Tag: IA-4816

SEC Ratifies the Appointment of Administrative Judges

In a stunning turn, the Securities and Exchange Commission altered its treatment of the SEC’s administrative law judges. There have been several challenges to the constitutionality of these in-house judges. It appears that the Trump administration’s Department of Justice changed position and perhaps undercut the position of the SEC. That caused the SEC to change it’s appointment procedures for its administrative law judges.

The problem is that the judges are appointed by an internal panel instead of by the President or the SEC Commissioners. The Appointments Clause of the Constitution is there 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.”

There is a split in courts on whether the system of appointing the SEC’s ALJs ran afoul of the Appointments Clause.

In the Lucia case, the court used a three prong test to determine if an official is an “Officer” under the Appointments Clause:

  1. significance of the matters resolved by the government official
  2. discretion the official exercises in reaching the decision
  3. the finality of the decision

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.”

According to the Lucia court, 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.

The 10th Circuit Court of Appeals came to the opposite conclusion in Bandimere v. SEC. That court used a different three part analysis 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.”

A split like this often gets a case heard by the Supreme Court to resolve the conflict. In October, the solicitor general argued in a brief that the US Supreme Court should not hear the Bandimere case and if it was inclined to spend time on the issue, the Lucia case was the better one to hear.

The other shoe dropped and in the Solicitor General’s Brief on Writ of Certiorari for Lucia the argument is now to hear the case and overturn the Lucia ruling.

“[T]he government is now of the view that such ALJs are officers because they exercise ‘significant authority pursuant to the laws of the United States.’ Buckley v. Valeo, 424 U.S. 1, 126 (1976)”

That means the way the SEC hires the judges may violate the Appointments Clause. The brief also notes that this “affects not merely the Commission’s enforcement of the federal securities laws, but also the conduct of adversarial administrative proceedings in other agencies within the government.”

The Supreme Court has not agreed to hear the case, so Mr. Lucia is not out of trouble yet.

The fix for the SEC has always been there. The SEC commissioners could appoint the ALJs directly instead of it going through an internal process. That does leave the door open for existing and past cases to be thrown out or placed in jeopardy.

The SEC put that fix in place. The SEC issued order on Thursday that directly ratified the appointment of the ALJs.

“To put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause, the Commission— in its capacity as head of a department—hereby ratifies the agency’s prior appointment of Chief Administrative Law Judge Brenda Murray and Administrative Law Judges Carol Fox Foelak, Cameron Elliot, James E. Grimes, and Jason S. Patil.”

That fixes the problem going forward, causes delays in the current cases, and calls into question prior case decisions.

It’s not clear if the SEC agreed with change in position of the Solicitor General. It could have made this change after the Supreme Court ruled against the SEC. I leave it to others to speculate about whether the DOJ decided to make the change in position without the support of the SEC.

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