In a highly anticipated decision, the United States Supreme Court ruled the practice employed for years by the Securities and Exchange Commission of choosing administrative law judges to hear SEC enforcement actions, violates the Appointments Clause of the Constitution. The Supreme Court, in Lucia v. Securities and Exchange Commission, held that administrative law judges (ALJs) are “officers of the United States” subject to the Appointments Clause.

The SEC has long been criticized for the process of choosing ALJs to hear enforcement matters. Going forward, ALJs will need to be appointed by the president or the head of the SEC. Holding for the requirement of an appointment, the court did not agree that ALJs are regular federal employees hired through the civil service process.

The case was brought by former investment advisor Raymond J. Lucia who appealed sanctions handed down by an ALJ that included a bar from the industry, as well as a $300,000 fine. Lucia argued that his constitutional rights were violated because the ALJ was not constitutionally authorized to have such broad power. Lucia asserted that ALJs should be subject to the Appointments Clause because they carry out judicial proceedings, including evidentiary rulings and rendering decisions. Lucia (as well as others), noted that the SEC rarely overturns or gives more than a passing review to ALJ decisions.

This decision should help level the playing field, at least within the SEC, for internally handled enforcement matters.