What Is SEC Rule 102(e)?
Companies listed on U.S. securities exchanges are subject to extensive oversight by the U.S. Securities and Exchange Commission (SEC). However, the SEC does not have the resources to perform this oversight on its own. As a result, it relies on so-called “gatekeepers”—attorneys, accountants, and other professionals whose role is, in part, to help companies comply with the law.
When a gatekeeper fails in its role as a gatekeeper, the consequences can be severe. Not only can companies and their owners and executives face prosecution for securities law violations, but the gatekeepers that facilitated or failed to prevent these violations can be prosecuted as well. In addition to facing fines, disgorgement, and other remedies, gatekeepers can also face professional discipline. For accountants, this can include losing their license to file reports with the SEC.
This is where Rule 102(e) of the SEC Rules of Practice comes into play. Adopted in 1935, Rule 102(e) authorizes the Commission to discipline professionals who violate the law or otherwise engage in “unethical or improper professional conduct.” While disciplinary actions under Rule 102(e) are less common than actions targeting primary violators of the federal securities laws, they do happen, and they can lead to significant penalties for those who fail to take the necessary steps to protect themselves.
Rule 102(e) of the SEC Rules of Practice: The Basics
Rule 102(e) of the SEC Rules of Practice provides that:
“The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found . . . not to possess the requisite qualifications to represent others; . . . to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or . . . to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws . . . .”
Under this provision, the SEC can take disciplinary action against professionals who, among other things, engage in “unethical or improper professional conduct” or who “willfully violate” the federal securities laws or aid or abet violations committed by others. The Rule then goes on to state that:
“With respect to persons licensed to practice as accountants, . . . ‘improper professional conduct’ . . . means:
(A) Intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards; or
(B) Either of the following two types of negligent conduct:
(1) A single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which [an accountant] knows, or should know, that heightened scrutiny is warranted; or
(2) Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.”
Rule 102(e) also gives the SEC the authority to take disciplinary action against individuals and firms that represent others before the Commission. This includes attorneys that represent companies and individuals in SEC investigations. Here, similarly, the grounds for professional discipline are stated broadly, giving the Commission substantial leeway to decide when to pursue charges in any particular case.
Examples of Professional Misconduct Subject to Discipline Under Rule 102(e)
Given the broad scope of Rule 102(e) and its application in a variety of different contexts, professionals can face discipline under the Rule for a variety of different types of professional misconduct. This includes (but is not limited to):
- Filing False or Misleading Reports – Filing false or misleading reports with the SEC is a form of professional misconduct that can warrant discipline under Rule 102(e). This includes intentionally, recklessly, and negligently filing financial statements and other required reports that contain false, misleading, or incomplete information.
- Failing to Report Filed Violations to the SEC – Accountants and other professionals who become aware of violations of the federal securities laws may have a duty to report these violations to the SEC. Failing to satisfy this duty can warrant professional discipline under Rule 102(e).
- Failing to Supervise Employees Engaged in SEC-Facing Work – Professionals who are responsible for supervising employees engaged in SEC-facing work must ensure that these employees are not committing any errors or violations. If a supervisor’s failures lead to an employee filing false information, submitting a misleading report, or otherwise mishandling a matter involving the SEC, the supervisor can face discipline under Rule 102(e).
- Aiding and Abetting Violations of the Federal Securities Laws – As discussed above, Rule 102(e) authorizes the SEC to discipline professionals who aid and abet violations of the federal securities laws. While there are specific statutory provisions that prohibit aiding and abetting, the SEC can pursue disciplinary action based on aiding and abetting violations under Rule 102(e) as well.
- Failing to Comply with Other Professional Duties – Rule 102(e) allows for professional discipline based on violations of other professional duties as well. This includes duties imposed by the federal securities laws and by state professional licensing boards and state bar associations.
5 Important Facts About Facing Professional Discipline Under Rule 102(e)
If you are facing professional discipline under Rule 102(e), it is important to have a clear understanding of the potential consequences of SEC disciplinary action. Here are five important facts to know about facing professional discipline under Rule 102(e):
1. Disciplinary Proceedings Under Rule 102(e) Are Administrative in Nature
Disciplinary proceedings under Rule 102(e) are administrative in nature. They involve hearings before Administrative Law Judges (ALJs), and they have a different procedural framework from civil or criminal enforcement litigation under the federal securities laws.
2. Disciplinary Proceedings Under Rule 102(e) Can Be Preceded by an SEC Investigation
Disciplinary proceedings under Rule 102(e) can be preceded by an SEC investigation. If you are currently under investigation by the SEC’s Division of Enforcement, you must take the necessary steps to protect yourself, and you should engage experienced defense counsel promptly.
3. SEC Professional Discipline Can Lead to Loss of a Professional License
One of the risks of facing professional discipline under Rule 102(e) is the loss of a professional license. If you are currently licensed to practice law or accountancy, you could lose your license to practice before the SEC if your disciplinary proceeding is not resolved favorably.
4. SEC Professional Discipline Can Lead to Loss of Privileges Before the Commission
In addition to the loss of your professional license, a disciplinary proceeding under Rule 102(e) can also lead to the loss of your privileges before the Commission. For attorneys, this means being unable to represent clients in SEC matters. For accountants, this means losing the ability to file financial statements and other documents with the Commission. In either case, this can have a significant impact on your practice.
5. Professionals Facing Discipline Under Rule 102(e) Can Face Collateral Consequences as Well
In addition to the direct consequences of professional discipline under Rule 102(e), professionals in all fields can face collateral consequences as well. For example:
- SEC civil enforcement litigation – The SEC can pursue civil enforcement litigation against professionals who are subject to discipline under Rule 102(e) based on violations of the federal securities laws.
- Criminal litigation – In some cases, professionals who are subject to discipline under Rule 102(e) can also face criminal prosecution for violations of the federal securities laws. This includes violations such as insider trading, securities fraud, and submitting false or misleading public filings.
- Professional discipline before state licensing boards and state bar associations – Professionals can face disciplinary action before their state licensing boards and state bar associations based on discipline imposed by the SEC. Here too, if you are facing professional discipline under Rule 102(e), it is critical that you engage experienced defense counsel who can defend you effectively.
Are You Facing Disciplinary Action Under Rule 102(e)?
If you are facing disciplinary action under Rule 102(e) of the SEC Rules of Practice, it is imperative that you speak with a defense attorney promptly. While the risks of facing professional discipline can be substantial, an experienced defense attorney will be able to help you, and there are a variety of defenses that can be asserted in response to a Rule 102(e) complaint. These include (but are not limited to):
- Establishing that you were not involved in any violation of the federal securities laws or that you did not engage in “unethical or improper professional conduct”;
- Establishing that you did not have a duty to report the violation in question;
- Establishing that you properly supervised your employees, and that their error or violation was not a result of your misconduct; and,
- Challenging the SEC’s findings regarding your intent, knowledge, or recklessness.
In all cases, regardless of the specific allegations involved, it is critical to take a proactive approach. The SEC is extremely aggressive in its pursuit of disciplinary action under Rule 102(e), and it is not going to voluntarily dismiss your case. To avoid unnecessary consequences, you need to defend yourself effectively, and this starts with engaging experienced defense counsel as soon as possible.
Speak with a Senior SEC Defense Attorney at Spodek Law Group
Are you at risk for professional discipline under Rule 102(e)? If so, our legal team can help you develop and execute a defense strategy focused on protecting your license, your practice, and your reputation. To speak with a senior SEC defense attorney at Spodek Law Group in confidence, call 212-300-5196 or request a complimentary consultation online now.
Todd Spodek, founder of Spodek Law Group, focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.
