On June 26, the D.C. Circuit, en banc, split 5-to-5 on whether to grant a petition seeking to overturn an August 2016 ruling by a three-judge panel that determined that Securities and Exchange Commission (SEC) administrative law judges (ALJ’s) are SEC employees, as opposed to appointees subject to the Constitution’s Appointments Clause. Although a victory for the SEC in the short term, the D.C. Circuit’s decision creates a split on the issue between U.S. circuit courts, likely setting the stage for the Supreme Court to adjudicate the issue.
Beginning with Gupta v. SEC in 2011, parties litigating in the SEC’s administrative forums have increasingly voiced due process and equal protection concerns regarding the SEC’s administrative proceedings. The stakes increased after Dodd-Frank, which enabled the SEC to seek monetary penalties in administrative proceedings against persons not already registered with the SEC. More recent challenges have focused on whether ALJs should be categorized as “inferior officers,” as opposed to merely SEC employees, since they possess the authority to impose significant financial penalties or industry bans.
In August 2016, the original three-judge panel of the D.C. Circuit in Lucia v. SEC ruled that ALJs were not subject to the Appointments Clause, relying principally on the fact that decisions issued by ALJs in administrative proceedings are not final and are not binding until the SEC affirmatively issues an order adopting the ALJ’s decision. ALJs are not “inferior” officers under the Appointments Clause the court reasoned, because they have not “been delegated sovereign authority to act independently of the Commission” nor “do they have the power to bind third parties” and because “the Commission’s right of discretionary review and adoption of its regulatory scheme ... ensure[s] that the politically accountable Commissioners have determined that an ALJ’s initial decision is to be the final action of the Commission.” As a result of the court’s 5-5 split en banc decision, that ruling effectively remains intact.
The D.C. Circuit’s position runs contrary to the December 2016 holding by the 10th Circuit Court of Appeals in Bandimere v. SEC, which found that ALJs are “inferior officers” as defined in the Appointments Clause, rendering the manner by which they are installed unconstitutional and the results of SEC administrative proceedings invalid. The 10th Circuit reasoned that ALJs “exercise significant discretion in performing ‘important functions’” and have key responsibilities, including to “shape the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, ruling on dispositive procedural motions, issuing subpoenas, and presiding over trial-like hearings.”
Given the circuit split, and the growing number of challenges to the SEC administrative enforcement regime, it appears more likely that the Supreme Court will step in to settle the matter.
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