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Supreme Court Finds SEC ALJs are Inferior Officers Subject to the Requirements of the Appointments Clause

Firm Thought Leadership
Lucia v. SEC, No. 17-130 (June 21, 2018)

In a much-anticipated opinion issued last Thursday, the United States Supreme Court resolved a circuit-court split, holding that the administrative law judges (“ALJs”) of the Securities and Exchange Commission (“SEC” or the “Commission”) are “officers” subject to the requirements of the Appointments Clause of Article II of the U.S. Constitution. Reversing the Court of Appeals for the D.C. Circuit, the Supreme Court held that a rehearing of the matter by a constitutionally-appointed ALJ or by the Commission itself is required, leaving some wondering about the finality of other cases heard by the Commission’s ALJs and about its implications for matters before administrative judges at other agencies.

Factual Background

The SEC initiated an administrative proceeding concerning Raymond Lucia and his investment company’s “Buckets of Money” strategy, alleging that he misled investors in violation of the Investment Advisers Act (§ 80b-1 et seq.). The ALJ assigned to the proceeding issued an initial decision finding violations and imposing sanctions. In appeals before the Commission and at the D.C. Circuit, Lucia argued that the administrative proceeding was invalid because SEC ALJs are “Officers of the United States,” and can therefore only be constitutionally appointed by the President, “Courts of Law,” or “Heads of Department,” as Article II of the U.S. Constitution mandates. Lucia further contended that because the Commission delegated to SEC staff members its authority, as a Department Head, to appoint ALJs, the appointment process failed constitutional rigor.

The D.C. Circuit ruled against Lucia, calling SEC ALJs “mere employees” in a decision that directly conflicted with a Tenth Circuit holding that these ALJs are indeed subject to the Appointments Clause as “inferior officers.” Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016). The Tenth Circuit opinion relied heavily on the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 881 (1991), and its test for defining officers.

In its 7-2 decision in Lucia, the Supreme Court has now sided with the Tenth Circuit, with six justices agreeing that Freytag squarely decides this case and finding that SEC ALJs are officers. Justice Kagan explained in her majority opinion that SEC ALJs, much as the Tax Court special trial judges (“STJs”) at issue in Freytag, “hold a continuing office established by law” and “exercise the same ‘significant discretion’ when carrying out the same ‘important functions’ as STJs do.” Slip Op. at 8. In short, both these sorts of trial arbiters wield nearly all the same discretion and authority as federal trial judges in overseeing their matters. And in the case of the SEC ALJ, decisions frequently go unreviewed by the Commission—a determinative factor the Court considered in holding that ALJs are Article II officers.

A Crack in the Dam?

In designing an appropriate remedy, the Supreme Court has decided that Lucia is entitled to a new hearing before either a properly-appointed ALJ (and specifically not the ALJ who presided over the initial proceeding) or the Commission itself.

While some commentators have predicted that a decision in Lucia’s favor might lead to a wave of similar demands for review of decisions and sanctions authored and imposed by SEC ALJs now understood to have been unconstitutionally appointed, Justice Kagan’s majority opinion seems to brace the appellate floodgates. In a pointed citation to Ryder v. United States, the Supreme Court highlights that relief was proper here because of Lucia’s “timely challenge to the constitutional validity of the appointment of an officer who adjudicate[d] his case.” 515 U.S. 177, 182-183 (1995). This suggests that many hopeful re-litigants—who have not challenged the constitutionality of their proceedings before the Commission’s ALJs—long ago waived their opportunity to seek review per Lucia. And while there is sure to be some challenge on this point—perhaps an initial decision or SEC ratification made in the early months while Lucia was pending can be “timely” appealed—the Supreme Court’s decision here is not at all likely to result in an endless stream of re-trials or exonerations for ages-old conduct.

Separately, while Justice Thomas is surely right in his concurrence that “this Court will not be able to decide every Appointments Clause case by comparing it to Freytag,” there are almost certainly administrative law judges at other agencies whose role and mandate makes them ripe for just such an analysis. The Court’s methodology and its ruling make it seem likely that we have not seen the last Appointments Clause challenge stemming from an agency ALJ decision—that many important agency fact-finders meet the “officer” test by simple analogy to the role of SEC ALJs. Yet without occasion to look beyond the SEC here, the Court has deferred certainty on that point for another day.

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