There have been several challenges to the constitutionality of the in-house judges at the Securities and Exchange Commission. The problem is that the judges are appointed by an internal panel instead of by the President or the SEC Commissioners. That will not make a difference for Raymond Lucia and his “Buckets of Money.”
Radio personality Raymond J. Lucia, Sr. got in trouble with the SEC by claiming that his “Buckets of Money” strategy had been successfully backtested when in fact it had not been. Lucia was a registered investment advisor, but the SEC barred him for his transgressions. He appealed.
In addition to appealing the substance of the charges against him, he argued that the SEC in-house court was unconstitutional. The appeal looked at the Appointments Clause of the Constitution. It’s an important part of the constitution to make sure that those who wield power are subject to “political force and the will of the people.” The President appoints “Officers” who are those who exercise “significant authority pursuant to the laws of the United States.”
The court went out to point out a three prong test to determine if an official is an “Officer” under the Appointments Clause:
- significance of the matters resolved by the government official
- discretion the official exercises in reaching the decision
- the finality of the decision
So far it sounds good for Mr. Lucia and the other parties arguing this point in their disciplinary matters.
But then there is the procedural matter of what happens after an SEC in-house judge issued his or her order. Under the SEC rules, there is not final decision until the Commission determines not to review the order. That initial order from the SEC judge only becomes final when the Commission issues the finality order. “The Commission’s final action is either in the form of a new decision after de novo review or, by declining to grant or order review, its embrace of the ALJ’s initial decision as its own.”
That leaves the full decision-making powers in the hands of the SEC commissioners who are appointed by the President in accordance with the Appointments Clause.
That seems to settle the argument that the SEC in-house administrative proceedings are unconstitutional.
Of course, Mr. Lucia could appeal this decision further. The Supreme Court may want to take a different view of who is an “officer” under the Appointments Clause.
Sources:
- Raymond J. Lucia Companies, Inc. v. SEC, No. 15-1345 (D.C. Cir August 9, 2016)
- Appeals Court Upholds SEC’s In-House Court as Constitutional by Aruna Viswanatha in the Wall Street Journal
- D.C. Circuit Rejects Challenge to Appointment of SEC ALJs by T. Gorman in SEC Actions
- Buckets of Money