On Oct. 30, 2020, the Fifth Circuit agreed to rehear en banc a case challenging the constitutionality of Securities and Exchange Commission (SEC) administrative proceedings on the ground that the agency “is violating separation-of-powers principles” because the agency’s administrative law judges are “insulated from control by the President by multiple layers of for-cause removal restrictions.” The case, Cochran v. SEC et al., brought by Michelle Cochran, an accountant, in response to charges by the SEC that she and her former firm violated Public Company Accounting Oversight Board standards by improperly conducting numerous annual audits and quarterly reviews, alleges that the removal restrictions render the SEC administrative proceeding against her unconstitutional.
Ms. Cochran’s challenge follows the 2018 Supreme Court decision in Lucia v. SEC, in which the Court held that the manner in which the SEC had appointed its administrative law judges (ALJs) was unconstitutional. Reasoning that ALJs exercise significant discretion in the course of deciding adversarial proceedings, under Supreme Court precedent, they are “inferior officers” whose appointment must be made by the president, “Courts of Law” or “Heads of Departments” to comport with the Constitution’s appointments clause, rather than through civil service hiring channels. Notably, although the government urged the Court to also address the constitutionality of the statutory removal protections at that time, the Supreme Court in Lucia declined because no lower court had yet addressed the issue.
The Fifth Circuit’s rehearing grant vacates an August 2020 decision by a panel dismissing Cochran’s suit against the SEC on jurisdictional grounds. Cochran again had argued that protections in place to prevent the removal of the SEC’s administrative law judges are unconstitutional and that a federal court should decide that question in advance of a resolution of her administrative hearing. But in a 2-1 split, the panel sided with the SEC and held that under Fifth Circuit precedent, Cochran first must present those constitutional removal arguments to the ALJ and then to the SEC in the course of her administrative proceeding and only after a final decision and order there, assuming it was unfavorable, could she raise the issue on appeal to a court of appeals.
The Fifth Circuit majority held that the text and structure of the statutory scheme for judicial review of SEC administrative decisions set forth in 15 U.S.C. § 78y evidences Congress’ intent to limit federal courts’ subject matter jurisdiction of Cochran’s claims. The agency process therefore is the exclusive path for initial adjudication of Cochran’s constitutional challenge and in the absence of a final agency decision, that process may not be circumvented to present a challenge directly to a federal district court. The majority noted that five other courts of appeal that have been presented with similar challenges to SEC proceedings, in the context of various constitutional challenges to the agency’s ALJs, have reached the same conclusion. But as Cochran notes in her en banc petition, certain district courts have held that federal subject matter jurisdiction exists over challenges to SEC proceedings, including Gupta v. SEC and Duka v. SEC.
The panel majority looked principally to the Supreme Court decision in Thunder Basin Coal Co. v. Reich. The majority concluded that none of the factors set out in Thunder Basin warranted excepting Cochran’s claim from the agency process. In particular, the panel held that (1) the administrative proceeding would not foreclose meaningful judicial review of Cochran’s constitutional claims because she could obtain judicial review following the agency’s ruling; (2) Cochran’s constitutional claims are not “wholly collateral” to the statute’s administrative review scheme because her constitutional challenge to the administrative proceeding itself is “inextricably intertwined with the conduct of the very enforcement proceeding the statute grants the [SEC] the power to institute and resolve as an initial matter”; and (3) even though the SEC does not possess particular expertise in constitutional questions like Cochran’s removal challenge, the agency’s expertise over Cochran’s case in general could enable the agency to decide Cochran’s case on other grounds, obviating the need to rule on the constitutional question. These findings, the majority noted, were compelled under recent Fifth Circuit precedent rejecting a similar separation of powers challenge to the Federal Deposit Insurance Corp.’s statutory review process, in which it found such claims implicitly precluded from federal jurisdiction absent a final administrative decision. Judge Catharina Hayes dissented. She explained that requiring Cochran to await a final decision in the administrative proceeding could deprive her of the chance to have a federal court rule on her constitutional challenge, because should she prevail, her constitutional removal challenge would be rendered moot.
In arguing for rehearing en banc, Cochran maintained that under existing Supreme Court precedent, “district courts have jurisdiction to hear separation-of-powers challenges to the SEC’s administrative proceedings,” and that “early resolution” of the constitutional question in federal court is critical “to avoid subjecting Americans to unconstitutional proceedings — and to prevent their having to endure multiple, voidable administrative adjudications.”  She further asserts that denying federal court review until after SEC proceedings are concluded means “the vast majority of SEC targets feel compelled to settle long before a final order is issued” in light of the cost of defending enforcement proceedings in which the agency enjoys a high success rate.
The Fifth Circuit’s decision followed the similar dismissal of Cochran’s suit by a Texas district court in March 2019 for lack of subject matter jurisdiction, the district court finding that because the SEC administrative proceeding against her remained pending, federal courts lacked jurisdiction to address the removal question. Notably, the district court commented that absent the jurisdictional bar, it “would give serious consideration to grant of plaintiff’s request for a preliminary injunction” of the administrative proceeding on the ground that the agency’s ALJs are unconstitutionally appointed.
En banc oral argument currently is scheduled for mid-January 2021. Should Cochran prevail, it could position her case for eventual review on the merits of the constitutionality of ALJ removal protections that the Supreme Court declined to address in Lucia.
 Petition for Rehearing en banc, Michelle Cochran v. Securities and Exchange Commission, et al., No: 19-10396 (5th Cir., Sept. 24, 2020), at ii.
 Lucia v. SEC, 138 S. Ct. 2044 (2018).
 Id. at 2051, n.1.
 Cochran v. Sec. & Exch. Comm’n, 969 F.3d 507, 510 (5th Cir. 2020), as revised (Aug. 12, 2020), reh’g en banc granted, opinion vacated, No. 19-10396, 2020 WL 6495394 (5th Cir. Oct. 30, 2020).
 Id. (citing Bennett v. SEC, 844 F.3d 174 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015)).
 796 F. Supp. 2d 503 (S.D.N.Y. 2011) (denying a motion to dismiss an equal protection challenge to an SEC administrative proceeding). Plaintiff Rajat Gupta was represented in this action by Kramer Levin Naftalis & Frankel, LLP.
 103 F. Supp. 3d 382 (S.D.N.Y. 2015) (holding that district court had subject matter jurisdiction over claims that removal protections for SEC ALJs are unconstitutional, but declining to enjoin SEC proceedings on the ground that plaintiff was unlikely to succeed on the merits of the constitutional claim), abrogated by Tilton v. Sec. & Exch. Comm’n, 824 F.3d 276 (2d Cir. 2016).
 510 U.S. 200 (1994).
 Cochran, 969 F.3d at 515.
 Id. at 512 (citing Bank of La. v. FDIC, 919 F.3d 916 (5th Cir. 2019)).
 Id. at 519.
 Petition for Rehearing at iii (citing Free Enterprise Fund v. Pub. Co. Accounting Oversight Board, 561 U.S. 477 (2010)).
 Id. at 2.
 Id. at 3.
 Cochran v. U.S. Sec. & Exch. Comm’n, No. 4:19-CV-066-A, 2019 WL 1359252, at *1 (N.D. Tex. Mar. 25, 2019), aff’d sub nom. Cochran v. Sec. & Exch. Comm’n, 969 F.3d 507 (5th Cir. 2020), as revised (Aug. 12, 2020).
 Id. at *3.