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Vedder Thinking | Articles SEC Administrative Law Judges: Key Takeaways and Lingering Questions from Lucia v. SEC

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On June 21, 2018, the United States Supreme Court resolved a circuit split on the question of whether administrative law judges (“ALJs”) of the Securities and Exchange Commission (the “SEC” or the “Commission”) qualify as “officers” of the United States subject to the Appointments Clause of the United States Constitution. In Lucia v. SEC, 585 U.S. ___ (2018), the Court held that the Commission’s ALJs are “inferior officers” and thus subject to the Appointments Clause. Whereas SEC ALJs were previously considered by the Commission to be “employees” and were hired by Commission staff, this ruling means that ALJs must be appointed in the future by the President, “Courts of Law,” or “Heads of Departments.”

Background

The circuit split arose from competing Court of Appeals decisions in the D.C. Circuit and the Tenth Circuit. After an SEC ALJ rendered an unfavorable decision against Raymond Lucia, he appealed within the Commission (and later to the D.C. Circuit) arguing that the administrative proceeding was invalid because the presiding ALJ had not been constitutionally appointed and thus lacked the constitutional authority to do his job. Lucia argued that the Commission’s ALJs are “Officers of the United States” who are therefore subject to the Appointments Clause and thus must be appointed by the President, “Courts of Law,” or “Heads of Departments.” The presiding ALJ, however, had been appointed by Commission staff members. The Commission and the D.C. Circuit1 rejected Lucia’s argument. They reasoned that the Commission’s ALJs were “mere employees” with responsibilities that fell outside of the sphere of the Appointments Clause.

Meanwhile, the Tenth Circuit in Bandimere v. SEC2 reached the opposite conclusion. David Bandimere challenged the authority of the ALJ who presided over the Commission’s enforcement action against him, and the Tenth Circuit held that, based on the Supreme Court’s 1991 ruling in Freytag v. Commissioner of Internal Revenue, the Commission ALJ was an inferior officer. Because the ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause.

Ruling

The Supreme Court reversed the D.C. Circuit’s ruling and instead sided with the Tenth Circuit in holding that SEC ALJs are subject to the Appointments Clause. Justice Kagan, writing for the majority, reasoned that three Supreme Court cases essentially decided the case before the Court. First, in the 1879 case United States v. Germaine,4 the Supreme Court made clear that in order to qualify as an “officer,” the individual must hold a “continuing” position established by law. Second, in Buckley v. Valeo,5 the Supreme Court held that members of a federal commission were officers because they “exercise[ed] significant authority pursuant to the laws of the United States.”6 Third, the Court focused on the 1991 case Freytag v. Commissioner, in which the Supreme Court applied the “significant authority” test in determining that Special Trial Judges in the United States Tax Court were “officers” for purposes of the Appointments Clause.

The Court found Freytag’s Special Trial Judges to be “near carbon-copies of the Commission’s ALJs”7 and stated that “Freytag says everything necessary to decide this case.”8 The Commission’s ALJs, Justice Kagan wrote, hold a continuing office established by law; exercise significant discretion in holding adversarial hearings, and use nearly all of the same tools utilized by federal judges; and issue decisions that contain factual and legal findings, and appropriate remedies. The Court noted that while the Tax Court’s Special Trial Judges must have their decisions adopted by a regular judge, an ALJ’s decision becomes final when the Commission declines review. “That last-word capacity makes this an a fortiori case: If the Tax Court’s STJs are officers, as Freytag held, then the Commission’s ALJs must be too.”9

Although addressed during oral argument, the majority opinion declined to rule on whether restrictions against removing the Commission’s ALJs are constitutional. In his partial concurrence and partial dissent, Justice Stephen Breyer addressed the issue, writing, “This would risk transforming administrative law judges from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission.”10 Holding that the ALJs are officers makes the Commission more accountable for their rulings but at the same time may make the ALJs less independent. The constitutionality of the restrictions against removing ALJs may be the subject of a future Supreme Court case.

Finally, the Court addressed the issue of the proper remedy for Lucia, holding that he is entitled to a new hearing before a properly appointed official, and that the hearing may not be before the ALJ who previously heard the enforcement action.

Key Takeaways and Questions

SEC’s Prior Ratification of ALJs. In November 2017, the Commission abandoned its position that its ALJs were “employees,” and ratified the prior hiring of its ALJs in a manner it deemed consistent with the Appointments Clause. In Lucia, however, the Court held that the ALJ who previously presided over that matter could not preside over Lucia’s new hearing “even if he has by now received a constitutional appointment.” The Court did not rule on whether the Commission’s ratification of the prior hires was adequate. It remains to be seen whether the Commission will maintain its position that the November 2017 ratification of its ALJs complied with the Appointments Clause.

Pending SEC Administrative Proceedings. On June 21, 2018, in reaction to the ruling in Lucia, the Commission announced that it was staying “any pending administrative proceeding initiated by an order instituting proceedings that commenced the proceeding and set it for hearing before an [ALJ], including any such proceeding currently pending before the Commission.” The stay will last for 30 days.

Previously Decided SEC Administrative Proceedings. The ruling in Lucia provides for relief to respondents who have made a “timely challenge” to the constitutionality of the Commission’s ALJs. Lucia contested the validity of the ALJ’s appointment during his appeal to the Commission and continued to assert that claim in the Court of Appeals and the Supreme Court. It appears, then, that respondents who did not previously make such a challenge may now be time-barred from doing so and ineligible for relief.

ALJs in Other Agencies. While the Court’s opinion was limited to the Commission’s ALJs, it raises constitutional questions about as many as 150 ALJs in many other federal agencies such as the CFPB and FDIC.

If you have any questions regarding the issues in this article, please contact Joshua Nichols at +1 (312) 609 7724, Ashley B. Huddleston at +1 (212) 407 7793, Michael J. Quinn at +1 (424) 204 7734, Junaid A. Zubairi at +1 (312) 609 7720 or any Vedder Price attorney with whom you have worked. 


1 832 F.3d 277 (D.C. Cir. 2016).
2 844 F.3d 1168 (10th Cir. 2016).
3 501 U.S. 868 (1991).
4 99 U.S. 508 (1879).
5 424 U.S. 1 (1976) (per curiam).
6 424 U.S. at 126.
7 585 U.S. ___, at 6 (2018).
8 585 U.S. ___, at 8 (2018).
9 585 U.S. ___, at 10 (2018).
10 585 U.S. ___, at 6 (2018) (J. Breyer) (emphasis in original).



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Ashley B. Huddleston

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Joshua Nichols

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Michael J. Quinn

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Junaid A. Zubairi

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