SCOTUS Rules SEC’s Current Administrative Law Judge Appointment Process Unconstitutional

By Sijuwade Falade, Summer Associate Legal Perspectives July 03, 2018

The U.S. Supreme Court recently held that the SEC’s administrative law judges (ALJs) are considered “Officers” of the United States, and as such, are subject to the U.S. Constitution’s Appointments Clause.  The Appointments Clause says that “Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

Background

This ruling comes out of Lucia v. SEC.  In 2012, Raymond Lucia and his investment company were found to be in violation of several federal securities laws and regulations. Lucia was prosecuted in an administrative enforcement action, in which an ALJ who was employed by the SEC permanently barred him from working as an investment advisor, fined him hundreds of thousands of dollars in civil penalties, and withdrew his investment company’s registration.  Lucia appealed to the D.C. Circuit Court of Appeals, arguing that the administrative proceeding was unconstitutional because the ALJ—who had been appointed by SEC staff members—had not been properly appointed.  Lucia maintained that ALJs are “Officers” of the United States and, as such, must be appointed directly by SEC Commissioners pursuant to the Appointments Clause, rather than by SEC staff members, who had been appointing them at the time.  The D.C. Circuit Court of Appeals disagreed with Lucia.

Lucia then appealed to the Supreme Court, which sided with Lucia and determined that ALJs are indeed “Officers” and thus must be appointed by the President, the “Courts of Law,” or the “Heads of Departments.” Given that SEC Commissioners are considered “Heads of Departments” whereas SEC staffers are not, the Court ruled that SEC staffers are not covered by the Appointments Clause and do not have the authority to appoint ALJs.

So, What Happens Next?

Although the practical impact of the Supreme Court’s ruling on the SEC and other federal agencies has yet to be determined, including whether the ruling will apply retroactively, what is clear is that any SEC case currently on appeal could be substantially affected.  And, ALJs within other federal agencies (e.g., the Social Security Administration, U.S. Department of Labor, and Federal Energy Regulatory Commission) could now similarly be subject to the Appointments Clause, depending on the amount of power they have been authorized to exercise over their respective enforcement proceedings. The Lucia ruling may also raise other tangential constitutional issues concerning administrative adjudication, such as whether ALJs that were appointed by federal agency staffers have infringed on equal protection, impartiality, and the right to fair trial.  

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