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The SEC Changes Course on its Defense of ALJs

For the past few years, the SEC has been battling challenges to the constitutionality of its administrative proceedings. Today, in a drastic shift in position, the SEC issued an order ratifying its prior appointment of its five sitting Administrative Law Judges (“ALJs”) to remedy what the SEC now seemingly concedes was an unconstitutional hiring process. Doing so, the SEC announced, will “put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause.”

New Reviews Ordered

In addition to ratifying the hiring of its ALJs, the SEC’s order requires the ALJs to reconsider all pending cases. They must review each case’s record and allow all respondents to submit additional evidence, even in those cases in which the ALJs have already rendered initial decisions, so long as the matter is still pending before the Commission. Appended to the SEC’s order is a list of over 100 cases that will be reconsidered under this policy.

The Constitutional Question

The Tenth Circuit Court of Appeals’ decision in the case of Bandimere v. SEC created a circuit split on the issue of whether the hiring of the SEC’s ALJs comported with the Appointments Clause of the U.S. Constitution. According to that court, the SEC’s ALJs are “inferior officers,” rather than “employees” because they exercise significant discretion in issuing their initial decisions and are not subject to removal at will. Because SEC ALJs are hired through an administrative process, and not appointment by the President, a court, or the head of the SEC, the court held that their appointments were unconstitutional.

In an earlier case, Raymond J. Lucia Cos. v. SEC, the D.C. Circuit Court of Appeals came to the opposite conclusion, holding that SEC ALJs are not “inferior officers,” but rather “employees,” and therefore not subject to Appointments Clause requirements. That decision turned on the fact that ALJs do not have final decision-making authority.

Petitions for certiorari in both Lucia and Bandimere are currently pending before the Supreme Court.

The SEC Abandons its Prior Position

Although the SEC had argued in both Lucia and Bandimere that its ALJs were not subject to the Appointments Clause, and even sought Supreme Court review of its loss in the Tenth Circuit, it submitted a brief yesterday to the Supreme Court taking the position that its ALJs are “inferior officers” and should have been appointed in conformity with the Appointments Clause. The government abandoned its defense of the ALJs’ hiring scheme, and suggested that the Court should appoint a third party to take the DOJ’s place defending on the SEC’s behalf.

This move, as well as the decision to retroactively appoint the ALJs and reevaluate all pending matters, represents a total reversal of the SEC’s prior position. Not only did the SEC argue in both Bandimere and Lucia that the Appointments Clause was inapplicable, but the ALJs themselves have issued decisions highlighting this position. In an early 2017 decision, ALJ Patil wrote, “SEC precedent holds that the Appointments Clause does not apply to [SEC] administrative law judges.” ALJ Elliot expressed his disagreement in even clearer terms: “The Commission remains of the view that its administrative law judges need not have been appointed in a manner consistent with the Appointments Clause, the Tenth Circuit Court of Appeals’ decision in Bandimere v. SEC, notwithstanding.”

What Comes Next?

As noted, the SEC’s order requires ALJs to review all pending matters. It does not address matters that are no longer pending, however. In light of the SEC’s concession that its proceedings were constitutionally defective, it seems likely that defense counsel in these matters may be exploring possible areas for collateral attack, which could lead to a new round of litigation for the SEC.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume VII, Number 335
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About this Author

Elizabeth Weil Shaw attorney Squire Patton Boggs
Associate

Elizabeth Weil Shaw assists clients primarily with government enforcement actions and inquiries, as well as internal investigations and compliance reviews. Liz has analyzed matters involving investigations by the US Securities and Exchange Commission, Department of Justice and State Attorneys General. She is a contributor to the firm's Anticorruption Blog.

303-830-6129
Coates Lear Government Investigations Attorney Squire Patton Boggs Denver, CO & Washington DC
Partner

Coates Lear specializes in assisting companies, boards of directors, board committees and individuals in internal investigations, government inquiries and enforcement proceedings. Drawing on his extensive government experience, Coates has particular expertise in matters involving the US Securities and Exchange Commission (SEC). He also helps clients evaluate and improve their compliance programs, and represents clients in complex litigation.

Before joining the firm, Coates was senior counsel in the SEC’s Division of Enforcement, where he worked from 2007 to 2015. While at the SEC,...

303-894-6141
Thomas E. Zeno, Squire Patton Boggs, Healthcare Fraud Lawyer, Economic Crimes Attorney
Of Counsel

Thomas Zeno has more than 25 years of experience in the US Attorney’s Office for the District of Columbia. During that time, Tom investigated and prosecuted economic crimes involving healthcare, financial institutions, credit cards, computers, identity theft and copyrighted materials. As the office’s Healthcare Fraud Coordinator for the last eight years, Tom supervised investigation strategies of agents from the Federal Bureau of Investigation, the Department of Health and Human Services, the Drug Enforcement Administration and the Medicaid Fraud Control Unit regarding...

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