one non-expert deposition to be approximately

$45,640, and the cost of conducting one expert witness deposition to be approximately

$75,696. 194 This cost estimate has been increased relative to the cost estimate in the proposal to

194

The $45,640 estimate is comprised of the following expenses: (i) travel expenses: $4,000; (ii)

reporter/videographer: $8,200; and (iii) professional costs for two attorneys (including

reasonable preparation for the deposition): 40 hours x $504/hr and 40 hours x $332/hr = $33,440.

The hourly rates for the attorneys and paralegal are based on the 2015-2016 Laffey Matrix. The

Laffey Matrix is a matrix of hourly rates for attorneys of varying experience levels and

paralegals that is prepared annually by the Civil Division of the United States Attorney’s Office

for the District of Columbia. See Laffey Matrix – 2015-2016, available at

https://www.justice.gov/usao-dc/file/796471/download (last visited July 8, 2016) (the “Laffey

Matrix”). In addition, if the deponent is an expert witness, we estimate the expert’s fees and

travel expenses will be approximately $30,056 per deposition, for a combined total of $75,696.

This includes (i) file review and preparation costs estimated at 80 hours, at a rate of $333/hr,

which totals $26,640; and (ii) expert fees incurred with appearing for the deposition, 8 hours x

$427/hr = $3,416. The hourly rate for expert witnesses is based on survey data of expert witness

fees from the SEAK, Inc. 2014 Survey of Expert Witness Fees. See SEAK, Inc. 2014 Survey of

Expert Witness Fees, which can be found at http://www.seak.com/wpcontent/uploads/2014/07/Expert-Witness-Fee-Data.pdf (last visited July 8, 2016). These

reflect the increased time-limit for depositions in amended Rule 233 from six hours to seven

hours and to include the costs associated with expert depositions. In single-respondent

proceedings, if both the Division and the respondent each take three depositions, one of which is

of an expert witness, and each attend each other’s depositions, then respondents may incur the

cost of conducting or attending up to six depositions plus expert witness fees and costs – an

estimated total of $303,896. Similarly, in multi-respondent proceedings, respondents may incur

the cost of conducting or attending up to ten depositions plus expert witness fees and costs – an

estimated total of $486,456. We recognize that respondents and the Division play a large role in

managing their own costs by determining, for example, whether to take depositions or participate

in the depositions of others, and whether to mitigate attorney costs, including by adjusting the

number of attorneys attending each deposition, contracting with a competitively priced reporter,

or arranging for less expensive travel. We note that determinations regarding the approach to

requesting depositions will likely reflect parties’ beliefs regarding the potential benefits they

expect to realize from taking or attending depositions. However, the costs of depositions are

borne by all attendees of the deposition, including not only the deposing party, but also the other

parties to the proceeding, the deponent, and third parties, in the form of lost wages, travel,

preparation, and attorney costs. 195

estimates exclude transcription costs, which are estimated at $3.65 per page, based on the

Federal Court Maximum Transcription Rates for Court Reporters, available at

http://www.uscourts.gov/services-forms/federal-court-reporting-program (last visited July 8,

2016).

195

Some witnesses who are deposed might bear little if any out-of-pocket cost if, for example,

the deposition is conducted in the city in which they live or work, and they choose not be

Relative to the proposed amendments to Rule 233, the adopted amendments expand the

potential use of depositions by allowing each side to request an additional two depositions from a

hearing officer. This would place the ultimate limit on depositions at five depositions for each

side in a single-respondent proceeding, and seven depositions for each side in a proceeding

against multiple respondents. In single-respondent proceedings, if the Division and the

respondent each take five depositions, one of which is of an expert witness, and each attend each

other’s depositions, then respondents may incur the cost of conducting or attending as many as

ten depositions plus expert witness fees and costs – an estimated total of $486,456. Similarly, in

multi-respondent proceedings, respondents may incur the cost of conducting or attending as

many as fourteen depositions plus expert witness fees and costs – an estimated total of

$669,016. 196 Although the total number of depositions increases, we believe that parties will

make the decision to request an additional deposition by considering the expected costs and

benefits of acquiring information from the deponent. To the extent that additional depositions

may reveal important information or evidence relevant to the proceeding and thus lead to more

focused hearings, this provision may improve the efficiency of administrative proceedings.

However, neither the parties to a proceeding nor the hearing officer can predict whether

additional depositions will ultimately have such an effect, and in situations where additional

depositions ultimately prove to be unhelpful or unnecessary, permitting those additional

depositions may impose delays and costs that can have an adverse effect on efficiency.

represented by counsel at the deposition. Moreover, the party seeking the deposition might

choose to reimburse the witness for some costs.

196

See supra note 194.

Similarly, the longer maximum prehearing periods permitted by the amendment to Rule

360 may impose costs on the parties. Based on our estimates of staffing requirements and

corresponding hourly rates, we estimate that the potential to lengthen the overall timeline in 120day proceedings by up to six months to allow more time for discovery may result in additional

costs to respondents of up to $754,080. 197 We thus estimate that the combined costs of the

lengthened prehearing period and the availability of depositions could cost respondents in a

single-respondent 120-day proceeding $1,240,536. 198 Similar combined costs for respondents in

a 120-day multi-respondent proceeding could be as high as $1,423,096. 199 Again, however, we

recognize that while a party is likely to take actions under the amended rules that result in these

costs only to the extent that the party expects to receive benefits from a longer maximum

prehearing period and the availability of depositions, actions taken by one party to a proceeding

197

The $754,080 estimate is comprised of the following expenses: (i) 1 senior attorney x 40

hours per week x 24 weeks x $504/hr = $483,840; (ii) 1 mid-level attorney x 20 hours per week x

24 weeks x $332/hr = $159,360; (iii) 1 paralegal x 30 hours per week x 24 weeks x $154/hr =

$110,880. The hourly rates for the attorneys and paralegal are based on the Laffey Matrix. We

do not anticipate the amendments to Rule 360 concerning the timing of hearings in 75-day and

30-day proceedings will generally result in a significant departure from current practice in the

length of time necessary for completion of such proceedings, which often are resolved by default

or summary disposition.

198

$754,080 + $486,456 =$1,240,536. This estimate is comprised of the potential costs

associated with the maximum lengthening of the prehearing period in 120-day proceedings and

the total estimated costs of depositions in single-respondent proceedings. To the extent the hours

spent during the prehearing period are used to prepare and/or respond to depositions, this may

overestimate the total costs of a single-respondent proceeding.

199

$754,080 + $669,016 = $1,423,096. As explained supra, this figure may overestimate the

total costs in multi-respondent proceedings to the extent there is overlap with the hourly rate

calculations associated with depositions.

during the additional time for discovery may result in costs incurred by the other parties to the

proceeding.

The amendments related to the timing of hearings and the use of depositions may also

affect the efficiency of proceedings. To the extent that the adopted amendments facilitate the

discovery of relevant facts and information through depositions and the extension of the

maximum prehearing periods, they may lead to more expeditious resolution of proceedings. For

example, for cases that may benefit significantly from the additional information, there could be

efficiency gains from the final rules if the costs associated with the use of depositions are smaller

than the value of the information gained from depositions. However, we note that because

parties may not take into account the costs that depositions may impose on other individuals

and/or entities, a potential consequence of the adopted amendments to Rule 233 is that parties

may engage in more discovery than is efficient. For example, for proceedings that may not

benefit significantly from information gained from a deposition, requesting depositions may

result in inefficiency by imposing costs on all attendees of the deposition, including the deposing

party, the other parties to the proceeding, the deponent, and third parties, without any significant

informational benefit. However, we believe that the amendments to Rules 232 and 233 may

mitigate the risk of this efficiency loss by setting forth standards for the issuance of subpoenas

and motions to quash deposition notices and subpoenas, and setting a limit on the maximum

number of depositions each side may notice.

Ultimately, it is difficult to predict with any certainty the economic efficiency gains, if

any, from the addition of depositions, a longer prehearing period, and associated rule changes.

At the same time, we recognize that there are necessarily cost increases from longer hearing

periods and additional discovery tools, and as we have explained, those costs are borne by

respondents and the Division, as well as other attendees of depositions, including deponents, and

third parties. We continue to believe that any such costs are appropriate given the benefits of

such rule changes.

2. Amendments Concerning Expert Reports and Testimony

The final amendments to Rule 222 specify a set of submissions and disclosures that

hearing officers may require from parties to a proceeding, and require parties to a proceeding

who intend to call expert witnesses to submit information about these expert witnesses. Though

producing submissions and disclosures may cause parties to proceedings to incur costs, these

amendments may yield benefits by facilitating access to information that may aid in interpreting

statements, evidence, and testimony during hearings. We are aware that some hearing officers

may currently require submissions and disclosures similar to those referenced in amended Rule

222, so the final rule will impose costs and yield benefits only to the extent that they result in

additional information being submitted to hearing officers beyond that submitted under current

practice.

3. Amendments Concerning Dispositive Motions

As discussed above, Rule 250 has been amended to provide that both sides to a

proceeding shall be permitted, as a matter of right, to make certain dispositive motions in certain

types of proceedings. The amendments to Rule 250 clarify how dispositive motions will operate

in conjunction with the amendments to Rules 233 and 360, which permit parties to take

depositions and provide for a longer maximum prehearing period.

Amended Rule 250 may improve the efficiency of administrative proceedings by

eliminating unnecessary hearings. The ability of either side to bring a dispositive motion serves

several functions, including those attendant to potential early resolution of claims. For example,

in proceedings where the underlying facts are not in dispute, the granting of a dispositive motion

may reduce the costs borne by all parties by narrowing the focus of or entirely eliminating the

need for a hearing. On the other hand, where motions are filed in proceedings not susceptible to

resolution via dispositive motion, the decision to allow dispositive motions could delay

proceedings or otherwise result in inefficiencies. For example, if the hearing officer grants

summary disposition, delays could result if the Commission subsequently remands the case for

an evidentiary hearing. Such delays could result in costs to parties to the proceeding.

Because the amendments to Rule 250 largely clarify how pre-existing motion practice

will operate alongside the amendments to Rules 233 and 360, the rule change may not result in a

significant departure from current practice. Further, we cannot predict with certainty how

practice will change in response to the availability of dispositive motions filed pursuant to

amended Rules 250(a), (b), and (d) as a matter of right—rather than with leave of the hearing

officer—given that parties will respond based on the individual facts of each case and their own

cost estimates of filing the motions. We are thus unable to estimate the total potential costs

associated with these amendments. Moreover, to the extent a

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