Overview and Impact of the Supreme Court Ruling in Lucia v. SEC

Overview and Impact of the Supreme Court Ruling in Lucia v. SEC

June 25, 2018

Background

The Supreme Court held on June 21, 2018 in Lucia v. SEC that Securities and Exchange Commission (SEC or Commission) Administrative Law Judges (ALJs) are “inferior officers” subject to the Appointments Clause of Article II of the U.S. Constitution rather than regular federal employees.  Such inferior officers must be appointed to their positions by the President, a court of law, or a head of department.  At issue in Lucia was that SEC ALJs had been appointed by SEC staff members, not the Commission.

The decision resolves a circuit split between the D.C. Circuit and the Tenth Circuit.  The D.C. Circuit, in Lucia, held that SEC ALJs are employees – rather than officers – of the SEC, finding the lack of finality of ALJ decisions (ALJ decisions require a Commission order to be final) a compelling factor under the precedent it determined to be relevant.1   The Tenth Circuit, in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), held that the SEC ALJ in that matter was an inferior officer as contemplated by the Appointments Clause and not properly appointed by the SEC.  Bandimere, like the Supreme Court decision in Lucia, found Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991) determinative.

Ruling

The SEC charged Raymond Lucia with certain securities law violations through an order instituting proceedings in its administrative forum, and assigned an ALJ, Cameron Elliot, to adjudicate the matter.  ALJ Elliot issued an initial decision following a hearing finding that Lucia had violated certain securities laws, and imposed sanctions.  Lucia appealed the decision to the full Commission, making the argument that because ALJ Elliot was an inferior officer as contemplated by the Appointments Clause, he had not been properly appointed, and therefore the proceeding – and ALJ Elliot’s ruling – were invalid.  This argument failed at the Commission level and again before the D.C. Circuit.

The Supreme Court held that Freytag, which dealt with “special trial judges” (STJs) of the U.S. Tax Court that were “near carbon-copies of the Commission’s ALJs”, was determinative.  Like the judges in Freytag, the Court held that the Commission’s ALJs: (1) hold a continuing office established by law; (2) receive a career appointment to a position created by statute, down to its duties, salary, and means of appointment; and (3) exercise the same significant discretion [as the STJs] when carrying out the same “important functions” as the STJs.  The Court held that both STJs and ALJs “have all the authority needed to ensure fair and orderly adversarial hearings – indeed, nearly all the tools of federal trial judges”, and detailed the extensive powers of both to conduct adversarial inquiries.  The Court noted that the ALJ’s decisions, unlike those of the STJs, which must be reviewed by a regular Tax Court Judge, can become final if the Commission declines to review them.  Because the STJs are officers, the Court held, then the Commission’s ALJs with even more autonomy, must be too.  Based on the reasoning in Freytag, the Court determined that SEC ALJs are “Officers of the United States” and must be appropriately appointed.

Practical impact

The Court determined that the appropriate remedy for a party whose case was heard and decided without the kind of appointment that the Appointments Clause requires is a new “hearing before a properly appointed” official, and stated that the official may not be the same ALJ, even if they receive a constitutional appointment, because that ALJ, having already heard the case and issued an initial decision on the merits, “cannot be expected to consider the matter as though he had not adjudicated it before.”  To cure the error, the Court held, another ALJ or the Commission itself must hold the new hearing.

Prior to the Court’s decision, on November 30, 2017, the Commission, in Exchange Act Release No. 82178, “in its capacity as head of a department” ratified the SEC’s appointment of its ALJs.  Therefore, assuming that this appointment was done consistent with the Appointments Clause, the practical impact of this decision is that the SEC will need to re-try previously litigated cases before judges not previously assigned to the matters.


1 See Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000).