SEC Suspends Pending Administrative Proceedings in Wake of Lucia Decision

Investment Management Update

Date: July 02, 2018

Key Notes:

  • The Supreme Court recently held that SEC ALJs are officers of the United States, subject to the U.S. Constitution’s Appointments Clause.
  • A properly appointed ALJ or the SEC itself must now review decisions of ALJs hired by SEC staff.
  • The SEC has ordered a temporary stay on all pending administrative proceedings.
  • The Court’s decision leaves unanswered whether the SEC’s ratification of the staff’s ALJ hiring decisions passed constitutional muster.

In a 7–2 decision, the U.S. Supreme Court recently ruled that administrative law judges (ALJs) of the Securities and Exchange Commission (SEC) are subject to the Appointments Clause of the U.S. Constitution, which requires that the president, courts of law or heads of departments appoint individuals to those positions. Lucia v. SEC, __, U.S. __, No. 17-130 (June 21, 2018). Before November 2017, the SEC delegated hiring ALJs to its staff, in violation of the Appointments Clause, leading the Court to rule that either a properly appointed ALJ or the SEC itself must revisit those ALJs’ decisions.

Case Background

The SEC initiated an administrative proceeding against Raymond Lucia and his investment company, alleging he used misleading slideshow presentations to deceive prospective clients. After nine days of testimony and argument, ALJ Cameron Elliott found Lucia liable and imposed sanctions, civil penalties and a lifetime ban from the investment industry. On appeal to the SEC’s Commissioners, Lucia argued that Judge Elliott lacked constitutional authority to render his decision because he had not been appointed properly. The SEC rejected Lucia’s argument that ALJs are subject to the Appointments Clause, and the U.S. Court of Appeals for the D.C. Circuit seconded that view. Because the D.C. Circuit’s ruling conflicted with the Tenth Circuit’s decision in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), the Supreme Court granted a writ of certiorari.

Court’s Decision

Delivering the Court’s opinion, Justice Kagan observed that ALJs have extensive powers, including supervising discovery, issuing and revoking subpoenas, administering oaths, examining witnesses and imposing sanctions. They set forth factual findings and legal conclusions in initial decisions that become final SEC actions if the SEC declines to review those decisions. The Court further noted that ALJs hold continuing office and have “nearly all the tools of federal trial judges” to exercise “significant discretion” to ensure fair and orderly hearings. Thus, the Court concluded that ALJs are officers of the United States subject to the Appointments Clause. It also ruled that the proper remedy for an adjudication tainted with an Appointments Clause violation is a new hearing before either the SEC itself or a constitutionally appointed ALJ who is not the same person who administered the defendant’s original proceeding.

In his concurrence, Justice Breyer argued for resolving the matter on statutory grounds. He observed that the Administrative Procedure Act (APA) requires agencies to appoint ALJs, and since the SEC delegated hiring ALJs to its staff, it ran afoul of the APA. Justice Breyer was concerned that designating ALJs as “officers” of the United States means the APA’s restrictions on ALJ removal are unconstitutional, such that the SEC could remove ALJs at will without good cause. Justice Breyer cautioned that the majority opinion could render ALJs “from independent adjudicators into dependent decisionmakers.”

Dissent

Justice Sotomayor’s dissent, joined in by Justice Ginsburg, opined that ALJs lack final decision-making authority because the SEC retains plenary authority over their decisions and reviews ALJ decisions de novo without being confined to the factual record below. Thus, the dissent concluded that ALJs do not exercise significant authority and are not subject to the Appointments Clause because they cannot enter final, binding decisions without some action—or inaction—by the SEC.

Outlook

Last November, in response to Lucia’s challenge to the Supreme Court, the SEC issued an order ratifying the hiring of all ALJs and asked all ALJs to reconsider the record and actions taken in cases pending before them. The Court’s opinion did not directly address whether that ratification was sufficient, although its requirement that a different ALJ review cases decided by an unconstitutionally appointed ALJ suggests that it is not. Also, the scope of the Court’s order remains unclear. It is unknown whether all previously decided cases must be reopened, or only those where the defendants challenged the constitutionality of the ALJ’s authority. Moreover, as noted by Justice Breyer’s concurrence, challenges to the APA’s provisions protecting ALJs from termination without cause seem imminent.

On the same day as (and “[i]n light of”) the Court’s decision, the SEC issued a brief order staying for 30 days (or further order of the SEC) all pending administrative proceedings. The order also applies to administrative proceedings that are pending before the SEC itself. We do not expect this development to be anything close to the end of enforcement actions brought before ALJs. We believe that during the 30-day period, the SEC will take steps to address the issues raised in Lucia, enabling it to continue using administrative proceedings as an efficient tool for securities law enforcement that is arguably more favorable to the SEC than going to federal courts.

FOR MORE INFORMATION

For more information, please contact:

Andrew J. Davalla
614.469.3353
Andrew.Davalla@ThompsonHine.com

Philip B. Sineneng
614.469.3217
Philip.Sineneng@ThompsonHine.com

David A. Wilson
202.263.4161
David.Wilson@ThompsonHine.com

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