(Article from Securities Law Alert, January 2018)
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On January 12, 2018, the Supreme Court granted certiorari to resolve a circuit split on the question of whether the administrative law judges (“ALJs”) for the SEC’s in-house courts are “Officers of the United States” within the meaning of the Appointments Clause of the United States Constitution. Lucia v. SEC, No. 17-130. The Appointments Clause states that the President “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint … Officers of the United States.” U.S. Const. art. II, § 2, cl. 2. The Appointments Clause further provides that “Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”
In Raymond J. Lucia Cos. v. SEC, 832 F.3d 277 (D.C. Cir. 2016) (Rogers, J.), the D.C. Circuit concluded that the SEC’s ALJs are not “Officers of the United States” within the meaning of the Appointments Clause. The court held that the key inquiry for determining the applicability of the Appointments Clause is whether the SEC ALJs “issue final decisions” of the SEC. The D.C. Circuit found it significant that the SEC has a discretionary right to review the action of any ALJ as it sees fit, either on its own initiative or upon a petition for review filed by a party or aggrieved person. Id. (citing 15 U.S.C. § 78d-1(a)-(b)). The SEC has the authority to “review[ ] an ALJ’s decision de novo” and “may make any findings or conclusions that in its judgment are proper and on the basis of the record.” Id. (citing 17 C.F.R. § 201.411(a)). In the event that “no review of the initial decision is sought or ordered,” the SEC will issue an order stating that it has declined review and specifying the date that the ALJ’s sanctions, if any, will take effect. The ALJ’s initial decision becomes final only upon issuance of the SEC’s order.
The D.C. Circuit noted that the SEC “retain[s] full decision-making powers” over cases heard by the ALJs. The court observed that the SEC’s ALJs “neither have been delegated sovereign authority to act independently of the [SEC] nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit.”
In Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) (Matheson, J.), the Tenth Circuit rejected final decision-making power as the key criterion for assessing whether the Appointments Clause applies. The Tenth Circuit relied on the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991) to hold that the SEC’s ALJs are “inferior officers” who must be appointed in conformity with the Appointments Clause.
The Freytag Court found that the special trial judges (“STJs”) of the federal Tax Court were “inferior officers” within the meaning of the Appointments Clause because (1) the position of STJ was “established by Law”; (2) “the duties, salary, and means of appointment” of STJs were “specified by statute”; and (3) STJs “perform more than ministerial tasks” and “exercise significant discretion” in “carrying out [their] important functions.” Bandimere, 844 F.3d 1168 (quoting Freytag, 501 U.S. 868).
The Tenth Circuit found that these three Freytag factors apply equally to SEC ALJs. The court determined that “SEC ALJs exercise significant discretion in performing important functions commensurate with the STJs’ functions described in Freytag.” The court noted, for example, that SEC ALJs have the “authority to shape the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, … and presiding over trial-like hearings,” among other responsibilities.
In so holding, the Tenth Circuit expressly disagreed with the D.C. Circuit’s decision in Lucia. While the Tenth Circuit acknowledged that “[f]inal decision-making authority is relevant in determining whether a public servant exercises significant authority,” the court found that not “every inferior officer must possess final decision-making power.”
The Supreme Court will hear the case later this year. A date for oral argument has not yet been set.