Have SEC ALJs Been Operating Contrary to the U.S. Constitution?

Sarah A. Good is partner and co-leader of the securities litigation and enforcement team and Laura C. Hurtado is a senior associate at Pillsbury Winthrop Shaw Pittman LLP. This post is based on a Pillsbury publication authored by Ms. Good and Ms. Hurtado.

The District of Columbia Circuit Court of Appeals’ earlier decision in Lucia v. SEC that U.S. Securities and Exchange Commission (SEC) administrative law judges (ALJs) are employees who are not subject to the Appointments Clause of the U.S. Constitution will stand after a ten-judge en banc panel of the Court deadlocked on the issue, resulting in a one-page per curiam order on June 26, 2017, denying Raymond J. Lucia’s petition for review. See Lucia v. SEC, No. 15-1345 (D.C. Cir. June 26, 2017) (noting Chief Judge Merrick Garland did not participate in this matter). It is undisputed that SEC ALJs are selected by the SEC’s Office of Administrative Law Judges and not by the President. Thus, a determination that SEC ALJs are “Officers” (as opposed to mere employees) would mean they are subject to the Appointments Clause and that their selection by someone other than the President renders their appointments unconstitutional.

The District of Columbia Circuit Court’s affirmance of its earlier ruling in Lucia puts the direct conflict between it and the Tenth Circuit Court of Appeals, which also considered the issue of the constitutionality of SEC ALJs and reached the opposite conclusion, on the path for consideration by the U.S. Supreme Court. See Bandimere v. SEC, No. 15-9586 (10th Cir. Dec. 27, 2016), reh’g denied, 855 F.3d 1128 (May 3, 2017). In Bandimere, the Tenth Circuit Court of Appeals held that SEC ALJs were inferior officers subject to the Appointments Clause. The Tenth Circuit denied the SEC’s petition for rehearing en banc on May 3, 2017. There is nothing of substance left for the Courts of Appeals to do in either Bandimere or Lucia.

Within three weeks of the Tenth Circuit Court of Appeals’ denial of the petition for rehearing in Bandimere, the SEC stayed all administrative hearings assigned to an ALJ in which a respondent has the option to seek review in the Tenth Circuit of a final order of the SEC under Section 9(a) of the Securities Act, Section 25(a) of the Securities Exchange Act, Section 43(a) of the Investment Company Act, or Section 213 (a) of the Investment Advisers Act. See In Re: Pending Administrative Proceedings, SEC Release No. 4708 (May 22, 2017). The stay was effective immediately and will remain in effect pending expiration of the time in which the SEC may file a petition for writ of certiorari in Bandimere, the resolution of any such petition and any decision issued by the Supreme Court in that case, or further order of the SEC.

Meanwhile, the Second, Eighth, Ninth and Eleventh Circuits currently have cases in which the Bandimere/Lucia issue will be litigated. At least one of these courts is likely to render a decision by the end of this year. The Eighth Circuit’s case is the most advanced and was argued and submitted on June 7, 2017. See Bennett v. SEC, Nos. 16-3827, 16-3830 (8th Cir.).

No petition for writ of certiorari has been filed in Lucia or in Bandimere. Pursuant to the Rules of the U.S. Supreme Court, if a petition for rehearing is filed in the lower court, the time to file the petition for writ of certiorari is 90 days after the date of the denial of rehearing or, if rehearing is granted, 90 days after the subsequent entry of judgment. This means any petition for writ of certiorari for Lucia or Bandimere likely will not be filed until the end of summer or in the fall.

A ruling by the U.S. Supreme Court that SEC ALJs have been appointed unconstitutionally would call into question all prior SEC ALJ adjudications. In light of the split among the Circuit Courts of Appeals, it remains important that defendants in SEC ALJ proceedings explicitly preserve their rights to object to the administrative process and any administrative adjudication.

(For the authors’ earlier discussion of these issues, please see “Constitutionality of SEC’s Administrative Law Judges Headed to Supreme Court?”), and “Questionable Proceedings: The constitutionality of adjudication by SEC administrative law judges facial judicial and legislative challenges,” Los Angeles Lawyer, vol. 39, no. 11 at 30-35 (Feb. 2017).)

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