Weiner Brodsky Kider PC

The U.S. Supreme Court ruled that under the U.S. Constitution, administrative law judges (ALJs) of the Securities and Exchange Commission (SEC) must be appointed by the Commission itself—i.e., the body of five commissioners which leads the agency, as opposed to other SEC staff members—such that proceedings held before unconstitutionally appointed ALJs are invalid.

In Lucia v. SEC, the SEC filed an administrative enforcement action against an investment advisor for allegedly misleading investors.  Under the SEC’s rules, the case was initially heard before an SEC ALJ, who made factual findings and prepared an initial decision finding that the investment advisor had violated the law.  The ALJ also imposed a $300,000 fine and a lifetime bar from the investment industry.

The investment advisor sought review of the ALJs decision before the Commission because the ALJ was allegedly not appointed in compliance with the Constitution.  The Constitution provides that “officers” of the United States must be appointed by the President with the advice and consent of the Senate, but that Congress could pass laws which would allow “inferior officers” to be appointed by just the “heads of departments”—in this case, the Commission.  The ALJ at issue had not been appointed by the Commission, and the case therefore turned on whether the ALJ was an “inferior officer” who had to be appointed by the Commission or a regular employee who could be hired through the standard civil service hiring system.

The Commission concluded that the ALJ was an employee and not an inferior officer, such that he did not need to be appointed by the Commission, and the Court of Appeals for the D.C. Circuit affirmed, but the Supreme Court disagreed.

The Supreme Court noted that the ALJs possessed significant power to manage cases and hearings, such as supervising discovery; issuing, revoking, or modifying subpoenas; deciding motions; ruling on the admissibility of evidence; administering oaths; hearing and examining witnesses; generally regulating the course of proceeding and the conduct of the parties and their counsel; and imposing sanctions for contemptuous conduct or violations of procedural requirements.  These powers are akin to those exercised by federal district court judges.  Further, the ALJs receive a career appointment pursuant to statute, such that they are not acting in temporary or episodic capacity.

One main argument against the ALJs being deemed inferior officers was that they issue initial decisions which are subject to review by the Commission, such that the ALJs do not necessarily make final decisions.  However, the Court recognized that the Commission is not required to review the ALJs decision, and if the Commission does not do so, the ALJs initial decision becomes final and is deemed the action of the Commis­sion.  Further, since the ALJs often make initial factual findings based on the evidence and testimony of the witnesses, and are best positioned to resolve conflicts in the evidence, the Commission often affords the ALJ’s factual findings a degree of deference.

The Court further noted that the ALJs were indistinguishable from Special Trial Judges of the U.S. Tax Courts, which the Supreme Court had ruled in an earlier case were inferior officers who had to be appointed.

With respect to a remedy, the Court vacated the Commission’s decision against the investment advisor and remanded the case for a new proceeding.  The Commission asserted that while this case was pending, it had “ratified” the “appointments” for all of its then-current ALJs to their position, which allegedly cured the appointment defect.  The Court took no position as to whether these purported ratifications were proper, but ruled that, if the Commission were to properly appoint its ALJs, an ALJ could hear the remanded case in the first instance.  However, this would need to be an ALJ other than the ALJ who had originally decided the case, since that ALJ could not be expected to consider the matter as though he had not adjudicated it before.

In an interesting historical footnote, the ALJ at issue in Lucia was the same ALJ that presided over the administrative hearing in the CFPB’s PHH enforcement action.

For a copy of the Opinion, click HERE.