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SEC Administrative Law Judges Face Free Enterprise Challenge

Several years ago, I testified as an expert witness in an administrative proceeding brought by the Securities and Exchange Commission.  The hearing was held in what looked like a courtroom before what appeared to be a judge and with lawyers for the SEC and the respondent.  However, the presiding officer was not an Article III judge and his decision was technically only an “initial decision”.  There were other differences between that proceeding and a trial in an Article III court:

  • There was no right to a jury;

  • The Federal Rules of Evidence didn’t apply;

  • Discovery was limited; and

  • The respondent was not permitted to assert counterclaims.

These differences might cause some to question whether SEC administrative proceedings afford due process.  One target of the SEC, however, is taking a different tack – challenging the status of ALJs under Article II of the U.S. Constitution.  Stillwell v. SEC, U.S. Dist. Ct. S.D. N.Y. Case No. 14 CV 7931.  Because SEC Commissioners and ALJs can be removed only for “good cause”, ALJs are insulated from removal by the President by at least two levels of protection.  This is a real constitutional problem.  In Free Enterprise Fund v. Public Company Accounting Oversight Board, 130 S.Ct. 3138 (2010), the Supreme Court held:

Here the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President’s determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President’s “constitutional obligation to ensure the faithful execution of the laws.”

Presently, the SEC has considerable latitude in choosing whether to pursue enforcement in an administrative setting or in a true Article III court.  If Mr. Stillwell and his fund are successful, that latitude may be eliminated.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...