# Amendments to the Commission's Rules of Practice > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-16987 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** July 29, 2016 - **Citation:** 81 FR 50212 ## Text 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 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 III. Economic Analysis IV. Administrative Law Matters V. Statutory Basis I. 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 1 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-2015-10-05/pdf/2015-24707.pdf (last visited July 8, 2016). 2 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/03-15262.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. 3 The comment letters are located at http://www.sec.gov/comments/s7-18-15/s71815.shtml (last visited July 8, 2016). 4 See, e.g., David M. Zornow, Christopher J. Gunther and Chad E. Silverman letter dated December 4, 2015 (“Zornow/Gunther/Silverman”). 5 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. 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 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 post-hearing 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 post-hearing 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. 6 17 CFR 201.360. 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 post-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, 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 7 See, e.g., Financial Services Roundtable letter dated December 4, 2015 (“FSR”); New Jersey State Bar Association letter dated December 1, 2015 (“NJSBA”). 8 See Zornow/Gunther/Silverman. 9 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”). 10 See Stephen E. Hudson letter dated December 3, 2015 (“Hudson I”). 11 See Gibson; Calfee. 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 12 See, e.g., Navistar International Corporation letter dated December 3, 2015 (“Navistar”). 13 See Brune; Gibson; Navistar. 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 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 14 NJSBA. 15 Id. 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 16 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. 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) 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 17 The prehearing periods in this rule do not affect the statutory hearing requirements in cease-and-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). 18 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. 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 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 19 See 2003 Release, 68 FR at 35787. 20 17 CFR 201.360(a)(2)(i). 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 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 21 See 2003 Release, 68 FR at 35787. 22 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. 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 30-day 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 proposed, will provide adequate preparation time for the parties while balancing the need for efficient resolution of administrative proceedings. 23 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). 24 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). 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 120-day 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 25 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. 26 Aegis J. Frumento and Stephanie Korenman letter dated December 4, 2015 (“Frumento/Korenman”); Brune; Navistar; Hudson I; Zornow/Gunther/Silverman; FSR; CCMC. 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 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 27 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)). However, one commenter believed that a limit of ten depositions per party would be reasonable. FSR. 28 Stephen E. Hudson letter dated December 4, 2015 (“Hudson II”, incorporating anonymous blog); Zornow/Gunther/Silverman. 29 NJSBA (citing Fed.R.Civ.P. 26(b)(2)(C)); Hudson I (same); Gibson (citing Fed.R.Civ.P. 26(b)(1)). 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-respondent proceeding as an appropriate starting point, coupled with hearing officer discretion to enlarge the number. 34 30 Brune; Navistar; Hudson I; FSR; CCMC. 31 Fed.R.Civ.P. 30(a)(2)(A)(i). 32 FSR. 33 CCMC. 34 Gibson. Three commenters supported the Commission's proposal of three depositions in a single-respondent 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 35 Calfee; NJSBA; Frumento/Korenman. 36 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). 37 NJSBA. 38 Frumento/Korenman. 39 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 40 Calfee; Hudson II (incorporating anonymous blog); FSR; Gibson; CCMC. 41 FSR; CCMC. 42 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). 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 43 Calfee; FSR; see Fed.R.Civ.P. 30(c). 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 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 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. 44 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. 45 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.”). 46 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). 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 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 47 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.). 48 This is consistent with the Federal Rules of Civil Procedure. See Fed.R.Civ.P. 30(d)(1). 49 This provision has been renumbered from the proposed rule, where it was numbered paragraph (a)(4). 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 identities of the proposed deponents, will be one of the topics discussed at any initial prehearing conference. 50 50 See infra discussion at section H. 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 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. 51 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. 52 See SEC v. Saul, 133 FRD. 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 ). 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 multi-respondent 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. 53 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. 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 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). 54 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. 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 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 55 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. 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 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. 56 Hudson II. 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 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 well-established 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. 57 1995 Release, 60 FR at 32764. 58 5 U.S.C. 555(d); Attorney General's Manual on the Administrative Procedure Act, section 6(c) (1947) (“ Attorney General's Manual ”). 59 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). 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 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. 60 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. 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.” 61 17 CFR 201.141(a)(2)(iv). 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 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. 62 17 CFR 201.161. 63 We are also adopting a conforming amendment to Rule 360(a)(2)(ii) to include a cross-reference to amended Rule 161(c)(2). 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 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 non-substantive 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. 64 Emphasis added. 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 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 65 17 CFR 201.220. 66 Id. 67 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. 68 80 FR at 60095. 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 69 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. 70 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 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. 71 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 Cease-and-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. 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 72 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. 73 See Pierce v. Pierce, 5 F.R.D. 125 (D.D.C. 1946); cf. Fed.R.Civ.P. 1. 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. 74 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 75 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). 76 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 77 See infra discussion of Rule 250 at Section M. 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. 78 17 CFR 201.222. 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 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 79 Gibson. 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 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 80 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. 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 81 See Fed.R.Civ.P. 26(b)(4), (a)(2), respectively. 82 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.”). 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 co-authored 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 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. 83 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. 84 17 CFR 201.230(a). 85 17 CFR 201.230(b). 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, 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 86 CCMC. 87 Id. 88 Id. 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 discussions and safeguard the privacy of potential respondents with whom the Division has negotiated. 89 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. 90 See, e.g., Fed.R.Civ.P. 5.2(a); DDC Local Civ. R. 5.4(f). 91 See generally, Federal Rule of Evidence 408 (“Compromise Offers and Negotiations”), Advisory Committee Notes; 2 McCormick on Evid. section 266 (7th ed.). 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 92 See 17 CFR 201.230(a). 93 17 CFR 201.230(a)(1)(i)-(v). 94 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 95 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). 96 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. 3-10936, 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). 97 See, e.g., SEC v. NIR Group, 283 FRD. 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 FRD. 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). 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 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. 98 Form 1662 can be found at: http://www.sec.gov/about/forms/sec1662.pdf . 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 99 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. 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). 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 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. 105 See Hudson II (citing anonymous blog). 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 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.” 106 106 See infra discussion at Section N. M. 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 attendant delay in cases where a hearing in which all evidence can be presented and witness demeanor can be observed is warranted.” 107 107 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.”). 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. 109 108 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. 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. 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, any respondent may seek a stay of the administrative proceeding and, where appropriate, the Commission in its discretion may issue such a stay. 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 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. 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). 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 *19-20 (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.”). 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 (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. 115 This is analogous to Federal Rule of Civil Procedure 56 (summary judgment); see also supra note 112. 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 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. 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 120- or 210-day time periods [under current Rule 360], it is an appropriate vehicle for a motion for 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 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. 123 119 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.”). 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). 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 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. 125 124 This is analogous to Federal Rule of Civil Procedure 50(a) (judgment as a matter of law). 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. 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 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, double-spaced 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. 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. 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. N. Rule 320 (Evidence: Admissibility) 1. 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 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.” 132 128 FSR; Gibson; Hudson II (citing anonymous blog); Brune; Grundfest; NJSBA. 129 Gibson; CCMC. 130 Calfee. 131 Gibson. 132 FSR; see also Brune; NJSBA. 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; notice requirements; and provisions allowing additional depositions to counter proposed hearsay. 136 133 Gibson; CCMC. 134 Gibson; CCMC. 135 Gibson. 136 CCMC. 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. 140 137 FSR; Brune. 138 Gibson. 139 Gibson; Grundfest. 140 Brune; FSR. 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. 141 141 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 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). 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 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. 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 *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 Relea [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-16987. Public record. Not legal advice.