Amendments to the Commission's Rules of Practice

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing for public comment amendments to update its Rules of Practice to, among other things, adjust the timing of hearings in administrative proceedings; allow for discovery depositions; clarify the rules for admitting hearsay and assertion of affirmative defenses; and make certain related amendments.

DATES:

Comments should be received on or before December 4, 2015.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number S7-18-15 on the subject line; or
• Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-18-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec/gov/rules/proposed.shtml ). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information in submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Adela Choi, Senior Counsel, and Laura Jarsulic, Associate General Counsel, Office of the General Counsel, (202) 551-5150, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission proposes to amend its Rules of Practice. The amendments are being proposed to update its existing rules.

I. Introduction

As it has done from time to time, the Commission proposes to amend its Rules of Practice. The Commission proposes amendments to update the Rules of Practice to adjust the timing of hearings and other deadlines in administrative proceedings and to provide parties in administrative proceedings with the ability to use depositions and other discovery tools. The Commission proposes additional amendments to implement the newly available discovery tools. These proposed Rules are intended to introduce additional flexibility into administrative proceedings, while still providing for the timely and efficient disposition of proceedings. The Commission also proposes amendments to clarify certain other Rules, including the assertion of affirmative defenses in answers and the admissibility of hearsay.

II. Discussion of Proposed Amendments

The proposed amendments are as follows:

A. Proposed Amendments to Rule 360

Rule 360 sets forth timing for certain stages of an administrative proceeding. These stages include a prehearing period, a hearing, a period during which parties review hearing transcripts and submit briefs, and then a deadline by which the hearing officer must file an initial decision with the Office of the Secretary. Under current Rule 360, the deadlines for these stages are calculated from the date of service of an order instituting proceedings. Initial decisions must be filed within the number of days prescribed in the order instituting proceedings—120, 210, or 300 days from the date of service of the order instituting proceedings. Broadly speaking, administrative proceedings instituted pursuant to Section 12(j) of the Exchange Act are designated as 120-day cases, administrative proceedings seeking sanctions as a result of an injunction or conviction are designated as 210-day cases, and administrative proceedings alleging violations of the securities laws are designated as 300-day cases. Because deadlines are calculated from the date of service of the order instituting proceedings, if there are delays early on in the proceeding, the hearing occurs later and the hearing officer then has less time to prepare an initial decision in advance of the Rule 360 deadline.

The amount of time for parties to prepare during the prehearing period may vary from case to case with the number of factual and legal allegations, the complexity of the claims and defenses, and the size of the record. Parties in 300-day cases, for example, have increasingly requested extensions of time to review investigative records and prepare for hearing, citing the volume and time it takes to load and then review electronic productions. Parties in such cases frequently file motions before the hearing officer or the Commission to resolve complicated issues prior to the hearing. In addition, the Chief Administrative Law Judge has sought several extensions of time for hearing officers to file initial decisions in more complicated 300-day cases.

As amended, Rule 360 would include three modifications to address the timing of a proceeding. First, the deadline for filing the initial decision would run from the time that the post-hearing briefing or briefing of dispositive motions or defaults has been completed, rather than the date of service of the order instituting proceedings. This modification would divorce the deadline for the completion of an initial decision from other stages of the proceeding. Under the proposed amendment, the deadlines for initial decisions that would be designated in orders instituting proceedings would be 30, 75, and 120 days from the completion of post-hearing or dispositive briefing. The proposed length of time afforded for the preparation of an initial decision in each type of proceeding would be the same as the amount of time hearing officers are afforded under current Rule 360, if a proceeding actually progresses according to the timeline set out in the current rule.

Second, amended Rule 360 would provide a range of time during which the hearing must begin. For example, in 300-day cases, current Rule 360 states that a hearing should occur within approximately four months. The amended rule would provide that the hearing must be scheduled to begin approximately four months after service of the order instituting proceedings, but not later than eight months after service of the order. Significantly, the amendment doubles the maximum length of the current rule's prehearing period. This is intended to provide additional flexibility during the prehearing phase of a proceeding and afford parties sufficient time to conduct deposition discovery pursuant to new proposed rules, while retaining an outer time limit to ensure the timely and efficient resolution of the proceeding. It also would allow respondents more time to review electronic documents in cases involving an electronic production from the Division.

Third, amended Rule 360 would create a procedure for extending the initial decision deadline by up to thirty days. This extension is intended to complement the Chief Law Judge's ability under current Rule 360 to request extensions of time from the Commission. Under amended Rule 360, the hearing officer may certify to the Commission in writing the need to extend the initial decision deadline by up to thirty days for case management purposes. This certification would need to be issued at least thirty days before the expiration of the initial decision deadline and the proposed extension would take effect if the Commission does not issue an order to the contrary within fourteen days after receiving the certification.

This procedure for extending the initial decision deadline by a thirty-day period is intended to promote effective case management by the hearing officers. For example, for a hearing officer faced with several initial decision deadlines in the same week, a thirty-day extension would provide flexibility to stagger the deadlines. The amended rule would retain the provision allowing the Chief Law Judge to request an extension of any length from the Commission, without regard to whether a hearing officer has already sought to extend the deadline.

We seek comments about the amount of time proposed for each phase of the proceeding, including the eight-month cap on the prehearing period for cases with the longest initial decision deadlines, the time allotted for post-hearing briefing, and the time provided for the hearing officer to prepare an initial decision.

B. Proposed Amendments to Rule 233

Rule 233 currently permits parties to take depositions by oral examination only if a witness will be unable to attend or testify at a hearing. The proposed amendment would allow respondents and the Division to file notices to take depositions. If a proceeding involves a single respondent, the proposed amendment would allow the respondent and the Division to each file notices to depose three persons (i.e., a maximum of three depositions per side) in proceedings designated in the proposal as 120-day cases (known as 300-day cases under current Rule 360). If a proceeding involves multiple respondents, the proposed amendment would allow respondents to collectively file notices to depose five persons and the Division to file notices to depose five persons in proceedings designated in the proposal as 120-day cases (i.e., a maximum of five depositions per side). Under the amendment, parties also could request that the hearing officer issue a subpoena for documents in conjunction with the deposition.

The proposed amendment is intended to provide parties with an opportunity to develop arguments and defenses through deposition discovery, which may narrow the facts and issues to be explored during the hearing. Allowing depositions should facilitate the development of the case during the prehearing stage, which may ultimately result in more focused prehearing preparations, with issues distilled for the hearing and post-hearing briefing.

We recognize that additional time during the prehearing stage of the proceeding would facilitate the effective use of depositions for discovery. As a result, we have proposed amendments to Rule 360, discussed above, that provide additional flexibility over deadlines during the prehearing discovery period of a proceeding, permitting the hearing to begin up to eight months after service of the order instituting proceedings. We anticipate that four to eight months would be a sufficient amount of time for parties to prepare for the hearing, review documents, and take up to three depositions per side in a single-respondent proceeding, and up to five depositions per side in a multiple-respondent proceeding. In selecting this increased amount of time and number of depositions permitted, we intend to provide parties with the potential benefits of this discovery tool, without sacrificing the public interest in resolving administrative proceedings promptly and efficiently.

We propose additional amendments to Rule 233 to guide the use of depositions for discovery purposes. The amendments would allow the issuance of subpoenas to order a witness to attend a deposition noticed by a party pursuant to Rule 233, and would not preclude the deposition of a witness if the witness testified during an investigation. Notices of depositions also would be served on each party pursuant to Rule 150 and would need to be consistent with the prehearing conference and the hearing officer's scheduling order.

Other proposed amendments to Rule 233 would outline procedures for deposition practice that are consistent with the Federal Rules of Civil Procedure. For example, the amendments would be consistent with federal rules on the location of the depositions; the method of recording; the deposition officer's duties; examination and cross-examination of the witness; forms of objections and waiver of objections; motions to terminate or limit depositions; review of the transcript or recording by the witness; certification and delivery of the deposition; attachment of documents and tangible things; and copies of the transcript or recording. We would retain current Rule 233's explicit statement that a witness being deposed may have counsel during the deposition.

We seek comments about the proposed structure of the amendments that provide for depositions, including the number of depositions allowed in single-respondent and multiple-respondent proceedings.

C. Proposed Amendments To Support Amended Rule 233

We also propose amendments to Rules 180, 221, 232, and 234 to support the purpose and intent of the proposed amendments to Rule 233. These amendments are based on the expectation that depositions would play an increased role in the prehearing stage of administrative proceedings, and adjust other rules accordingly.

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 propose 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 for contemptuous conduct. The person would have the same right to review of the exclusion or suspension by filing a motion to vacate with the Commission.

Rule 221 sets forth the purposes of a prehearing conference and includes a list of the subjects to be discussed. We propose amendments to Rule 221 to add depositions and expert witness disclosures or reports to the list of subjects to be discussed at the prehearing conference. Under the current rule, the list of subjects for discussion at the prehearing conference covers most other significant aspects of the prehearing period. By adding depositions and the timing of expert witness disclosure to that list, the proposed amendment recognizes the impact that depositions and other discovery tools may have on the development of a schedule that makes efficient use of time during the prehearing period and the proceeding more broadly. It also conforms to the proposed amendment to Rule 233, which would require notices of depositions to be consistent with the prehearing conference and the hearing officer's scheduling order.

Rule 232 sets forth standards for the issuance of subpoenas and motions to quash. With the proposed amendments, Rule 232(a) would make clear that parties may request the issuance of a subpoena in connection with a deposition permitted under Rule 233, and Rule 233(e) would allow any person to whom a notice of deposition is directed to request that the notice of deposition be quashed. This proposed amendment is intended to promote efficiency in the discovery process because it would allow persons who are noticed for depositions to move to quash at the notice stage, rather than waiting for a party to request the issuance of a subpoena to order attendance.

We also propose to amend the standards governing applications to quash or modify subpoenas. Rule 232(e)(2) provides that the hearing officer or the Commission shall quash or modify a subpoena, or order return upon specified conditions, if compliance with the subpoena would be unreasonable, oppressive or unduly burdensome. As amended, Rule 232(e)(2) would provide that the hearing officer or Commission shall quash or modify a subpoena or notice of deposition, or order return upon specified conditions, if compliance with the subpoena would be unreasonable, oppressive, unduly burdensome, or would unduly delay the hearing. This amendment would require the hearing officer or Commission to consider the delaying effect of compliance with a subpoena or notice of deposition as part of the motion to quash standard and is intended to promote the efficient use of time for discovery during the prehearing period.

Finally, we propose to amend Rule 232(e) to add a new provision that specifies an additional standard governing motions to quash depositions noticed or subpoenaed pursuant to Rule 233(a), as amended. Under new Rule 232(e)(3), the hearing officer or Commission would quash or modify a deposition notice or subpoena filed or issued under Rule 233(a) unless the requesting party demonstrates that the deposition notice or subpoena satisfies the requirements under Rule 233(a). This is intended to ensure that parties notice the correct number of depositions pursuant to Rule 233(a) and follow other requirements of that rule.

Rule 232(e)(3) also would require the party requesting the deposition to demonstrate that the proposed deponent is a fact witness, a designated expert witness under Rule 222(b), or a document custodian. This provision is intended to foster use of depositions where appropriate and encourage meaningful discovery, within the limits of the number of depositions provided per side pursuant to Rule 233(a). This provision should encourage parties to focus any requested depositions on those persons who are most likely to yield relevant information and thereby make efficient use of time during the prehearing stage of the proceeding.

Rule 232(f) provides for the payment of witness fees and mileage. We propose to add a provision to Rule 232(f) stating that each party is responsible for paying any fees and expenses incurred as a result of deposition or testimony by the expert witness whom that party has designated under Rule 222(b).

Rule 234 contains procedures for taking depositions through the use of 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 propose 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. This proposed amendment is intended to provide a clear standard under which the hearing officer or Commission would review such a motion, and is consistent with standards for other types of motions articulated under other Rules of Practice. The amendment would replace 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.

We seek comments about the proposed amendments to the standards for motions to quash subpoenas and notices for depositions, including the consideration of whether compliance with the subpoena would unduly delay the hearing and the requirement that a proposed deponent must be a fact witness, expert witness under Rule 222(b), or document custodian.

D. Proposed Amendment to Rule 222

Rule 222 provides that a party who intends to call an expert witness shall submit a variety of information. The proposed amendment to the rule provides for two exceptions: (1) Drafts of any material that is otherwise 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, except under limited circumstances.

The proposed amendment also would require disclosure of a written report for a witness retained or specially employed to provide expert testimony in the case, or an employee of a party whose duties regularly involve giving expert testimony. The proposed amendment would outline the elements that must be contained in 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. These proposed amendments are consistent with the requirements for expert witness disclosures and expert reports in the Federal Rules of Civil Procedure and we believe they would promote efficiency in both prehearing discovery and the hearing. Moreover, the administrative law judges already have required such expert reports in proceedings before them.

We propose 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 amended, Rule 222(b) would limit the list of proceedings to the previous four years, and would limit the list of publications to the previous ten years.

E. Proposed Amendment to Rule 141

Rule 141(a)(2)(iv) specifies the requirements for serving an order instituting proceedings on a person in a foreign country. The proposed amendment would incorporate additional methods of service. The current rule allows for service of an order instituting proceedings 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.”

We propose to amend this rule to state 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 rules, unless prohibited by the foreign country's law, service may be made by delivering a copy of the order instituting proceedings 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 would also allow 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 would cover situations where existing agreements do not apply, or efforts to serve under such agreements are or would not be successful.

In addition to providing clarification that proper service on persons in foreign countries may be made by any of the above methods, the amended rule would provide some certainty regarding whether service of an order instituting proceedings has been effected properly and would allow the Commission to rely on international agreements in which foreign countries have agreed to accept certain forms of service as valid.

We also propose to amend Rule 141(a)(3), which requires the Secretary to maintain a record of service on parties. In instances where a division of the Commission, rather than the Secretary, serves an order instituting proceedings, the Secretary does not always receive a copy of the service. The proposed amendment would make it clear that a division that serves an order instituting proceedings must file with the Secretary either an acknowledgement of service by the person served or proof of service.

F. Proposed Amendment to Rule 161

Rule 161 governs extensions of time, postponements, and adjournments requested by parties. Under the 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. We propose 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. All the other requirements for granting a stay that are in the current rule would remain unchanged. This proposed amendment recognizes the important role of settlement in administrative proceedings.

G. Proposed Amendment to Rule 230

Rule 230(a) requires the Division to make available to respondents certain documents obtained by the Division in connection with an investigation prior to the institution of proceedings. Rule 230(b) provides a list of documents that may be withheld from this production. We propose amending Rule 230(b) to provide that the Division may redact certain sensitive personal information from documents that will be made available to respondents, unless the information concerns the person to whom the documents are being produced. Under the amendment, the Division would be able to redact an individual's social-security number, an individual's birth date, 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. This proposed amendment is intended to enhance the protection afforded to sensitive personal information.

We also propose 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. This proposed amendment is intended to preserve the confidentiality of settlement discussions and safeguard the privacy of potential respondents with whom the Division has negotiated and is consistent with case law that favors the important public policy interest in candid settlement negotiations.

H. Proposed Clarifying Amendments to Rules 220, 235, and 320

Rule 220 sets forth the requirements for filing answers to allegations in an order instituting proceedings. Currently, Rule 220 states that a defense of res judicata, statute of limitations, or any other matter constituting an affirmative defense shall be asserted in the answer. We propose amendments to Rule 220 to emphasize that a respondent must affirmatively state in an answer whether the respondent is asserting any avoidance or affirmative defense, including but not limited to res judicata, statute of limitations, or reliance. This proposed amendment would not change the substantive requirement under the current rule to include affirmative defenses in the answer. Instead, it is intended to clarify that any theories for avoidance of liability or remedies, even if not technically considered affirmative defenses, must be stated in the answer as well. Timely assertion of affirmative defenses or theories of avoidance 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.

Rule 235 provides the standard for granting a motion to introduce a prior sworn statement of a witness who is not a party. Although current Rule 235(a) states that the standard applies to “a witness, not a party,” we propose adding new Rule 235(b) to make clear that sworn statements or declarations of a party or agent may be used by an adverse party for any purpose. Further, new Rule 235(b) would clarify that “sworn statements” include a deposition taken pursuant to Rules 233 or 234 or investigative testimony, and allows for the use of declarations pursuant to 28 U.S.C. Section 1746.

Rule 320 provides the standard 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 propose to amend the rule to add “unreliable” to the list of evidence that shall be excluded. This amended admissibility standard is consistent with the Administrative Procedure Act. We also propose to add 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. Admitting hearsay evidence if it meets a threshold showing of relevance, materiality, and reliability also is consistent with the Administrative Procedure Act.

I. Proposed Amendments to Appellate Procedure in Rules 410, 411, 420, 440, and 450

We propose amendments to certain procedures that govern appeals to the Commission. Rule 410(b) outlines the procedure for filing a petition for review of an initial decision and directs a party to set forth in the petition the specific findings and conclusions of the initial decision as to which exception is taken, together with supporting reasons for each exception. Rule 410(b) also states that an exception may be deemed to have been waived by the petitioner if the petitioner does not include the exception in the petition for review or a previously filed proposed finding made pursuant to Rule 340.

We propose to amend Rule 410(b) to eliminate both the requirement that a petitioner set forth all the specific findings and conclusions of the initial decision to which exception is taken, and the provision stating that if an exception is not stated, it may be deemed to have been waived by the petitioner. Instead, under amended Rule 410(b), a petitioner would be required to set forth only a summary statement of the issues presented for review. We also propose to add new Rule 410(c) to limit the length of petitions for review to three pages. Incorporation of pleadings or filings by reference would not be permitted.

This proposed amendment is intended to address timing issues and potential inequities in the number of briefs each party is permitted to submit to the Commission. The timing issues arise out of the requirement under Rule 410 that a party must file its petition for review within 21 days after service of the initial decision or 21 days from the date of the hearing officer's order resolving a motion to correct manifest error in an initial decision. This means that during the three-week period immediately following the issuance of the initial decision, a party must decide whether to file a motion to correct manifest error and, if not, whether to appeal. If the party decides to file a petition to appeal, then the petitioner is required under the current rule to quickly determine every exception the petitioner takes with the findings and conclusions in the initial decision, along with supporting reasons. Requiring the petitioner to submit a petition that includes all exceptions and supporting reasons, which may be deemed waived if not raised in the petition, encourages petitioners to file lengthy petitions that provide lists of exceptions with little refinement of the arguments or narrowing of issues to those most significant to the Commission's review. As a result, petitions for review often have exceeded the length of opening briefs later filed in support of a petition for review. In addition, petitions often list exceptions that are later abandoned or unsupported in the opening brief.

The proposed amendment would address these issues by allowing a party to file a petition for review that provides only a brief summary of the issues presented for review under Rule 411(b), which refers to prejudicial errors, findings or conclusions of material fact that are clearly erroneous, conclusions of law that are erroneous, or exercises of discretion or decisions of law or policy that the Commission should review. After filing a petition for review that gives the Commission summary notice of the issues presented by the case, the petitioner would then be able to focus on the brief that develops the reasoned arguments in support of the petition. This practice is consistent with the Commission's routine grant of appeals, without allowing parties to file oppositions to petitions. Providing for a summary petition would also be consistent with the Federal Rules of Appellate Procedure, which requires only notice filing if a petitioner may appeal as of right.

Allowing parties to file only a summary statement of the issues on appeal also would address potential briefing inequities in the current rule. As described above, a petitioner often files a lengthy petition for review that is followed, in the typical case, by an opening brief limited to 14,000 words. Essentially, petitioners are afforded two opportunities under the current rule to brief the issues in the case, while under current Rule 450, the opposing party typically may submit only a brief in opposition that is limited to 14,000 words. As a practical matter, that brief in opposition must address not only the arguments explained in the petitioner's opening brief, but also each exception listed in the petition for review. This has the potential to place opposing parties at a disadvantage. The proposed amendment to Rule 410(b) would correct this apparent inequity by requiring a petitioner to make arguments in its opening brief rather than in the petition for review. This also has the benefit of encouraging a petitioner to narrow the issues and explain supporting arguments, while allowing opposing parties to address only those arguments asserted in the petitioner's opening brief.

We propose an amendment to Rule 411(d) to effect the amendments to Rule 410(b). Rule 411(b) states that Commission review of an initial decision is limited to the issues specified in the petition for review and any issues specified in the order scheduling briefs. We propose to amend Rule 411(b) to state that Commission review of an initial decision is limited to the issues specified in an opening brief and that any exception to an initial decision not supported in an opening brief may be deemed to have been waived by the petitioner.

We propose amendments to Rule 450 to provide additional support for a structure in which opening briefs are the primary vehicles for arguments on appeal. Rule 450(b) states that reply briefs are confined to matters in opposition briefs of other parties. We propose amendments to Rule 450(b) to make clear that any argument raised for the first time in a reply brief shall be deemed to have been waived by the petitioner.

We also propose amendments to Rule 450(c) to prohibit parties from incorporating pleadings or filings by reference. Under current Rule 450(c), parties are permitted to incorporate pleadings or filings by reference, although the number of words in documents incorporated by reference count against Rule 450(c)'s word limit for briefs. As a practical matter, it is difficult to enforce a word count that allows for incorporation by reference, and the rule has encouraged parties to rely on pleadings or filings from the hearing below, which already are in the record, rather than addressing the relevant evidence or developing the arguments central to the appeal before the Commission. Prohibiting incorporation by reference is intended to sharpen the arguments and require parties to provide specific support for each assertion, rather than non-specific support through incorporation of other briefs or filings.

We propose amendments to Rule 450(d) to conform to the proposed amendments to Rule 450(c). Rule 450(d) requires parties to certify compliance with the length limitations set forth in Rule 450(c). As amended, Rule 450(d) would no longer refer to pleadings incorporated by reference, and would require parties to certify compliance with the requirements set forth in Rule 450(c), instead of certifying only compliance with the length limitations in Rule 450(c).

Finally, we propose amendments to Rules 420(c) and 440(b) to make them consistent with the proposed amendments to Rules 410(b) and 450(b). Rule 420 governs appeals of determinations by self-regulatory organizations and Rule 440 governs appeals of determinations by the Public Company Accounting Oversight Board. Current Rule 420(c) is similar to proposed amended Rule 410(b) in that it limits the length of an application for review and requires that applicants set forth in summary form only a brief statement of alleged errors in the determination and supporting reasons. We propose to amend Rule 420(c) to include a provision stating that any exception to a determination that is not supported in an opening brief may be deemed to have been waived by the applicant. Likewise, current Rule 440(b) is similar to proposed amendments to Rule 410(b) because it requires that an applicant set forth in summary form only a brief statement of alleged errors in the determination and supporting reasons. We propose to amend Rule 440(b) to include a page limit for the application (two pages, which is consistent with current Rule 420(c)) and a provision stating that any exception to a determination that is not supported in an opening brief may be deemed to have been waived by the applicant. These proposed amendments would align appeals from determinations by the Public Company Accounting Oversight Board with appeals from determinations by self-regulatory organizations and appeals from initial decisions issued by hearing officers.

J. Proposed Amendments to Rule 900 Guidelines

We propose amendments to Rule 900, which sets forth guidelines for the timely completion of proceedings, provides for confidential status reports to the Commission on pending cases, and directs the publication of summary information concerning the pending case docket. Rule 900(a) states that the guidelines will be examined periodically and, if necessary, readjusted in light of changes in the pending caseload and the available level of staff resources. Consistent with that provision, we propose to amend Rule 900(a) to state that a decision by the Commission with respect to an appeal from the initial decision of a hearing officer, a review of a determination by a self-regulatory organization or the Public Company Accounting Oversight Board, or a remand of a prior Commission decision by a court of appeals ordinarily will be issued within eight months from the completion of briefing on the petition for review, application for review, or remand order, and, if the Commission determines that the complexity of the issues presented in an appeal warrant additional time, the decision of the Commission may be issued within ten months of the completion of briefing. We also propose to amend Rule 900(a) to provide that if the Commission determines that a decision by the Commission cannot be issued within the eight or ten-month periods, the Commission may extend that period by orders as it deems appropriate in its discretion. Finally, we propose to amend Rule 900(c) to include additional information in the published report concerning the pending case docket. Specifically, we propose to amend the rule to include, in addition to what is already included, the median number of days from the completion of briefing of an appeal to the time of the Commission's decision for the cases completed in the given time period.

K. Effective Date and Transition

We are proposing that the amended Rules govern any proceeding commenced after the effective date of the amended Rules. We seek comments about whether the amended Rules should be applied, in whole or in part, to proceedings that are pending or have been docketed before or on the effective date, and, if so, the standard for applying any amended Rules to such pending proceedings.

III. Request for Public Comment

We request and encourage any interested person to submit comments regarding: (1) The time periods for each stage of the proceeding under proposed amendments to Rule 360, (2) the structure and number of depositions provided under proposed amendments to Rule 233, (3) the standards governing an application to quash deposition notices or subpoenas under proposed amendments to Rule 232, (4) the standards governing the admission of evidence, including hearsay, under Rule 320, (5) the assertion of affirmative defenses under Rule 220, (6) the effective date and whether and how any amended rules should apply to proceedings pending on the effective date, (7) the other proposed changes that are the subject of this release, (8) additional or different changes, or (9) other matters that may have an effect on the proposals contained in this release.

IV. Administrative Procedure Act, Regulatory Flexibility Act, and Paperwork Reduction Act

The Commission finds, in accordance with Section 553(b)(3)(A) of the Administrative Procedure Act, that these revisions relate solely to agency organization, procedure, or practice. They are therefore not subject to the provisions of the Administrative Procedure Act requiring notice, opportunity for public comment, and publication. The Regulatory Flexibility Act therefore does not apply. Nonetheless, we have determined that it would be useful to publish these proposed rules for notice and comment before adoption. Because these rules relate to “agency organization, procedure or practice that does not substantially affect the rights or obligations of non-agency parties,” they are not subject to the Small Business Regulatory Enforcement Fairness Act. To the extent these rules relate to agency information collections during the conduct of administrative proceedings, they are exempt from review under the Paperwork Reduction Act.

V. Economic Analysis

We are mindful of the costs and benefits of our rules. In proposing these amendments, we seek to enhance flexibility in the conduct of administrative proceedings while maintaining the facility to efficiently resolve individual matters.

The current rules governing administrative proceedings serve as the baseline against which we assess the economic impacts of these proposed amendments. At present, Commission rules set the prehearing period of a proceeding at approximately four months for a 300-day proceeding and do not permit parties to take depositions solely for the purpose of discovery. Rules governing the testimony of expert witnesses have not been formalized, but the administrative law judges already have required expert reports in proceedings before them.

The scope of the benefits and costs of the proposed rules depends on the expected volume of administrative proceedings. In fiscal year 2014, 230 new administrative proceedings were initiated and not settled immediately. New proceedings initiated and not immediately settled in fiscal years 2013 and 2012 totaled 202 and 207 respectively.

The amendments to Rule 233 and Rule 360, as well as the supporting amendments, may benefit respondents and the Division of Enforcement by providing them with additional time and tools to discover relevant facts and information. The proposed amendment to Rule 233 and supporting amendments would permit respondents and the Division of Enforcement to take depositions by oral examination, permitting a more efficient discovery period. We preliminarily believe that the proposed amendments regarding depositions will provide parties with an opportunity to further develop arguments and defenses, which may narrow the facts and issues to be explored during the hearing. The proposed amendments to Rule 360 would alter the timeline to allow for expanded discovery. We anticipate that the potential for a longer discovery period would allow respondents additional time to review investigative records and to load and then review electronic productions. Together, allowing depositions and providing time for additional discovery should facilitate the information acquisition during the prehearing stage, and may ultimately result in more focused hearings. Furthermore, we preliminarily believe that more information acquisition at the prehearing stage may lead to cost savings to respondents and the Division of Enforcement stemming from the earlier resolution of cases through settlement or shorter, more focused, hearings. We are unable to quantify these benefits, however, as the potential savings would depend on multiple factors, including the complexity of actions brought to administrative proceedings and the impact that the change to discovery may have on settlement terms, which are unknown.

We preliminarily believe that the costs of the proposed amendments will be borne by the Commission as well as respondents in administrative proceedings and witnesses who provide deposition testimony. These costs will primarily stem from the cost of depositions and the additional length of administrative proceedings.

Costs stemming from depositions depend on whether respondents and the Division of Enforcement take depositions for the purpose of discovery and how they choose to participate in these depositions. Costs of depositions include the expenses of travel, attorney's fees, and reporter and transcription expenses. Based on staff experience, we preliminarily estimate the cost to a respondent of conducting one deposition could be approximately $36,840. However, we recognize that respondents and the Division of Enforcement play a large role in managing their own costs by determining whether to take or attend depositions, managing attorney costs, including the number of attorneys attending each deposition, contracting with a competitively-priced reporter, arranging for less expensive travel, and choosing the location of depositions. We note that determinations regarding the approach to depositions will likely reflect parties' beliefs regarding the potential benefits they expect to realize from participation in depositions. However we recognize that although respondents and the Division of Enforcement can choose the extent and manner in which they request depositions, the costs of depositions are borne not only by the party choosing to conduct a deposition, but also by other parties who choose to attend the deposition, the witness, and other entities in time, travel, preparation, and attorney costs.

The longer potential discovery period permitted by the proposed amendment to Rule 360, while intended to provide sufficient time for parties to engage in discovery, may impose costs on respondents and the Commission. We preliminarily estimate that potentially lengthening the overall administrative proceedings timeline by up to four months to allow more time for discovery may result in additional costs to respondents in a single matter of up to $462,400. Again, however, we recognize that while parties are likely to incur these costs only to the extent that they expect to receive benefits from engaging in depositions and additional discovery, the costs imposed by the additional time for discovery may be incurred by all parties, not just the party advocating for additional time for discovery. Further, to the extent that the proposed rules may result in the earlier resolution of cases through settlement or shorter, more focused, hearings, some of these costs may potentially be offset.

The proposed amendments related to discovery may also affect efficiency in certain cases. To the extent that the proposed amendments facilitate the discovery of relevant facts and information through depositions and extending the time for discovery, they may lead to more expeditious resolution of administrative proceedings, which could enhance the overall efficiency of the Commission's processes. For example, for complex cases that may benefit significantly from the additional information there could be efficiency gains from the proposed rules if the costs associated with the use of depositions are smaller than the value of the information gained from depositions. However, we note that because parties may not take into account the costs that depositions may impose on other entities, a potential consequence of the proposed amendments to Rule 233 and Rule 360 is that parties may engage in more discovery than is efficient. For example, for simple cases which may not benefit significantly from the additional information gained from a deposition, requesting depositions may result in inefficiency by imposing costs on all parties and witnesses involved without any significant informational benefit. However, we preliminarily believe that the supporting proposed amendments to Rule 232 and 233 may mitigate the risk of this efficiency loss by setting forth standards for the issuance of subpoenas and motions to quash depositions and setting a limit on the maximum number of depositions each side may request.

As an alternative to the proposed rules, we could continue to permit depositions only when a witness is unable to testify at a hearing, or propose other limited discovery tools, such as the use of interrogatories or requests for admissions in lieu of depositions. Although alternatives such as interrogatories or admissions may reduce some of the costs of the discovery process (i.e., the cost of depositions), they might increase other costs (resulting from the time attorneys and parties need to prepare responses) and also may yield less useful information for the administrative proceeding given the limited nature of questioning these forms permit. Relative to these alternatives, we believe that the proposed amendments would achieve the benefits of discovery in a cost-efficient manner.

The proposed amendments to Rule 222 specify the requirements for parties requesting to call expert witnesses. To the extent that the requirements specified in Rule 222 are identical to the current practices of administrative law judges, we do not anticipate any significant economic effects. However, the proposed amendments to Rule 222 may impose costs on parties involved in proceedings before administrative law judges whose current practices differ in any way from the requirements specified in Rule 222.

We preliminarily do not expect any significant economic consequences to stem from proposed amendments to Rules 141, 161, 220, 230, 235, 320, 410, 411, 420, 440, 450, and 900. For Rule 233 and its supporting amendments and Rule 360, we expect that these proposed amendments will have an impact on the efficiency of administrative proceedings but do not expect them to significantly affect the efficiency, competition, or capital formation of securities markets. We also do not expect the proposed amendments to impose a significant burden on competition.

We request comment on all aspects of the economic effects of the proposal, including any anticipated impacts that are not mentioned here. We are particularly interested in comments regarding the expected benefits and costs of the proposed rules, including the specific benefits and costs parties expect to result from the proposed amendments. We are also interested in comments regarding how the amendments may affect the overall length and outcomes of administrative proceedings, and how parties approach administrative proceedings. Additionally, we request quantitative estimates of the benefits and costs on respondents in administrative proceedings and witnesses who provide deposition testimony, in general or for particular types of proceedings. We also request comment on reasonable alternatives to the proposed rules and on any effect the proposed rules may have on efficiency, competition, and capital formation.

VI. Statutory Basis and Text of Proposed Amendments

These amendments to the Rules of Practice are being proposed pursuant to statutory authority granted to the Commission, including section 3 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7202; section 19 of the Securities Act, 15 U.S.C. 77s; sections 4A, 19, and 23 of the Exchange Act, 15 U.S.C. 78d-1, 78s, and 78w; section 319 of the Trust Indenture Act of 1939, 15 U.S.C. 77sss; sections 38 and 40 of the Investment Company Act, 15 U.S.C. 80a-37 and 80a-39; and section 211 of the Investment Advisers Act, 15 U.S.C. 80b-11.

List of Subjects in 17 CFR Part 201

• Administrative practice and procedure

Text of the Amendments

For the reasons set out in the preamble, 17 CFR part 201 is proposed to be amended as follows:

PART 201—RULES OF PRACTICE

1. The authority citation for part 201, subpart D, continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 77sss, 77ttt, 78c(b), 78d-1, 78d-2, 78 l, 78m, 78n, 78o(d), 78o-3, 78s, 78u-2, 78u-3, 78v, 78w, 80a-8, 80a-9, 80a-37, 80a-38, 80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202, 7215, and 7217.

2. Section 201.141 is amended by revising paragraphs (a)(2)(iv) and (v) and (a)(3) to read as follows:

3. Section 201.161 is amended by revising paragraph (c)(2)(iii) to read as follows:

4. Section 210.180 is amended by revising paragraphs (a)(1) introductory text, (a)(1)(i), and (a)(2) to read as follows:

5. Revise § 201.220 to read as follows:

6. Section 201.221 is amended by revising paragraph (c) to read as follows.

7. Section 201.222 is amended by revising the section heading and paragraph (b) to read as follows:

8. Section 201.230 is amended by:

a. Revising the paragraph (b) subject heading;

b. Redesignating paragraph (b)(1)(iv) as paragraph (b)(1)(v) and adding new paragraph (b)(1)(iv);

c. Redesignating paragraph (b)(2) as paragraph (b)(3) and adding new paragraph (b)(2); and

d. In paragraph (c), removing the term “(b)(1)(iv)” and adding in its place “(b)(1)(v)” wherever it occurs.

The revision and additions read as follows:

9. Section 201.232 is amended by revising paragraphs (a), (c), (d), (e), and (f) to read as follows:

10. Section 201.233 is revised to read as follows:

11. Section 201.234 is amended by revising paragraphs (a) and (c) to read as follows:

12. Section 201.235 is amended by revising the section heading and paragraphs (a) introductory text, (a)(2), and (a)(5), and by adding paragraph (b) to read as follows:

13. Section 201.320 is revised to read as follows:

14. Section 201.360 is amended by revising paragraphs (a)(2) and (3) and (b) to read as follows:

15. Section 201.410 is amended by revising paragraph (b), redesignating paragraph (c) as paragraph (d), and adding new paragraph (c) to read as follows:

16. Section 201.411 is amended by revising paragraph (d) to read as follows:

17. Section 201.420 is amended by adding a sentence to the end of paragraph (c) to read as follows:

18. Section 201.440 is amended by revising paragraph (b) to read as follows:

19. Section 201.450 is amended by revising paragraphs (b), (c), and (d) to read as follows.

20. Section 201.900 is revised to read as follows: