There have been several challenges to the constitutionality of the in-house administrative 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. The SEC has fended off attacks. Now there is break in wall. The 10th Circuit found the use to be unconstitutional.
The Constitutional question is whether the SEC’s ALJs are “Officers of the United States,” including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2.
For some reason, the SEC does not appoint the ALJ’s directly. If it did so, it could probably erase this problem going forward. I assume the legal advice is that the change would put past cases into jeopardy.
In August, the U.S. Court of Appeals for the D.C. Circuit in Raymond J. Lucia Cos. v. SEC, accepting the SEC’s argument that ALJs are mere “employees,” and not officers at all. This seemed to be the accepted stance when the US Supreme Court in September denied hearing the appeal of Lynn Tilton in her case arguing on roughly the same issue.
The 10th Circuit Court of Appeals came to the opposite conclusion last week in Bandimere v. SEC. The Bandimere may differ slightly from prior cases. Unlike some of the other attacks, Mr. Bandimere raised the constitutional question before the SEC, which rejected it. The 10th Circuit put the other attacks in the bucket of collateral lawsuits attempting to enjoin the administrative enforcement actions.
The 10th Circuit, based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), concluded that the SEC ALJ who presided over an administrative enforcement action against Mr. Bandimere was an inferior officer who was not constitutionally appointed. The Freytag analysis has three parts to determine if an ALJ is an “inferior officer”:
(1) the position of the SEC ALJ was “established by Law,”;
(2) “the duties, salary, and means of appointment . . . are specified by statute,”.; and
(3) SEC ALJs “exercise significant discretion” in “carrying out . . . important functions,” .
The Bandimere decision rejected the argument in the Lucia case that ALJs do not have final decision-making power. They have enough power to make them an “inferior officer.”
I would place a bet that the SEC will appeal this case to the Supreme Court. Given the split in the circuit courts of appeal, it makes the case more likely to be heard.
Sources:
- Bandimere v. SEC
- 10th Circuit Holds SEC ALJs Are Holding Office Unconstitutionally by Keith Paul Bishop in California Corporate & Securities Law
- SEC’s ALJs: Going to SCOTUS Again? by Broc Romanek in TheCorporateCounsel.Net
- Are the SEC’s administrative law judges unconstitutional? by Jonathan H. Adler in the Washington Post
- SEC’s Use of In-House Courts Unconstitutional, Appeals Court Rules
- Tilton Rejected as U.S. Supreme Court Lets SEC Case Proceed
- SEC’s In-House Courts Are Upheld