LawFlash

Supreme Court Provides One Answer about SEC Administrative Law Judges, but Leaves Many Questions

June 25, 2018

On June 21, in Lucia v. Securities and Exchange Commission, the US Supreme Court held that administrative law judges of the US Securities and Exchange Commission are not mere federal employees but qualify as “Officers of the United States” under the Appointments Clause of the US Constitution, which requires such officers to be appointed by the president, courts of law, or heads of departments. Lucia’s further implications for decisions issued by SEC ALJs (and by ALJs at other federal agencies) remain to be seen. 

The SEC—which confidently announced last November that it had “resolved any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause”[1] by “ratifying” their prior appointments[2]—appears to be baffled about what lies ahead for its administrative process. Immediately after receiving the Lucia decision,[3] the Commission issued an order staying all pending administrative proceedings for thirty days or until further order of the Commission.[4]

Background

One of the ways the SEC enforces the federal securities laws is by instituting administrative proceedings against alleged wrongdoers. Lucia began with an SEC administrative proceeding against petitioner Raymond Lucia and his investment company, which were known for the retirement savings strategy called “Buckets of Money.” The SEC charged Mr. Lucia with violating the Investment Advisers Act, Section 80b-1 et seq., for misleading and deceiving investors and prospective investors through slideshow presentations. By law, the SEC may itself preside over such a proceeding, or may delegate the task to one of its five ALJs, who historically have been selected by SEC staff. In this case, the SEC delegated the matter to ALJ Cameron Elliot.

SEC ALJs supervise discovery, issue and modify subpoenas, decide motions, determine the admissibility of evidence, administer oaths, hear and examine witnesses, and can impose sanctions for contemptuous conduct or violations of procedural requirements.[5] In cases assigned to them, ALJs also issue “initial decisions” that contain factual findings and legal conclusions, as well as the appropriate order, sanction, relief, or denial of relief.[6] The SEC can review the decision upon request or on its own accord. If the SEC declines to review the decision, it issues an order that the ALJ’s initial decision has become final, and the decision is then deemed an action of the Commission.[7]

In the proceeding against Mr. Lucia, Judge Elliot presided over nine days of testimony and argument, and issued a decision concluding that Mr. Lucia had violated the Investment Advisers Act and imposing sanctions of civil penalties of $300,000 and a lifetime bar from the investment industry. The SEC then reviewed Judge Elliot’s decision and remanded for additional fact-finding. Judge Elliot made additional findings and issued a revised initial decision with the same sanctions. Mr. Lucia appealed the decision to the SEC, arguing that the administrative proceeding was invalid because Judge Elliot had been appointed by SEC staff rather than by the Commissioners.[8]

The SEC rejected Mr. Lucia’s argument, and the DC Circuit Court of Appeals agreed, concluding that SEC ALJs are employees rather than “Officers of the United States” within the meaning of the Appointments Clause.[9] The DC Circuit’s decision conflicted with a decision by the US Court of Appeals for the Tenth Circuit in Bandimere v. SEC.[10]

Distinguishing Officers and Employees

In reaching its decision, the Supreme Court relied on a framework established by United States v. Germaine[11] and Buckley v. Valeo,[12] and applied in Freytag v. Commissioner.[13] Germaine made clear that, to qualify as an officer, an individual must occupy a “continuing” position established by law.[14] Buckley held that members of a federal commission were officers if they “exercis[ed] significant authority pursuant to the laws of the United States.”[15] In Freytag, the Court concluded that “special trial judges” (STJs) of the United States Tax Court are officers rather than employees.[16] There, the Court found significant that STJs serve on an ongoing basis; their duties, salaries, and means of appointment are specified in the Tax Code; and they possessed significant duties and discretion.[17]

The Court noted that ALJs, like STJs, receive a career appointment and hold a continuing office established by law.[18] The ALJs’ duties, salary, and means of appointment also are governed by statute.[19] In addition, “ALJs exercise the same ‘significant discretion’ when carrying out the same ‘important functions’ as STJs do.”[20] Moreover, ALJs have a “more autonomous role” than STJs, because a regular Tax Court judge must always review an STJ’s opinion, whereas the SEC can decline to review an ALJ’s decision.[21] According to the Court, “[t]hat last-word capacity makes this an a fortiori case: if the Tax Court’s STJs are officers, as Freytag held, then the Commission’s ALJ must be too.”[22] Based on this reasoning, the Court remanded the case and required that the SEC administrative proceeding against Mr. Lucia be assigned to a different ALJ or the SEC itself for a new hearing.[23]

Implications

Although it set a clear course for Mr. Lucia’s case, the Court left behind many questions for the administrative adjudication systems at the SEC and other federal agencies.

First, when the SEC issued its November 2017 order “ratifying” the appointments of its ALJs, it directed the newly ratified ALJs to “review their actions in all open administrative proceedings to determine whether” those same ALJs should “ratify those actions.”[24] The Lucia Court declined to determine whether agency ratification of ALJ appointments would resolve the constitutional infirmity of those appointments,[25] and also—by forbidding Judge Elliot from rehearing Mr. Lucia’s case—suggested that litigants who received a final decision in a pending administrative proceeding may be entitled to have their cases heard by a different ALJ. These questions surrounding the “ratification” process may well explain the SEC’s June 21 order staying all pending administrative proceedings.

Second, the Court declined both Mr. Lucia’s and the Solicitor General’s invitations to consider whether existing restrictions on removal of ALJs are consistent with the constitutional principles articulated in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).[26] As Justice Stephen Breyer’s separate opinion illustrates well, that thicket remains, irrespective of the Court’s decision not to enter it in Lucia. [27]

The bigger picture here is that the SEC may already have decided that litigated administrative enforcement proceedings are more trouble than they are worth. As many have noted, the agency has brought almost all of its contested enforcement actions in federal court since the Lucia/Bandimere circuit split arose, and has largely confined its administrative docket to settled matters and to the minority of cases involving suspensions and bars of regulated entities and persons that can only be brought administratively.  

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
David C. Boch
Timothy P. Burke
Thomas J. Hennessey
Jordan D. Hershman
Jason D. Frank
Jason S. Pinney
Peter R. Pound
Emily E. Renshaw

Chicago
Peter K.M. Chan

Hartford
Michael D. Blanchard

Los Angeles
J. Warren Rissier

New York
Michele A. Coffey
Susan F. DiCicco
Bernard J. Garbutt III
Mary Gail Gearns
Brian A. Herman
Ben A. Indek
Michael S. Kraut
Kenneth I. Schacter

Orange County
Robert Gooding

Philadelphia
Marc J. Sonnenfeld

San Francisco
Joseph E. Floren
Elizabeth A. Frohlich
Susan D. Resley
Charlene S. Shimada
Lucy Wang

Washington, DC
Elizabeth Baird
Amy J. Greer
Ivan P. Harris
Christian J. Mixter
Andrew Southerling



 

[1] Art. II, § 2, cl. 2.

[2] “SEC Ratifies Appointment of Administrative Law Judges,” Press Release No. 2017-215 (Nov. 30, 2017).

[3] No. 17-130, slip op. (U.S. June 21, 2018). 

[4] Order In re: Pending Administrative Proceedings, Securities Act Rel. No. 10510 (June 21, 2018).

[5] Id. (citing 17 CFR § 201.111, 201.180; §§ 200.14(a), 201.230).

[6] Id. (citing 17 CFR §§ 201.360(a)(1), (b)).

[7] Id. (citing § 78d­-1(c); 17 CFR § 201.360(d)(2)).

[8] There was no dispute that the SEC qualified as a Head of Department under the Appointments Clause. Slip Op. 3.

[9] See 832 F.3d 277, 283-89 (D.C. Cir. 2016). Mr. Lucia petitioned for rehearing en banc, but following oral argument, the en banc court divided evenly, resulting in a per curiam order denying Mr. Lucia’s petition for review. See 868 F.3d 1021 (D.C. Cir. 2017).

[10] 844 F.3d 1168, 1179 (10th Cir. 2016).

[11] 99 U.S. 508 (1879).

[12] 424 U.S. 1, 126 (1976).

[13] 501 U.S. 868 (1991).

[14] Germaine, 99 U.S. 511.

[15] Buckley, 424 U.S. at 126, n.162.

[16] Freytag, 501 U.S. at 881.

[17] Id.

[18] Slip Op. at 8.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] “SEC Ratifies Appointment of Administrative Law Judges,” Press Release No. 2017-215 (Nov. 30, 2017).

[25] Slip Op. at 13 n.6.

[26] See Slip Op. at 4 n.1.

[27] Lucia v. Securities and Exchange Commission, No. 17-130 (U.S., June 21, 2018) (Breyer, J., concurring in the judgment in part and dissenting in part).