In prior posts (most recently here), I have noted the U.S. Supreme Court’s recent predilection for taking up cases arising under the securities laws or otherwise involving securities lawsuits. On January 12, 2018, the Court reinforced this impression again by agreeing to take up yet another case arising under the securities laws. In this latest case the Court will address the question of whether or not the SEC’s administrative law judges (ALJ) were appointed in violation of the requirements of the Appointments Clause in the U.S. Constitution. The specific question involved is whether or not the ALJs are “inferior officers” of the type that under the Constitution must be appointed by the “Heads of Departments,” or whether they are just regular federal employees. The case could have significant ramifications not only for the SEC but for a variety of other federal agencies as well. The U.S. Supreme Court’s January 12, 2018 order in the case of Raymond James Lucia v. SEC can be found here.



Under its Congressional authorizing statutes, when the SEC initiates an enforcement action, it can either sue in federal court or commence an administrative proceeding. If the SEC decides to pursue an administrative proceeding, an ALJ presides over the hearing. The ALJ has extensive authority to conduct the proceeding; however the ALJ’s ruling in the matter is subject to review by the Commission itself.  The ALJs are selected by SEC staff from a pool of candidates identified by the Office of Personnel Management.


Raymond Lucia, an investment adviser and media figure, was the target of an SEC enforcement action that the agency pursued through an administrative proceeding. The ALJ in Lucia’s enforcement action ultimately ruled against him, resulting among other things in a $300,000 fine and an order barring Lucia from the industry. Lucia unsuccessfully appealed the ALJ’s ruling to the SEC.


Lucia then pursued an appeal in the D.C. Circuit. Among other things, Lucia argued on appeal that the ALJ that had presided over his administrative proceeding at the SEC had not been properly appointed as required by the Appointments Clause in the U.S. Constitution.


A three-judge panel of the D.C. Circuit rejected his appeal, ruling among other things that the ALJ was not an “officer” within the meaning of the Appointments Clause, and therefore not subject to the requirements of the Appointments Clause. (The text of the Appointments Clause is set out below.) Lucia sought en banc review by the entire D.C. Circuit. The ten judges comprising the en banc board deadlocked in a 5-5 vote, leaving the three-judge panel’s ruling standing.


While Lucia’s en banc review was pending, the Tenth Circuit held in Bandimere v. SEC (here) that SEC ALJs are Officers of the United States who must be appointed pursuant to the Appointments Clause.


Lucia filed a petition for a writ of certiorari seeking to have the U.S. Supreme Court review the D.C. Circuit’s ruling in his case. The question presented to the Court in Lucia’s petition is whether the SEC’s ALJs are Officers of the United States within the meaning of the Appointments Clause. Among other things, Lucia’s petition cited the existence of the “square and acknowledged conflict” between the D.C. Circuit and the Tenth Circuit on this issue as a basis for the Court to take up the case. (A prior guest post on this blog discussing the circuit split and the likelihood of the U.S. Supreme Court taking up this issue can be found here.)


There were a couple of interesting developments while Lucia’s petition was pending. First, in November, the Solicitor General’s office, apparently reflecting a change of position on the issue at the U.S. Department of Justice under the Trump administration, reversed the government’s position that the ALJs were “employees” not officers. The government filed a brief with the Court saying that the government now sees the ALJs as Officers of the United States whose appointment should be subject to the Appointments Clause.  The day after the Solicitor General filed the brief, the SEC announced that it had formally ratified the appointment of its ALJs.


In his reply brief (here), Lucia argued that the government’s change of its position and its revised procedures did nothing for him, as it “afforded” him  “no redress for having subjected him to trial before an unconstitutionally consulted tribunal” and left him subject to “draconian sanctions.” Lucia also argued that the SEC’s belated ratification of the ALJs appointment did not resolve the appointments clause concerns.


A number of parties filed amicus briefs in support of Lucia’s petition. For example, the U.S. Chamber of Commerce filed a brief in which the business group argued not only that SEC ALJs are offices whose appointment is subject to the requirements of the Appointments Clause, but also that the SEC ALJ’s authorities had been expanded dramatically under the Dodd-Frank Act and other statutory provisions. The Chamber argued further that the dramatic expansion of the ALJ’s authority had been accompanied by the agency’s dramatically increased reliance on the administrative processes in preference to judicial processes through the courts. Behind this change in agency practices, the business group argued, is the fact that when proceeding through its administrative processes the agency enjoyed an unfair “home court advantage.” The amicus brief cited statistical studies showing that the agency prevailed much more frequently in administrative proceedings compared to enforcement proceedings filed in federal court.


The Appointments Clause

The Appointments Clause in the U.S. Constitution provides in pertinent part that the President “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers as they thing proper, in the President alone, in the Court of Law, or in the Heads of Departments.”



It may have been inevitable that sooner or later the Court was going to have to take up the issue of the constitutionality of the appointment of the SEC’s ALJs. This issue has been ricocheting around in the lower courts, and the disagreement between the courts pretty much cried out for the Court address the question. While the Court’s consideration of these issues may have been both predictable and necessary, that does not mean that the Court’s consideration of these issues does not have consequences. To the contrary, this court could have significant practical consequences.


For starters, there is this case’s potential impact on other cases pending in the administrative process or on appeal in the federal appellate courts. As Greg Stohr noted in a January 12, 2018 Bloomberg article discussing the Court’s cert grant in this case (here), the outcome of this case “could affect more than 100 cases currently at the SEC, along with a dozen that are on appeal in the federal courts.” Law 360 quoted “defense attorneys” as saying that if the Supreme Court rules in Lucia’s favor “it could open the door to challenges of prior rulings handed down by ALJs who weren’t hired under the provisions required by the appointments clause.”


The practical consequences from the Court’s consideration of the issues in the case are not limited just to the SEC. The Court’s ruling in this case potentially could affect procedures at a number of other federal agencies that use ALJs in civil enforcement actions and that arguably are appointed similarly to the way the SEC ALJs are appointed. These other agencies potentially could include, among others, the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Federal Deposit Insurance Agency, and the Consumer Financial Protection Bureau.


Beyond the potential formal legal effect of these cases, there is the potential practical effect as well. The U.S. Chamber of Commerce’s amicus brief emphasized both the SEC’s increased reliance on its own in-house administrative processes as well as the agency’s “home court advantage” when proceeding before its own ALJs. The business group’s emphasis on these issues highlights the fact that behind the legal challenge that this case represents is a more fundamental attack on the way that the SEC has been going about its enforcement business. Although it remains to be seen how this case ultimately will turn out, part what is going on here is an attempt to try to change the SEC’s approach to these enforcement actions.


The SEC will hear and likely will decide this case during its current term. According to the Wall Street Journal (here), the Court could hear argument in this case as early as April. This case will be interesting to watch.