SEC Has Authority to Impose Sanctions Based on Violations of State Attorney Disciplinary Code
Susan M. Greenwood | Bloomberg Law
The U.S. Court of Appeals for the District of Columbia Circuit denied a petition for review of a Securities and Exchange Commission (SEC) opinion and orderpermanently denying attorney Steve Altman “the privilege of appearing or practicing” before the SEC.
Alleged Disciplinary Infractions
As the D.C. Circuit explained, Altman appeared before the SEC after his client (Client) was subpoenaed in connection with secretarial tasks Client performed for a company under SEC investigation (Target), while employed by a different company (Employer). At the time the SEC issued the subpoena, Altman was negotiating a severance package between Client and Employer. In the course of these negotiations, Altman indicated to the Target’s attorney that Client “‘won’t cooperate’” with the SEC or “‘won’t remember’” Target’s alleged fraud, if Target convinced Employer to provide Client with the severance package.
The SEC alleges that Altman’s conduct violate Rule 102(e)(1)(ii) of the SEC’s Rules of Practice (Rules) and Section 4C of the Securities Exchange Act of 1934 (Exchange Act). Following an evidentiary hearing, an administrative law judge (ALJ) agreed and further found that Altman violated Rules 1-102(A)(4), 1-102(A)(5), and 1-102(A)(7) of the New York State Bar Association Lawyer’s Code of Professional Responsibility Disciplinary Rules (NYDR). The ALJ suspended Altman from appearing before the SEC for nine months. Both Altman and the SEC’s Office of General Counsel appealed. On review, the SEC affirmed the ALJ’s findings but increased Altman’s penalty to a permanent bar because it “better ‘serves the public interest and is remedial because it will protect the integrity of [the Commission's] prosecutorial and adjudicatory processes, and thereby the investing public, from future harm by Altman.’”
SEC Authority to Impose Sanctions
On appeal to the D.C. Circuit, Altman argued that the SEC lacked authority to impose sanctions based on his alleged NYDR violations. The Court disagreed, noting that Exchange Act Section 4C “authorizes the Commission to deny the privilege of appearance upon finding improper professional conduct.” However, the D.C. Circuit explained that the definition of “unethical or improper professional conduct” is ambiguous, leading to the question of “whether the Commission’s interpretation of the statute to allow it to apply State Bar disciplinary rules to define the proscribed conduct is permissible.”
Congress codified Rule 102(e)(1)(ii) as Exchange Act Section 4C, the D.C. Circuit continued, when it enacted the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Prior to Sarbanes-Oxley, the SEC took the position that pursuant to Rule 102(e)(1)(ii), “it ‘perceives no unfairness whatsoever in holding those professionals who practice before [the Commission] to generally recognized norms of professional conduct . . . whether or not such norms had previously been explicitly adopted or endorsed by the Commission.’” The marked similarity between Rule 102(e)(1)(ii) and Section 4C further allowed the D.C. Circuit to apply the rule that “when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’” Accordingly, the SEC’s longstanding tradition of relying on “norms of professional conduct” permitted it to “rely on Altman’s knowledge of and duty to conform to the New York Bar disciplinary rules.”
Lack of New York Bar Proceedings Irrelevant
The D.C. Circuit further commented that the SEC’s authority to impose sanctions is not diminished because New York State did not bring separate disciplinary action against Altman. Indeed, the Court explained that the sanctions concerned only appearances before the SEC and “has no effect either on [Altman's] ability to practice law in New York State and to appear before any court, or on New York State’s authority to discipline him.”
Notice of Disciplinary Rules
To escape sanctions, Altman argued that he was not on notice of the standards of conduct proscribed by the SEC or New York. The D.C. Circuit determined that “Altman was on notice of his duty to comply with the New York Bar disciplinary rules, and when appearing before the Commission, he could be held to the duty.” As for his notice of the SEC’s standards of conduct, the Court acknowledged that it has sustained notice challenges where there was a “failure to provide standards or notice as to the possibility that negligent or reckless conduct could fall within Rule 102(e)’s ambit.” However, Altman’s conduct was “egregious” and such intentional conduct clearly falls within the Rule’s realm.
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