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Supreme Court Holds SEC’s Administrative Law Judges are Subject to Constitutional Appointments

Litigation & Dispute Resolution Alert Emily Stedman, Jonathan W. Hackbarth, Jeff Peelen

In Lucia v. Securities and Exchange Commission, the Supreme Court recently held that the Securities and Exchange Commission’s (SEC) administrative law judges (ALJs) are officers of the United States and subject to the Appointments Clause. The Appointments Clause limits the power to appoint officers of the United States to “the President . . . , courts of law, or in the heads of department.” The SEC itself is a “head of department,” but it did not appoint the Lucia ALJ. This constitutional violation, the Supreme Court found, required the SEC to provide Raymond Lucia with a new hearing, before a constitutionally appointed ALJ. This decision, however, leaves open several questions, such as whether the SEC’s subsequent ratification of the appointments of existing ALJs is constitutionally sufficient. The case’s impact on pending administrative proceedings (and even those already concluded)—both before the SEC and across all federal agencies—remains unclear.

The SEC and its ALJs Generally

The SEC prosecutes enforcement actions via administrative proceedings. Although the Commission may preside over these hearings itself, it more often “delegate[s] that task to an ALJ.” Presently, the SEC has five ALJs. Prior to Lucia, these ALJs were not appointed directly by the Commission, a “head of department.” Instead, the SEC assigned this task to its staff.

ALJs presiding over enforcement actions have “extensive powers,” including and not limited to:

supervising discovery; issuing, revoking, or modifying subpoenas; deciding motions; ruling on the admissibility of evidence; administering oaths; hearing and examining witnesses; generally regulating the course of the proceeding and the conduct of the parties and their counsel; and imposing sanctions for contemptuous conduct or violations of procedural requirements.

These duties make the Commission’s ALJs akin to federal trial judges with Article III powers.

After hearing an administrative proceeding, the ALJ issues an initial decision containing findings of fact and conclusions of law. An ALJ’s initial decision is subject to de novo review by the SEC, which may affirm, reverse, modify, set aside, or remand the decision. This review by the Commission is discretionary. The respondent may request review, the SEC might review the case sua sponte, or it might deny review and issue an order making the ALJ’s findings the final decision. The respondent’s next recourse is an appeal to the appropriate United States Court of Appeals.

Lucia

In 2012, the SEC initiated an enforcement action against Raymond Lucia, bringing fraud charges under the Investment Advisers Act. The SEC alleged that “Lucia used misleading slideshow presentations to deceive prospective clients.” Judge Elliot presided over the nine-day administrative proceeding and ultimately found that Lucia violated securities laws. The ALJ imposed hefty sanctions on Lucia: (1) a monetary fine of $300,000 and (2) a lifetime ban from the investment industry.

Lucia appealed to the Commission, seeking to invalidate the ALJ’s decision by arguing that Judge Elliot was an “Officer of the United States,” subject to the Appointments Clause, and therefore lacking the constitutional authority to hear this matter because Judge Elliot was not constitutionally appointed. The SEC overruled the argument and affirmed the ALJ’s decision, holding that the SEC’s ALJs lacked sufficient independence to qualify as “officers of the United States” and instead served as “mere employees” not subject to the Constitution’s Appointments Clause. The D.C. Circuit Court of Appeals affirmed, but Lucia requested review en banc. The ten-member en banc court split evenly on the issue, resulting in a per curiam opinion, upholding the lower courts’ decision. The Supreme Court granted certiorari.

The SCOTUS Decision

Justice Kagan, writing for the majority—joined by Chief Justice Roberts, and Justices Kennedy, Thomas, Alito, and Gorsuch—set out to decide one issue: Are the Commission’s ALJs “officers of the United States” subject to the Appointments Clause, or are the ALJs merely employees of the United States Government? Relying on existing precedent, the Court answered: SEC ALJs are officers of the United States subject to the Appointments Clause, and because Judge Elliot was not appointed by a head of department, here the SEC, Lucia is entitled to a new hearing before a constitutionally appointed ALJ (that cannot be Judge Elliot).

Two previous cases lay the foundation for the Court’s decision: United States v. Germaine, and Buckley v. Valeo,. In Germaine, the Supreme Court decided that “civil surgeons” did not hold “continuing position[s] established by law,” but instead performed “occasional or temporary” duties. Thus, “civil surgeons” are employees of the United States and not officers. Buckley addressed “members of a federal commission” who “exercised significant authority pursuant to the laws of the United States,” and therefore are officers subject to the Appointments Clause.

Relying on these foundational holdings, the Court then turned to a third prior decision: Freytag v. Commissioner. In Freytag, taxpayers challenged the authority of the United States Tax Court’s Special Trial Judges (STJs). STJs “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders,” all while “exerc[ing] significant discretion.” STJs also hold “a continuing office established by law.” The significant discretion, the ongoing nature of their positions, and the establishment of STJs under the law collectively make STJs officers of the United States, subject to the Appointments Clause.

The Lucia majority analogized STJs to the SEC’s ALJs and found that Freytag controls. Like STJs, ALJs hold continuing offices established by law, the positions are continuing (SEC ALJs hold career appointments), ALJs have significant discretion, and with “nearly all the tools of federal trial judges,” ALJs have substantial authority to ensure the fair and orderly disposition of the administrative proceedings. Specifically, ALJs take testimony, receive evidence, examine witnesses, conduct trials, administer oaths, rule on motions, regulate hearings and the conduct of the parties, rule on the admissibility of evidence, shape the administrative record, enforce orders, punish conduct, and issue decisions that can become final. Although the Lucia Court left open the question of which of these duties “is necessary for someone conducting adversarial hearings to count as an officer,” the totality of these duties mandate that the Commission’s ALJs be constitutionally appointed as officers of the United States pursuant to the Appointments Clause.

Judge Elliot, an officer of the United States but appointed by the Commission’s staff, did not have the authority to hear Lucia’s administrative proceeding. The Supreme Court remanded the case for new administrative hearing before a constitutionally appointed ALJ. That ALJ, however, cannot be Judge Elliot. Instead, the Court held, “another ALJ” must hear the matter, because Judge Elliot “cannot be expected to consider the matter as though he had not adjudicated it before.”

Open Questions

The Lucia decision leaves open several questions. First, on November 30, 2017, the Commission “ratified” its staff’s prior appointments of the five existing ALJs. The SEC explicitly stated that was its attempt to “resolv[e] any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause.” Press Release, “SEC Ratifies Appointment of Administrative Law Judges, Nov. 30, 2017, https://www.sec.gov/news/press-release/2017-215. The Supreme Court saw “no reason to address” this ratification, noting, “The Commission has not suggested that it intends to assign Lucia’s case on remand to an ALJ whose “. . . authority rests on the ratification order.” Instead, the SEC might hear the case itself or assign the case to a now constitutionally appointed ALJ (if one exists is unclear). In response to the Lucia decision, the SEC immediately stayed all administrative proceedings for thirty days, so the forum for Lucia’s rehearing remains undecided. Also, respondents with pending administrative proceedings before ratified ALJs likely will begin to challenge the ratified ALJ’s authority to hear the matter and respondents also might move to reopen closed proceedings based on similar challenges.

Second, as described above, the Lucia majority set forth a non-exhaustive list of continuing duties that ALJs (and STJs) exercise with significant authority and discretion. However, the Court declined to decide which of these duties (or any combination of duties) is required in order to implicate the Appointments Clause or to count as an officer of the United States. Hundreds of ALJs—across the federal government—conduct similar proceedings, with similar duties and discretion. Lucia opens the door for more Appointments-Clause challenges, across a multitude of federal agencies.

Third, it is unclear whether respondents can waive these types of challenges. Lucia timely challenged Judge Elliot’s appointment by raising the issue on appeal before the Commission, and he continued to raise the issue at every stage of judicial review. The Supreme Court recognized this in passing and without deciding whether a later or earlier challenge would have sufficed. Going forward, the SEC likely will argue that respondents must raise this issue during the administrative proceeding. Respondents, of course, will argue that Lucia demonstrates that they can challenge appointments for the first time on review to the Commission. What happens, for example, if the Commission declines review of the ALJ’s decision and a respondent makes the challenge for the first time on review to the appropriate court of appeals?

Conclusion

To be an officer of the United States, subject to the Appointments Clause, those presiding over adversarial proceedings must (1) hold continuing positions established by law and (2) exercise substantial authority. In Lucia, the wide-array of trial duties conducted by the SEC ALJ’s in a continuing, potentially final, and substantive manner, implicated the Appointments Clause and called into question the existing ALJ’s authority to hear enforcement actions. Before Lucia, the SEC’s ALJs were appointed by the Commissions’ staff. Now this type of appointment is decidedly unconstitutional. During Lucia, the SEC “ratified” the appointments of the existing ALJs. Now, the question is open as to whether such ratification resolves the Appointments Clause question. After Lucia, the SEC stayed all of its administrative proceedings in an effort to address the Lucia holding. Now, it remains to be seen how this decision will impact the SEC’s pending and prior administrative decisions and how other federal agencies will adjust to prevent the same confusion from infiltrating their administrative processes.

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