The Securities and Exchange Commission joined the raging debate about whether SEC administrative proceedings conducted by administrative law judges (“ALJs”) are unconstitutional if the ALJs have not been appointed in accordance with the Appointments Clause of the U.S. Constitution. In a 3-2 decision in In the Matter of Raymond J. Lucia Companies, Inc., the Commission ruled on September 3, 2015 that ALJs are “mere employees” of the Commission – not “inferior officers” of the United States – and are therefore not subject to the Appointments Clause’s requirements.
The Commission’s ruling arose from an administrative enforcement proceeding against a former registered investment adviser who had been charged with making material misrepresentations to prospective clients. An ALJ had conducted the proceedings and had ruled that the respondents had committed securities fraud. The respondents sought de novo review from the Commission, contending that – among other things – the administrative proceedings were unconstitutional because the presiding ALJ had not been appointed in accordance with the Appointments Clause.
The Appointments Clause – Article II, § 2 of the Constitution – provides that “the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” Most SEC ALJs (including the one who oversaw the case here) are not appointed by the President, the courts, or the SEC’s Commissioners (the “Heads of the Department”). They obtain their positions through the regular civil-service hiring process.
The Commission ruled that the Appointments Clause does not apply to the SEC’s ALJs, because the ALJs are “mere employees,” not “inferior officers.” Relying on the D.C. Circuit’s 2000 decision in Landry v. FDIC, which had held that the FDIC’s ALJs are not inferior officers, the Commission observed that “the touchstone for determining whether adjudicators are inferior officers is the extent to which they have the power to issue ‘final decisions.’”
The Commission concluded that its ALJs do not issue “final decisions.” Instead, they issue only “initial decisions.” Respondents may petition the Commission for review of those “initial decisions,” and “we are unaware of any cases which the Commission has not granted a timely petition for review.” The Commission may also review a decision on its own initiative. And the Commission’s rules provide that “‘the Commissionwill issue an order that the decision has become final,’ and it ‘becomes ‘final’ only ‘upon issuance of the order’ by the Commission.”
Two Commissioners (Gallagher and Piwowar) dissented and will issue a separate opinion later.
We previously blogged about other constitutional challenges to SEC administrative proceedings here, here,here, here, here, and here. As those blog posts noted, two principal issues are in play: (i) whether District Courts have jurisdiction to review constitutional challenges to SEC administrative enforcement proceedings and (ii) whether those proceedings are constitutional. The Commission’s Raymond J. Lucia ruling did not need to address the first of those questions, although the Commission might have been expressing its position on the jurisdictional issue when it noted in a footnote that “[i]t is important that the Commission have an opportunity to address constitutional issues in the first instance, as it has in the past.” Appeals are currently pending in the Second, Eleventh, and D.C. Circuits on the jurisdictional and/or constitutional issues.