The U.S. Supreme Court yesterday rejected the Securities and Exchange Commission’s longtime method of appointing administrative law judges (ALJs) to hear actions brought by its enforcement division.  In Lucia v. Securities and Exchange Commission, the Court held that ALJs were “Officers of the United States,” and therefore under the Constitution, could not be lawfully appointed by SEC staff members, as ALJs are, rather than by the SEC commissioners.

At issue was a practice of great interest both to lawyers defending SEC enforcement actions, as well as political leaders and scholars of U.S. administrative law.  Because the decision interpreted the  Appointments Clause of Article 2 of the Constitution, it will likely be cited in litigation over appointment of other administrative agency officials, and used in an attempt to limit agency powers. While it will immediately result in a new hearing for the parties in the case, the ultimate implications of Lucia may not become known for years.

Under the Appointments Clause, “principal officers” may be appointed only by the President, while Congress may authorize “inferior officers” to be appointed by the President alone, a court, or a department head (here it was acknowledged by all parties that the SEC, unlike its staff, is a department head).

The case involved what has become a typical SEC action, a civil enforcement suit against an investment company and its principal, Raymond Lucia, for violating the Investment Advisers Act through misleading sales presentations.  The ALJ hearing the case found for the SEC, and imposed civil penalties of $300,000 and a lifetime bar from the investment industry.  In enforcing the securities laws, the SEC often has a choice of whether to bring an action in U.S. District Court or before its own ALJs.

The Supreme Court held that because the action was decided by an unconstitutionally appointed ALJ, Lucia and his company were entitled to a new hearing before a different ALJ. 

Justice Elena Kagan wrote the majority opinion, from which Justices Sonia Sotomayor and Ruth Ginsburg dissented, and from which Justice Stephen Breyer dissented in part.  The opinion was decided on relatively narrow grounds, holding that the result was controlled by a 1991 decision in which the Court held that “special trial judges” of the U.S. Tax Court were officers under the Constitution.  Like the Tax Court officials, the Court stated, SEC ALJs exercise “significant discretion” in performing “important functions,” which meant they were officers, not simply employees.

While the appeal in the case was pending, the SEC issued an order ratifying the prior appointments of its ALJs.  The appellants contended that order was invalid.  The Court declined to address the issue, since it is possible that the “SEC may decide to conduct the hearing itself,” or “may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.” 

In another development during the pendency of the case, following the election of President Trump, the government changed its position and argued that the appointments were unconstitutional, the position that ultimately prevailed. The government also asked the Court to address the constitutionality of the currently applicable civil service restrictions on removing ALJs.  Because that issue has not been addressed in the lower courts, the Supreme Court declined to address it in its decision. In the future, however, opponents of administrative agency powers can be expected to seek to invalidate those removal restrictions, and thus enhance elected officials’ control over ALJs.

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