ATTORNEY: TAMAR A. WEINRIB
POMERANTZ MONITOR SEPTEMBER/OCTOBER 2018
Like many federal agencies, the SEC uses administrative law judges (“ALJs”) to hear and render initial decisions on administrative cases brought by the agency. Up until now the SEC has considered these ALJs to be “employees” who could be hired and fired by agency staff.
On June 21, 2018, in Lucia v. SEC, the United States Supreme Court upended that practice, holding that the SEC’s ALJs are not mere employees but are actually “inferior officers” of the United States, subject to the Appointments Clause of the United States Constitution. The Supreme Court’s ruling means that going forward, ALJs must be appointed by the President, “Courts of Law,” or “Heads of Departments.”
The case reached the Supreme Court after an SEC ALJ rendered an unfavorable decision against Raymond Lucia, a financial radio host and investment adviser known for his “buckets of money” investment strategy. The unfavorable decision, under the Investment Advisers Act, banned Lucia from the industry and charged him a $300,000 fine. Lucia appealed within the SEC (and later to the D.C. Circuit) arguing that the administrative proceeding was invalid because the presiding ALJ had not been constitutionally appointed and thus lacked the constitutional authority to do his job. The Trump Administration sided with Lucia, reversing the position previously taken by the Obama administration that ALJs are not inferior officers.
Justice Kagan, writing for the majority and relying on three Supreme Court cases, explained that the ALJ’s are “inferior officers” because they hold a “continuing office established by law,” and “exercise significant authority pursuant to the laws of the United States” in carrying out “important functions,” which include adjudicating administrative decisions. The Court found its previous decision in Freytag v. Commissioner particularly compelling. There, the Supreme Court held that Special Trial Judges (“STJ”) in the United States Tax Court were “officers” for purposes of the Appointments Clause. The Supreme Court found that the SEC’s ALJs are nearly carbon copies of the STJs, except that the STJs must have their decisions adopted by a regular judge. An ALJ’s decision, on the other hand, only becomes final when the SEC declines review. “That last-word capacity makes this an a fortiori case: If the Tax Court’s STJs are officers, as Freytag held, then the Commission’s ALJs must be too.”
Notably, the SEC had already abandoned its position that ALJs were “employees” back in November 2017 (though after Lucia’s enforcement action) and ratified the prior hiring of its ALJs in a manner it deemed consistent with the Appointments Clause. The Supreme Court ruled on the issue anyway, concluding not only that Lucia is entitled to a new hearing before a properly appointed official, but also that this official cannot be the ALJ who previously heard the enforcement action, even if that particular ALJ “has by now received a constitutional appointment.” The Court did not rule on whether the SEC’s ratification of the prior hires was sufficient to satisfy the Appointments Clause.
On August 22, 2018, the SEC issued an order (the “Order”) lifting a stay it had imposed on June 21, 2018, in reaction to the ruling in Lucia on “any pending administrative proceeding initiated by an order instituting proceedings that commenced the proceeding and set it for hearing before an [ALJ], including any such proceeding currently pending before the Commission.” The Order also reaffirms the SEC’s November 30, 2017 order ratifying the constitutional appointment of certain ALJs; grants all respondents in the newly un-stayed proceedings the “opportunity for a new hearing before an ALJ who did not previously participate in the matter”; and remands all cases pending before the SEC to the Office of the ALJs “for this purpose.” Moreover, the Order vacates “any prior opinion” the SEC has issued in nearly 130 pending matters. The day after issuing the Order, Chief ALJ Brenda P. Murray confirmed that another nearly 70 cases pending before ALJs prior to the Order would be reheard, pursuant to the Order. As a result, parties who received a negative initial decision from an ALJ prior to the SEC’s ratification order but have not yet exhausted their appeal, now have the chance for a completely new hearing before a different ALJ. Parties who do not wish to have a new hearing in front of a fresh ALJ were required to notify the Chief ALJ by September 7.
This decision leaves open several questions, including the constitutionality of the SEC’s ratification order; the extent to which this ruling will apply to other agencies like the CFPB and the FDIC; and the degree to which political influence can and will be exerted in the ALJ appointment process.