SEC Rule 102(e) Proceedings Against Professionals.

SEC Rule 102(e) proceedings are administrative proceedings under the Securities and Exchange Commission’s Rules of Practice and Procedure. Rule 102(e) is the Commission’s authority to seek professional disciplinary action for incompetence, lack of integrity, lack of ethics, and violation of federal securities laws. While the SEC’s Rule 102(e) authority is broad, the SEC’s decision in a Rule 102(e) proceeding is subject to review by the federal appellate courts.

Q: What are the Remedies available to the SEC under Rule 102(e)?

Under Rule 102(e), the SEC can censure professionals or suspend them from appearing before the SEC. Both Rule 102(e)(i) and Rule 102(e)(ii) allow the SEC to impose these penalties. Rule 102(e) does not provide for the imposition of criminal penalties, which must be asserted in a separate criminal enforcement proceeding.

Rule 102(e) is part of the SEC’s Rules of Practice, and Rule 102(e) comes from the Commission’s 1935 adoption of its first “professional practice” rule. A professional’s Rule 102(e) violation may have roots in the professional’s behavior on a SEC-related assignment. These roots can be disciplinary violations within the SEC’s jurisdiction. A professional’s Rule 102(e) violation may also result from violations committed outside of the professional’s assignments for the SEC. These violations may not fall within the SEC’s Rule 102(e) jurisdiction.

Section 4C of the Exchange Act was enacted as Section 602 of the Sarbanes-Oxley Act of 2002. Before it was promulgated as Rule 102(e) during the Commission’s 1995 procedural reorganization, Rule 102(e) was Rule 2(e) of the SEC’s professional practice rules. Although Rule 102(e) itself does not mention the SEC’s enforcement authority, Section 4C of the Exchange Act confers enforcement authority upon the Commission. This authorization includes the ability to employ Rule 102(e) as an aid in protecting the public in appropriate cases.

Who and What are Subject to SEC Rule 102(e)?

Q: Who is Subject to SEC Rule 102(e)?

Rule 102(e) encompasses attorneys, accountants, auditors, and other professionals practicing before the SEC. Rule 102(f) defines practicing before the Commission as: (i) “appearing or practicing before the Commission,” (ii) “representing another person before the Commission,” and (iii) “preparing for filing with the Commission any certified audit report, internal control report, opinion letter, written certification as required by the Sarbanes-Oxley Act, or any other document issued by a professional the consent of which is required for filing with the Commission.”

At Spodek Law Group, we define “appearing before the SEC” to include:

• Transacting business with the SEC directly (i.e. meeting with the SEC);
• Representing another person (including individuals or businesses) in any matter related to the SEC; and,
• Preparing documents for SEC filing (i.e. preparation of audit reports or opinion letters, etc.).

While Rule 102(e) has the effect of professional sanctions, it is a rule of practice adopted under the Commission’s own rulemaking authority and backed by Section 4C of the Exchange Act. The regulation’s Rule 102(e) allows the SEC to intervene when an “attorney, accountant, auditor, representative, or any other person who shall practice or attempt to practice before the Commission” has “(i) not to possess the requisite qualifications to represent others; or (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.”

Q: What Conduct Triggers an SEC Rule 102(e) Proceeding?

Rule 102(e)(1)(i) provides for SEC intervention where a professional is found “not to possess the requisite qualifications to represent others.” Forcing the SEC to justify such a claim should be the strategy for individuals and companies charged with having lack of skill and expertise in a matter in front of the SEC’s Rule 102(e) authority.

Rule 102(e)(1)(ii) applies where a professional is found “to be lacking in character or integrity or to have engaged in unethical or improper professional conduct.” In this instance, a professional may face an action related to their professional duties or their character and ethics. Such assertions about a professional’s deficiency in character, integrity, ethics, or professional conduct must be thoroughly examined and contested by any professional facing a SEC Rule 102(e) proceeding.

Rule 102(e)(1)(iii) states that “any person who shall (i) willfully violate, or willfully aid or abet a violation of, the federal securities laws... or (ii) willfully violate, or willfully aid or abet a violation of, any rule or regulation issued by the Commission... may be subject to appropriate sanctions under Rule 102(e).” Rule 102(e) provides an additional administrative remedy, separate from Section 4C, where a professional can be disciplined for having a deficiency in integrity or violating any federal securities law.

Rule 102(e)’s scope encompasses any professional who may face an SEC Rule 102(e) proceeding based on their role as a securities practitioner or professional. Section 4C provides statutory authority for the SEC’s disciplinary power regardless of Rule 102(e)’s regulatory text. The SEC must show that a professional appears to have violated Rule 102(e) to prevail.

What Conduct Counts as Improper Professional Conduct for Accountants?

Rule 102(e) can reach accounting firms, as well as the individual accountant involved in the audit, accounting, or preparation of the certified audit report or other filed documents. For accountants, Rule 102(e) is triggered by accountant misconduct that can take one of several forms, including intentional, knowing, or reckless violations of applicable professional standards. For examples of accounting misconduct that would trigger an SEC action, Rule 102(e) takes into account an accountant’s failure to maintain professional independence, preparation of inaccurate or misleading financial statements, and lack of adequate audit documentation.

Even in the absence of recklessness, a “single, highly unreasonable negligent violation of a professional standard” can qualify for SEC Rule 102(e) scrutiny (assuming that the circumstances called for heightened scrutiny). With “single instance” negligence, the focus of the inquiry will be on what the accountant knew or should have known about the circumstance giving rise to the alleged negligent violation. For example, a failure to follow a professional standard may lead to a Rule 102(e) proceeding when the accountant knew that the circumstances involved in an engagement (e.g. a complex valuation, transactions with related parties, or reliance on a customer’s internal control report) called for heightening the level of professional scrutiny.

As with Rule 102(e) cases against attorneys and other professionals, repeated unreasonable violations can also trigger an action against an accountant. However, in these cases, the focus will be on an accountant’s “lack of competence” to practice before the SEC. For accountants, intentional misconduct may also constitute improper professional conduct. In these cases, an accountant may have knowingly or intentionally departed from professional standards, for example, by knowingly preparing inaccurate or misleading financial statements, certifying financial statements while not being independent of the company, and fabricating audit documentation. Similar to negligence, one grossly unreasonable departure from professional standards can also suffice to impose liability.

The SEC recently applied this standard (i.e. Rule 102(e)(1)(ii) for improper professional conduct) when it charged the accounting firm Clark Schaefer Hackett (“CSH”) for its audit work, including the preparation of certified audit reports, regarding Lordstown Motors Corp (“Lordstown Motors”).

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

What Happens After the SEC Starts a Rule 102(e) Case?

If the SEC decides to bring a contested disciplinary case under Rule 102(e), the proceedings typically go as follows:

• Order Instituting Proceedings (OIP), The SEC begins a contested disciplinary proceeding by serving the respondent with an order instituting proceedings (OIP). This order is the formal document that details the SEC’s allegations against the respondent (or respondents). If the SEC does not intend to pursue the matter, then it may issue a termination letter instead.
• Answer (with Affirmative Defenses), Pursuant to Rule 220, a respondent is required to file an answer with the Commission’s Office of the Secretary within 20 days after service of the OIP. Affirmative defenses must be explicitly stated in the respondent’s answer, as failure to so-do results in a waiver of the right to rely on such defenses at the administrative hearing.
• Pre-Hearing Discovery (under Rule 230), Rule 230 of the SEC’s Rules of Practice and Procedure provides for pre-hearing discovery. Under Rule 230, “ a respondent to an administrative proceeding shall have access to nonprivileged materials gathered prior to the initiation of the proceeding,” which include both materials the Commission intends to use and materials that may have favorable implications for the respondent.
• Administrative Hearing (and Evidence), If an answer is filed, then an administrative hearing will occur. Under the Commission’s Rules of Practice, evidence that would typically be excluded in federal district court trials can be admissible. Specifically, hearsay evidence, which is excluded under the Federal Rules of Evidence, may be admissible during Rule 102(e) hearings. This reflects the SEC’s broad power under Rule 102(e) to impose sanctions and the limited protections afforded to respondents at these proceedings. However, respondents are still entitled to cross-examine SEC witnesses.
• Burden of Proof, The SEC’s D.E. has the burden of proof in Rule 102(e) proceedings. In these administrative proceedings, this burden of proof is a “preponderance of the evidence.” The preponderance of the evidence standard is the same standard of proof that applies in federal civil litigation, although it is a much more lax standard than that applied in criminal litigation.
• Settlement (under Rule 240), Rule 240 of the Commission’s Rules of Practice allows respondents to seek settlement at any stage of their Rule 102(e) case. While settling is an option, the interested division presents the offer with its recommendation and the Commission has ultimate authority to accept or decline the respondent’s settlement offer.

What Sanctions and Related Professional Consequences Can Follow?

Q: What Sanctions are Available under Rule 102(e)?

Rule 102(e) provides for temporary or permanent suspension of a professional’s “privilege to practice before the Commission.” Depending on the circumstances involved, a barred professional can be suspended or permanently denied practice before the Commission. In the event of a suspension, the professional must obtain reinstatement from the SEC before they may resume practice before the Commission.

Q: What Situations Trigger Immediate Suspension?

Rule 102(e) gives the SEC the power to impose an immediate (administrative) suspension in certain instances, and these include:

• Injunctions regarding “securities, bonds, commodities, or currency or futures transactions” which “involve fraud or are otherwise injurious to the public.” In these cases, the Commission must then initiate a Rule 102(e)(3) proceeding and will subsequently either end the suspension with a settlement or impose a more permanent sanction.
• Convictions of “a felony or a misdemeanor involving moral turpitude,” which Rule 102(e)(2) reaches regardless of when the conviction occurred. Again, the SEC may suspend the professional’s practice until a full Rule 102(e) proceeding has taken place. In these cases, a suspended respondent generally has 30 days to petition to lift their immediate suspension.

Q: Can the PCAOB Impose Additional Sanctions?

The PCAOB only has jurisdiction over registered accounting firms and their associated persons. PCAOB sanctions are not part of Rule 102(e) proceedings, but professionals are subject to PCAOB sanctions in addition to those that may be available under Rule 102(e).

Again, the sanctions available under Rule 102(e) are separate and distinct from those available to state licensing boards for professionals licensed by their respective states. With the respect to Rule 102(e) practice bars:

• They are not the same as state-issued license revocations;
• While an SEC Rule 102(e) practice bar does not itself revoke a state professional license, state licensing boards independently control state professional licenses, and they may impose their own license-related sanctions if deemed necessary under the individual board’s rules and policies.

Q: Can an SEC Practice Bar be Temporary?

Yes, bars imposed under Rule 102(e) can be temporary. While many barred professionals never return to practice before the SEC, it is possible to seek reinstatement following an SEC Rule 102(e) practice bar. As mentioned above, Rule 102(e) provides for both temporary and permanent practice bars, with the latter being permanent. The latter, to practice after a Rule 102(e) ban, requires petitioning the SEC for relief.

Can I Challenge the SEC’s Decision or Hearing Structure?

Q: Can I Challenge the SEC’s Administrative Decision?

Yes. Before appealing a decision to a court of appeals, the SEC’s Commission must review the initial decision, either upon the respondent’s petition or suo motu (i.e. on its own). When conducting its review, the Commission can review the decision de novo, and thus it may disagree with an administrative law judge’s decision on any grounds. Rule 410 of the Commission’s Rules of Practice and Procedure generally gives respondents 21 days to petition for review.

While the Commission is not bound by the administrative judge’s initial decision, there are procedural protections available to challenge the Commission’s decision on appeal as well. Exchange Act Section 25 generally gives respondents 60 days to seek judicial review in the appropriate court of appeals. Seeking judicial review is not a stay of an SEC order to have lost its privilege to practice before the Commission. Thus, the administrative judge’s initial decision stands pending review.

Q: How Should I Approach the Judicial Review Process?

If you’re challenging an SEC Rule 102(e) practice bar (i.e. professional sanctions), you want a judge who is sympathetic to your side and who is well-versed in the procedural nuances of the judicial review process. The appeal process is a full-length trial on appeal that, among other issues, will center on whether the District Court abused its discretion.

For more information, we encourage you to read our SEC Rule 102(e) Defense section.

Q: Does Jarkesy Apply to SEC Rule 102(e) Proceedings?

Jarkesy’s holding in SEC v. Jarkesy, 144 S. Ct. 3224, 3232 (2024) is that when the SEC seeks civil penalties (e.g. treble damages, fines) for securities fraud, the respondents are entitled to a trial by jury in federal district court. However, Jarkesy does not address Rule 102(e) proceedings that seek only professional-practice sanctions (i.e. Rule 102(e) practice bars). This means that for currently-pending or future Rule 102(e) enforcement cases, respondents will not necessarily be entitled to a jury.

In any case, Rule 102(e) practice bars are the type of case that need to be examined case-by-case. When defending professionals against any Rule 102(e) allegation, Spodek Law Group will craft the appropriate arguments tailored to the unique facts of the circumstances and the appropriate defense strategy.

Q: Can I File an Axon Action and Request an Injunction?

Yes, in an “Axon action.” While the majority of cases in which a defendant seeks preliminary injunctive relief are against private citizens, Axon Enterprise, Inc. v. SEC, 141 S. Ct. 1238, 1254 (2021) established that respondents can do so in administrative cases as well. In Axon, the Supreme Court held that respondents have the right to challenge “structural constitutional violations” in federal district court before final agency action. As a result, this allows for the possibility of seeking preliminary injunctive relief while respondents continue to face an administrative hearing at the SEC.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.