A developing constitutional debate over the appointment of the U.S. Securities and Exchange Commission's administrative law judges (ALJs) could spell trouble for the commission and threatens to undo scores of prior SEC adjudications.
On Feb. 16, 2017, the United States Court of Appeals for the D.C. Circuit granted a petition for an en banc rehearing of its recent decision in Raymond J. Lucia Cos. Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016). In Lucia, a three-member panel of the court concluded that the administrative law judges of the SEC were employees of the SEC, and not “inferior officers of the United States,” thus, relieving the SEC’s ALJs from the mandate of the appointments clause of the U.S. Constitution.
The decision in Lucia, however, stands in stark contrast to a recent ruling in the U.S. Court of Appeals for the Tenth Circuit. In David Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), the Tenth Circuit held that the ALJs were in fact “inferior officers of the United States” and, as such, were subject to the appointments clause. In other words, rather than simply receiving their appointments from the commissioner, the SEC’s ALJs were subject to executive appointment and Senate confirmation. Both decisions relied heavily on a recent U.S. Supreme Court case concerning the appointment of special tax judges of the United States Tax Court and, yet, the two courts arrived at different conclusions. Although the en banc rehearing could alter the D.C. Circuit’s position on the matter, a circuit split has emerged, thereby setting the stage for a potential landmark case before the Supreme Court.
The appointments clause of the U.S. Constitution requires that officers of the United States be appointed by the president with the advice and consent of the Senate. Those appointees deemed to be employees or “lesser functionaries” of the government are not subject to this requirement. Of course, what distinguishes an “employee” from an “inferior officer” has been the subject of several Supreme Court cases. More recently, in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the Supreme Court concluded that special tax judges of the U.S. Tax Court are inferior officers based on factors, such as whether a given position was established by law and whether the appointee exercised significant discretion in exercising important functions. In the wake of Freytag, the present circuit split centers around whether possessing “final decision-making authority” is a dispositive factor in the “employee” versus “inferior officer” analysis.
The Supreme Court has addressed final decision-making authority but only in the context of the distinctions between a principal and an inferior officer, not between an inferior officer and an employee. Even in that instance, the Supreme Court has not made final decision-making authority the linchpin of what constitutes the exercise of significant discretion. While the majority in Bandimere acknowledged that the finality of an SEC ALJ’s disposition was relevant, the court refused to make final decision-making authority the dispositive factor, or in the words of Judge Mary Beck Briscoe, “the sine qua non” of inferior officer status.
The SEC has five administrative law judges who receive career appointments and may only be removed for good cause. Besides rule-making authority, which the commission is not permitted to delegate, the SEC’s ALJs have substantial authority and are tasked with conducting administrative hearings and all that flows from presiding over these hearings, from deciding motions and the admissibility of evidence to issuing initial decisions and imposing sanctions. Technically speaking, orders of an SEC ALJ are not “final” until the commission itself has determined that no further review is necessary and, even then, only when the commission has issued a finality order.
The D.C. Circuit, relying on Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), in which it found ALJs of the Federal Deposit Insurance Corp. to be employees, concluded that the ALJs were not inferior officers of the United States primarily because they lacked final decision-making authority. The Tenth Circuit, however, disagreed, determining that the D.C. Circuit misapplied the holding in Freytag by placing undue weight on final decision-making authority, which the court believed was, at best, one factor in the overall analysis.
The Landry decision makes things more interesting, even though it is 17 years old. Judge A. Raymond Randolph, who stills sits on the D.C. Circuit Court of Appeals, authored an opinion in which he concurred in the court’s judgment but disagreed with the majority’s analysis of the appellant’s appointments clause argument. Like the Bandimere court, Judge Randolph believed the majority was misinterpreting the Supreme Court’s opinion in Freytag by placing too much weight on the final-decision making authority of the FDIC’s ALJs. Judge Randolph also took issue with the majority’s argument that because decisions of the FDIC’s ALJs were reviewed de novo by the commissioner, the ALJs were employees of the FDIC rather than inferior officers of the United States. Interestingly enough, this point was also raised by the SEC in the Lucia opinion, given that decisions of an SEC ALJ are also reviewed de novo by the commission. Yet, Judge Randolph deemed it “odd” for the constitutional status of an appointee to depend on an “internal rule of procedure.” In light of the Lucia court’s reliance on Landry and the similar arguments raised, it is likely the concerns first raised in Judge Randolph’s opinion will be on the minds of the other judges of the D.C. Circuit at the upcoming en banc hearing of Lucia.
Ultimately, one can only speculate as to how the D.C. Circuit will rule upon its en banc rehearing of Lucia. It appears there is discord even within the D.C. Circuit, given Judge Randolph’s opinion in Landry. Indeed, in the order granting the en banc hearing, the court explicitly instructed the parties to brief the issue of whether the court should overrule Landry. In any event, the stakes are quite high should the question ultimately reach the Supreme Court, given that an adverse ruling from the nation’s highest court against the SEC has the potential to unravel years of SEC administrative dispositions and alter the manner in which the SEC appoints its administrative law judges going forward.
Reprinted with permission of Law360.