On February 18, 2025, President Trump issued executive order 14215, titled “Ensuring Accountability for All Agencies,” with the stated purpose of making federal agencies, including independent regulatory ones like the Securities and Exchange Commission (SEC), “truly accountable to the American people” by exercising “Presidential supervision and control of the entire executive branch.” Of note, the EO states that “authoritative interpretations of law for the executive branch” shall be made only by the “President and the Attorney General.” To limit agency discretion and authority, the EO further states that no agency employee may advance a legal interpretation that “contravenes the President or the Attorney General’s opinion on a matter of law,” including “positions advanced in litigation.”
At the same time President Trump issued the EO, a case styled Lemelson v. SEC was pending in federal district court. Lemelson’s action sought declaratory and injunctive relief to prevent the SEC from continuing an alleged “unconstitutional” SEC follow-on administrative enforcement proceeding, which sought to bar Lemelson, an unregistered hedge fund adviser, from the securities industry. A follow-on enforcement proceeding takes place in the SEC’s in-house courts before an SEC administrative law judge (ALJ) and is typically predicated on an injunction obtained by the SEC in a separate federal district court action against the same defendant. The purpose of an SEC follow-on proceeding is to impose a bar or suspension — if it is in the public interest — against securities industry participants.
In his complaint, Lemelson alleged that the SEC in-house courts are unconstitutional because, among other things, ALJs are not independent Article III judges, and a jury trial is unavailable in a proceeding before an ALJ. Lemelson later amended his complaint to add a claim that the follow-on proceeding was unconstitutional because ALJs are not controlled or removable by the president in violation of Article II. This type of constitutional challenge to the legitimacy of ALJs was previously opposed in court by both the first Trump administration and the Biden administration. Indeed, the DOJ vigorously argued in an opposition brief in Lemelson (filed near the end of the Biden administration) that SEC ALJ tenure protections (which restrict the direct removal of ALJs by the president) are constitutional.
Against this backdrop, on February 18, 2025, the DOJ filed a notice of change in position in the Lemelson case, stating that “the Acting Solicitor General has decided that the multiple layers of removal restrictions for administrative law judges in 5 U.S.C. § 7521 do not comport with the separation of powers and Article II and that the United States will no longer defend them in litigation.” This dramatic departure from the DOJ’s prior defense of the constitutional legitimacy of SEC ALJs appears to reflect the president’s and attorney general’s view of how independent regulatory agencies align (or not) with principles of separation of powers.
Key Takeaways
- The DOJ’s withdrawal of support for the existing ALJ appointment process raises serious questions concerning the continued viability of SEC in-house courts. Without a proffered defense on the constitutional issue in the Lemelson case, it’s conceivable the court will rule that tenure protections for ALJs are unconstitutional, thereby disqualifying the SEC in-house courts as a forum.
- Another possibility is that the Trump administration will create a new structure in which SEC ALJs are appointed with no tenure protection and are directly accountable to the president. Under this scenario, SEC in-house courts could sidestep at least one persistent constitutional challenge and have a better chance of survival. However, it’s too early to know whether the administration will embark on such a fix or precisely how it would be achieved.
- Alternatively, the Trump administration could choose to abandon the SEC’s administrative courts and simply allow them to be decommissioned. This outcome would result in SEC enforcement cases being filed exclusively in federal court.
- In recent years, the SEC has shifted away from administrative proceedings in favor of federal court actions. Consequently, the SEC’s enforcement program is well-positioned to file nearly all cases in federal court, except disciplinary actions brought under Rule 102(e) of the SEC Rules of Practice. Rule 102(e) proceedings seek to censure or bar accountants, attorneys, and other professionals from appearing or practicing before the SEC due to improper professional conduct. This type of disciplinary proceeding, however, cannot be filed in federal court, putting the SEC in a difficult position given the headwinds facing its in-house courts. In the wake of the Supreme Court’s Jarkesy decision, which found a constitutional right to a jury trial in certain circumstances, the SEC recently dismissed three pending Rule 102(e) actions that sought only remedial relief. This decision raises the question whether the SEC is reassessing the suitability of its in-house courts as a forum for Rule 102(e) proceedings.
- Finally, although it’s too soon to predict the ultimate fate of the SEC’s in-house courts, it’s likely that in the near term the SEC will stop filing contested actions in this forum until there is more clarity. The loss of administrative courts as a forum could result in some less serious cases not being pursued by the SEC.
