In a recent post, I discussed the Securities & Exchange Commission’s stunning admission of a breach in “internal separation,” which is basically a firewall between the agency’s prosecution and judging teams that practice before the SEC’s in‐​house courts. As I explain in the post, this breakdown is concerning because “internal separation” is the legislative solution for the constitutional problems caused by regulatory agencies running their own courts. Put differently, it’s an affront to the separation of powers when the prosecutor and judge are mixing it up behind the scenes.

In this post, I’ll discuss the inefficiency of the SEC’s in‐​house courts. This is important because the sine qua non of these agency adjudications is their putative efficiency. Indeed, we’ve long tolerated the constitutional oddness inherent to executive branch trials in large part due to their (supposed) comparative advantage over Article III courts when it comes to getting things done in a timely manner. On paper, at least, there is every reason to expect that the administrative process would be streamlined. Discovery is limited; there is no jury. And the SEC’s very structure—where prosecutors and judges work for the same agency—is designed for efficiency, if not fairness. In practice, however, the agency’s sluggishness belies any pretensions to efficiency.

Before we get to that, let’s start with a brief history of SEC enforcement, from my last post:

Over the years, Congress has significantly expanded the SEC’s authority to prosecute on its home turf. During its first three decades of existence, the SEC could bring administrative enforcement actions only against businesses that had to register with the agency as a condition of doing business; furthermore, in terms of penalties, the commission was limited to denying or revoking the wrongdoer’s registration. Today, by contrast, the agency can bring home‐​court prosecutions against any person, regardless of whether they’re registered with the agency, and the agency can seek a spectrum of penalties, including disgorgement, professional bars, and steep civil penalties.

As Judge Jed Rakoff noted in a 2014 speech, “a claim of greater efficiency” has been the “stated rationale” for the growth of SEC’s adjudicative functions since the agency’s inception.

Turning to the agency’s docket of cases, it bears noting at the outset that the SEC prefers to settle and achieves this result for almost 98% of its enforcement actions. Of those cases that don’t settle, the agency commonly secures default judgments against defendants that don’t bother to participate in the proceedings. Even among non‐​settling, non‐​default proceedings, most are “follow on” actions, where the agency seeks additional penalties based on facts that already had been established by a civil or criminal action in a state or federal court. The upshot is that only a small fraction of agency enforcement actions entails adversarial litigation over facts and law.

Here’s how the administrative process works. After an investigation, the SEC begins a prosecution by filing an Order Instituting Proceedings, which formally sets forth the charges against the alleged violator. Like most other agencies, the SEC conducts its adjudications in a two‐​step process. The parties first litigate before an inferior officer, known as an “administrative law judge” (ALJ), who renders an “initial decision.” The losing party can then appeal the ALJ’s initial decision to a principal officer—in this case, the five‐​member Commission that heads the SEC, who collectively make the final decision.

Under the SEC’s rules of procedure, the ALJs have approximately sixteen months to try contested cases. At the next step, the Commission has ten months to perform its appellate role, but the clock does not start until briefing is completed and the Commission has heard oral arguments (if any). Putting it all together, the SEC has about twenty‐​six months to conduct an administrative proceeding, in addition to however long the Commission takes to conduct a hearing and full briefing. These are generous targets that the SEC has set for itself. Even if the agency aced its deadlines, its adjudications would be no more efficient—and likely less so—than judgments obtained through a federal court proceeding culminating in a jury verdict, which average 771 days, or just over twenty‐​five months, in duration.

Still, the SEC has failed to meet even these permissive timelines. To be sure, the lion’s share of blame does not rest with the agency’s ALJs, who, for the most part, either meet or come close to meeting their target deadlines. The bottleneck instead occurs with the Commission’s appellate role. Over the last five years, the SEC has issued only three opinions involving agency enforcement actions. Meanwhile, the agency’s backlog has grown to thirteen cases, and the average pending proceeding is more than six years old. (For all the relevant citations, see our recent brief in SEC v. Cochran).

There are two takeaways. First, the SEC conducts at most a handful of these complex administrative proceedings in any given year. Second, when the agency does try complex cases on its home court, the SEC is terrible at timeliness. Given that efficiency is a major reason why the SEC has in‐​house courts to begin with, I think it’s fair to wonder whether these proceedings are worth the constitutional hassle.