## Facts

- The SEC began an administrative disciplinary proceeding against Touche Ross & Company and three former partners under SEC Rule of Practice 2(e) for alleged improper, unethical, or unprofessional conduct connected to audits of financial statements filed with the SEC.
- Rule 2(e) authorized the SEC, after notice and hearing, to censure, suspend, or bar professionals (including accountants) from practicing before the SEC.
- Before any evidentiary hearing or final SEC order, Touche Ross filed a federal district court action seeking declaratory and injunctive relief.
- Touche Ross argued (1) Rule 2(e) exceeded the SEC’s statutory authority and (2) the SEC’s structure denied due process because the Commission both initiated the case and would ultimately decide it.
- The district court dismissed the complaint as premature and rejected the pre-enforcement challenge; Touche Ross appealed.

## Issues

1. Whether the SEC had statutory authority under the federal securities laws to adopt and enforce Rule 2(e) governing professional conduct of those practicing before the Commission.
2. Whether a target of an ongoing SEC disciplinary proceeding may bring a pre-enforcement district court action challenging the rule and proceeding, or must first exhaust administrative remedies and await a final agency order.
3. Whether the SEC’s combination of charging and adjudicatory functions in the proceeding was so biased as to violate due process and justify immediate judicial intervention.

## Decision

- The Second Circuit affirmed dismissal of the district court action.
- The court held the SEC had authority to promulgate and apply Rule 2(e) as an incident of its responsibility to administer and enforce the securities laws and to protect the integrity of SEC filings.
- The court held the suit was premature because Touche Ross had not exhausted administrative remedies; review was available after a final SEC order through the statutory review process.
- The court rejected the due process challenge as insufficient to bypass exhaustion, finding no per se constitutional defect in the SEC’s combination of functions.

## Legal Principles

- An agency may regulate who may “practice before” it, including by disciplining professionals, when reasonably connected to the agency’s statutory mission and the reliability of submissions made to the agency.
- Parties generally must exhaust administrative remedies and await final agency action before obtaining judicial review; pre-enforcement district court suits are disfavored absent extraordinary circumstances.
- The combination of investigative/prosecutorial and adjudicative roles within an administrative agency does not, standing alone, violate due process; a claimant must show concrete bias or unfairness typically assessed on a developed administrative record.

## Conclusion

The Second Circuit sustained the SEC’s authority to discipline accountants under Rule 2(e) and required Touche Ross to litigate its statutory and constitutional objections within the SEC proceeding, with any judicial challenge reserved for review of a final SEC order.


Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979)