Alerts

SEC Stays All Administrative Proceedings After Supreme Court Decision on Appointment of SEC Administrative Law Judges

Alerts / June 27, 2018

On June 21, 2018, the U.S. Securities and Exchange Commission (the SEC or the Commission) issued an order staying for at least 30 days all administrative proceedings before an administrative law judge (ALJ).[1] The Commission’s order was a direct response to the Supreme Court’s decision earlier that day in Lucia v. SEC, a case that resolved a split between the D.C. and 10th circuits, with the Court finding that SEC ALJs are “Officers of the United States” subject to the Appointments Clause of the Constitution.

Writing for the majority, Justice Kagan found that the Appointments Clause requires ALJs be appointed exclusively by the President, a court of law or a department head.[2] The majority reasoned that the Court was bound by a similar case regarding United States Tax Court special trial judges (STJs). Freytag v. Commissioner, 501 U.S. 868 (1991). There, the Court held that STJs were officers because they held continuous, not temporary, appointments and exercised “significant authority” in carrying out their jobs. The Freytag Court concluded that STJs presiding over adversarial hearings had significant discretion to carry out important functions, including the ability to “take testimony, conduct trials, and have the power to enforce compliance with discovery orders.”

Because the ALJ in Lucia was selected as a civil service employee rather than as an SEC appointee (as is generally the case), but had these extensive powers, the appointment was unconstitutional, and the former investment adviser appellant was entitled to a new hearing before the Commission itself or a presidentially-appointed ALJ.

Justice Thomas’ concurring opinion relied on original meaning, finding the Founders believed all federal civil officers with ongoing statutory duty, like ALJs, who issue “initial decisions in adversarial proceedings,” are officers subject to the Appointments Clause.[3]

Justice Breyer’s concurrence in part and dissent in part stated that the Court should have relied on statutory, not constitutional grounds; the Administrative Procedure Act did not permit the SEC “to delegate its power to appoint its administrative law judges to its staff.”[4] Justice Breyer dissented as to the majority’s directing that a different ALJ or the commission itself must hold Lucia’s rehearing, drawing a parallel to reversed and remanded district court cases, where “typically the judge who rehears the case is the same judge who heard it the first time.”[5]

Justice Sotomayor’s dissent centered on lacking jurisprudential guidance regarding what constitutes “significant authority.”[6] While ALJs “wield extensive powers,” the SEC can review de novo their decisions either on petition or sua sponte; it is not confined by the initial record; ALJ’s decisions are not final until the commission enters a finality order; and every action an ALJ takes is, by operation of law, “deemed the action of the Commission.”[7] Therefore, the “ALJs do not exercise significant authority because they do not, and cannot, enter final, binding decisions against the Government or third parties.”[8] She wrote, moreover, that the Freytag language upon which the majority found itself bound was dicta.[9]

While it is clear that Lucia opens the door to challenges of approximately 150 in-house judges across 25 other federal agencies who are empowered to “decide adversarial proceedings” in much the same way as the commission’s ALJs are, what is less clear is exactly how the SEC will address challenges to prior rulings handed down by their ALJs after the 30-day stay expires.

Authorship Credit: Catherine E. Woltering and Jonathan D. Blattmachr.


[1] In re Pending Administrative Proceedings, Order, Sec. Act. Rel. No. 10510 (June 21, 2018).
[2] Justice Kagan was joined by Chief Justice Roberts and Justices Kennedy, Alito, Thomas and Gorsuch. Justice Sotomayor dissented (joined by Justice Ginsburg), and Justice Breyer (joined by Justices Ginsburg and Sotomayor) concurred in part and dissented in part. See Lucia v. SEC, No. 17-130, Slip Op., 588 U.S. ___ (June 21, 2018) (Kagan, J.) (available at https://www.supremecourt.gov/opinions/17pdf/17-130_4f14.pdf).
[3] Thomas, J., concurring, at 1.
[4] Breyer, J., concurring in part and dissenting in part, at 1.
[5] Id. at 13.
[6] Sotomayor, J., dissenting, at 1-2.
[7] Id. at 3-4, (citation omitted) (emphasis in original).
[8] Id. at 4.
[9] Id. at 5.

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