Why it matters: This month, we check in on the ongoing constitutional challenges to the Securities and Exchange Commission’s in-house administrative proceedings. The circuits are split on the issue, making it ripe for Supreme Court consideration. The latest? On May 3, 2017, the U.S. Court of Appeals, Tenth Circuit, denied rehearing en banc of its December 2016 decision in Bandimere v. SEC, in which it had found, under the Appointments Clause of the U.S. Constitution, the SEC’s administrative law judges (ALJs) to be “inferior officers” who had not been “constitutionally appointed” in violation thereof and thus their decisions were moot. The rehearing denial caused the SEC to take the unusual step on May 22, 2017, of suspending all SEC administrative proceedings arising in the Tenth Circuit until the issue is resolved, presumably by the Supreme Court. In addition, on Feb. 16, 2017, the U.S. Court of Appeals, D.C. Circuit, vacated and granted rehearing en banc of its August 2016 decision in Lucia v. SEC, in which it had found that the SEC’s administrative law judges were employees rather than officers (inferior or otherwise) such that the constitutional appointment issue need not be reached. The en banc panel heard oral argument in Lucia on May 24, 2017, and a decision is pending. Read on for an update.
Detailed discussion: This month, we check in on the ongoing constitutional challenges to the SEC’s in-house administrative proceedings. The circuits are split on the issue—with the majority of those that have considered it siding with the SEC on exhaustion of remedies, rather than constitutional, grounds—making the issue ripe for Supreme Court consideration. We have discussed the constitutional challenges to the SEC’s administrative proceedings in prior newsletters, most recently in our October 2015 newsletter under “‘Wherefore Art Thou, Due Process?’ Part III” and in various updates since. Here is the latest from the Tenth and D.C. Circuits.
Tenth Circuit—Bandimere v. SEC: On May 3, 2017, the Tenth Circuit denied rehearing en banc of its divided December 2016 decision in Bandimere in which it had considered the constitutionality of the SEC’s administrative proceedings and found that under Article II of the U.S. Constitution (Appointments Clause), SEC ALJs are “inferior officers” who must be “constitutionally appointed” in the manner prescribed in the Appointments Clause. Because the SEC ALJ who ruled against defendant David Bandimere was not so constitutionally appointed, the Bandimere panel had vacated the liability ruling against him. The two judges who dissented in the denial of rehearing said that they would have granted the SEC’s petition because it presented “numerous questions of constitutional importance” and the Tenth Circuit’s original panel decision and denial of rehearing “will have an overwhelming impact on the fundamental structure of administrative agencies [like the SEC] and the administrative process” that deserved the full Tenth Circuit’s review.
Case in point: In an unusual move resulting from the rehearing denial in Bandimere, on May 22, 2017, the SEC issued the following order placing on hold all SEC ALJ proceedings arising from the Tenth Circuit until the matter is resolved:
“In light of the U.S. Court of Appeals for the Tenth Circuit’s recent decision denying rehearing en banc in Bandimere v. SEC, we find it prudent to stay all administrative proceedings assigned to an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission [under applicable provisions of the federal securities laws]. The stay is effective immediately and shall remain in effect pending the expiration of time in which the government may file a petition for a writ of certiorari in Bandimere, the resolution of any such petition and any decision issued by the Supreme Court in that case, or further order of the Commission. ... We also elect to stay all administrative proceedings pending before the Commission on review from an initial decision by an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission under the aforementioned provisions of the federal securities laws.”
It is anticipated that the SEC will now file a petition for writ of certiorari with the Supreme Court in an attempt to get a clear mandate on the issue.
D.C. Circuit—Lucia v. SEC: On May 24, 2017, an en banc panel of the D.C. Circuit heard oral argument in Lucia as they reconsidered their August 2016 decision in the case in which they had found, under the Appointments Clause, the SEC’s ALJs to be employees who have no final decision-making capability rather than officers (inferior or otherwise), such that the issue of whether the ALJs were constitutionally appointed need not be reached. Thus, the D.C. Circuit had affirmed the SEC ALJ’s liability ruling against defendant Lucia.
Lucia filed a petition for rehearing en banc, which the D.C. Circuit granted on Feb. 17, 2017, and vacated the panel’s August 2016 decision. In its order granting rehearing, the D.C. Circuit limited briefs and argument to the following question presented relevant to this discussion: “Is the SEC administrative law judge who handled this case an inferior officer rather than an employee for the purposes of the Appointments Clause of Article II of the Constitution?” How the en banc panel answers this question could result in the D.C. Circuit overturning its 2000 decision in Landry v. FDIC, which came to the same conclusion (employees over officers) in the context of the Federal Deposit Insurance Corp.’s use of ALJs and on which the court relied in reaching its decision in Lucia (in its order granting rehearing, the en banc panel also invited briefing and argument as to whether Landry should be overturned). Following the May 24, 2017, oral argument, the en banc panel’s decision in Lucia is pending.
We will keep an eye out for developments in both of these cases—as well as any rollbacks by Congress of the administrative proceedings provisions in Dodd-Frank—and report back.