Last week, a federal court in the Northern District of Georgia rendered a significant decision that potentially deals a strong blow against the Securities and Exchange Commission (the “SEC”). In the case of Hill v. SEC, No. 15-CV-1801-LMM (June 8, 2015), U.S. District Judge Leigh Martin May declared that the SEC administrative proceeding in that case was “likely unconstitutional” and issued a temporary injunction to halt the action against Charles Hill, a real estate broker in Atlanta--unregistered with the SEC--who was accused of deriving profits of $744,000 as a result of insider trading.

The court’s constitutional analysis focused on the Appointment Clause contained in Article II of the Constitution and whether the SEC’s hiring of Administrative Law Judge (“ALJ”) James Grimes comported with this constitutional provision. In order to reach the Appointment Clause issue, Judge May first found that ALJs qualify as “Inferior Officers” under Article II because they exercise “significant authority pursuant to the laws of the United States” and the “duties, salary, and means of appointment for that office are specified by statute.” See Freytag v. Comm’r of Internal Revenue, 501 U.S. 868, 881-882 (1991). Because of this, the ALJs are subject to the Appointment Clause of Article II, which requires that the power to appoint all “inferior officers” rest in “the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl. 2. In this instance, ALJ Grimes was hired by the SEC’s Office of Administrative Law Judges and not by a commissioner of the SEC.1 Judge May therefore found that SEC’s administrative hearing process was “likely unconstitutional,” enough to justify an injunction of the SEC action against Mr. Hill.

Notably, the court struck down two key arguments in the SEC constitutionality debate. First, Judge May rejected the argument that Congress has unconstitutionally delegated power to the executive branch by providing the SEC with unfettered discretion when deciding to bring a case in federal court or in an administrative proceeding. The court analogized this discretion to that which federal prosecutors have when determining which charges to bring against an individual. See United States v. Batchelder, 442 U.S. 114, 126 (1979). Second, Judge May held that neither the Seventh Amendment nor Supreme Court jurisprudence prevent Congress from creating new causes of action or providing for enforcement in an alternative forum without a jury trial. Long-standing Supreme Court jurisprudence provides that Congress may “assign the adjudication” of cases involving “public rights”—those which “arise between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments”—to certain administrative agencies without violating the Seventh Amendment. See Atlas Roofing Co. v. Occupational Safety & Health Review Comm’n, 430 U.S. 442, 455 (1977).

Judge May’s decision granting a temporary injunction against the SEC comes at a time when the SEC has increased its use of administrative proceedings in enforcement actions following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (the “Dodd-Frank Act”). See Pub. L. No. 111-203, 124 Stat. 1376 (2010). Congress passed the Dodd-Frank Act in response to the 2008 global financial crisis and the legislation provided for a number of measures that were intended to prevent future economic downturns. One of the measures included in the Dodd-Frank Act was the expansion of the SEC’s authority to seek civil monetary penalties from any person--including those both registered andunregistered with the SEC--through the use of an internal administrative hearing. Prior to the passage of the Dodd-Frank Act, the SEC only had the authority to commence an administrative proceeding against registered persons with the SEC.See, e.g.Gupta v. S.E.C., 796 F. Supp. 2d 503, 507 (S.D.N.Y. 2011). To seek civil penalties against unregistered persons--like Mr. Hill-- before the enactment of the Dodd-Frank Act, the SEC was required to take action in federal court.

The white collar defense bar has been critical of the SEC’s increasing use of administrative proceedings in enforcement actions following the Dodd-Frank Act for a number of reasons. For example, in an administrative proceeding, the SEC is not required to comply with the Federal Rules of Evidence or the Federal Rules of Civil Procedure. Moreover, an individual brought before an SEC administrative hearing has no right to a jury trial. Furthermore, as discussed herein, ALJs who oversee these hearings are hired by the SEC Office of Administrative Law Judges and not appointed by the President, the commissioners of the SEC, or the judiciary. As a consequence, the white collar defense bar has recently filed a number of cases raising these arguments and others, challenging the SEC’s use of administrative proceedings rather than pursuing their claims in federal court. See, e.g.Duka v. SEC, No. 15-CV-357, 2015 WL 1943245 (April 15, 2015); Chau v. S.E.C., No. 14-CV-1903 (LAK), 2014 WL 6984236 (Dec. 11, 2014).

While Judge May’s decision last week concerned only a temporary injunction and the full merits of the case are still to be determined, more of these cases are being filed in federal courts. On June 11, 2015, just three days after Judge May’s decision, a group of plaintiffs filed suit against the SEC in the Southern District of New York.See Spring Hill Capital Partners, LLC v. SEC, No. 15-CV-4542. In this case, the plaintiffs assert the same Article II argument to invalidate the SEC’s administrative hearing procedure and similarly request an injunction to halt the SEC’s action against them. We will continue to follow these cases and others, as challenges to the constitutionality of these SEC administrative proceedings are likely to increase.