In a June 21, 2018 decision, the U.S. Supreme Court held that the SEC’s administrative law judges (ALJs) are not merely “employees” but rather are “officers” who must be appointed to their position by the “Heads of Departments” under the Constitution’s Appointments Clause. The Court’s decision at one level represents a rather straightforward application of the Court’s existing case law regarding ALJs. However, the decision raises a number of troublesome issues for the SEC, and leaves a number of other important questions unanswered. The decision also raises a number of questions for other agencies as well. The ultimate questions in the wake of Lucia v. Securities and Exchange Commission may be whether and to what extent the SEC (and even perhaps other agencies) will continue to use administrative processes to pursue enforcement action. The Court’s opinion in the case 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.
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. On January 12, 2018, the Court agreed to hear the case.
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 the ratification, the SEC directed its ALJs to review all cases that were pending before them.
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.”
The June 21, 2018 Decision
In an opinion written by Justice Elena Kagan for a 6-3 majority, the Court held that the SEC’s ALJs are “officers” whose must be appointed to their office by “Heads of Departments,” and that because the ALJ who presided over Lucia’s administrative hearing was not appointed by the SEC’s Commissioners, the ALJ’s holding against Lucia must be set aside and the enforcement action against him must be re-tried.
In reaching its decision, the Court relied heavily on its 1991 decision in Freytag v. Commissioner, involving challenges to “special trial judges” (STJ) of the United States Tax Court. In the prior case, the Court had held that the STJs occupied “continuing positions” and “exercised significant authority” and therefore were “officers” within the meaning of the Appointments Clause. The Court said that the prior case “says everything necessary to decide this case.” The Court found that SEC’s ALJs shared many of the same attributes as the STJ, and in particular that they “exercised significant authority.” On that basis, the Court concluded that the ALJs are Officers of the United States subject to the Appointments Clause.
The appropriate remedy, the Court said, for an “adjudication tainted with an appointments violation is a new hearing before a properly appointed official.” The Court specifically noted that the new hearing could not be before the same ALJ as previously presided in the action against Lucia, as he “cannot be expected to consider the matter as though he had not adjudicated it before.” To cure the constitutional error therefore, another ALJ (or the Commission itself) must hold the new hearing to which Lucia is entitled.
At one level, the Court’s ruling here is straightforward, as it based its decision squarely on existing precedent. Because the SEC’s ALJs responsibilities and powers are sufficiently significant, the Court said, the ALJs are “officers” who must be put in office as required by the Appointments Clause. Lucia himself is entitled to a retrial before an ALJ who has been appointed as the constitution requires.
Though seeming straightforward enough, the Court’s decision poses a long list of problems and unanswered questions.
First, starting with Lucia himself, it is not clear at all what the SEC will or even can do next. Justice Kagan’s order seems to expect that Lucia would just be re-tried by another ALJ or by the full Commission. The problem for the agency is that it may not have any existing ALJs whose appointments are compliant with the constitution’s requirements. (The possibility of re-trial before the full Commission is, according to one commentator, “unrealistic.”) Though the Commission did “ratify” its ALJs prior appointments in its November 2017 order, the Supreme Court declined to rule whether or not the agency ratification is sufficient to resolve the constitutional insufficiency of the appointments.
The SEC evidenced its uncertainty by the order it issued later the same day as the Court issued its opinion in the Lucia case; as Daniel Walfish noted in his June 27, 2018 Law 360 article about the Lucia decision, “the SEC issued a highly unusual order staying for 30 days all pending administrative proceedings, presumably so the agency can figure out how to react to the decision.”
Another problem arises from the Court’s requirement that Lucia’s case must be reheard by a different ALJ. According to briefing before the Court, there are approximately 13 administrative cases pending at the SEC in which the defendants have preserved an Appointments Clause challenge. As Walfish notes in his Law 360 article, “each of these cases presumptively has to be reheard with the SEC before a different ALJ” – again, a properly appointed ALJ, of which there arguably are none at the present moment. As further detailed in a separate June 25, 2018 Law 360 article by attorneys from the Morrison & Foerster law firm about the Lucia decision (here), there are several other categories of litigants with cases in various procedural stages whose proceedings are now in some confusion as a result of the uncertainty over whether the existing ALJs had or have appropriate authority as required by the constitution.
Another challenge facing the SEC is that it is far from clear what the agency can do now that will avoid future problems. The Department of Justice had sought to have the Court rule on the constitutionality of the statutory restrictions limiting the removal of the ALJs. Under the enabling statutes, the ALJs have certain civil service protections from removal. In a prior case involving the PCAOB, the Court held that the multilevel civil service protections for officers of that agency violated the constitution (as it limited the Presidential removal power). The Court declined to consider this removal issue. As the Morrison & Foerster attorneys noted in their article, “by declining to address this removal question, the Lucia court left the commission (and any similarly situated agencies) in limbo, knowing even an effort to address the appointments clause problem deciding by the court might run afoul of the Constitution’s executive vesting clause.”
For other agencies (such as, for example, the FDIC and the CFPB) considering the meaning of Lucia for their administrative law judge regimes, the Lucia decision offers precious little guidance. The Lucia court said only that the SEC’s ALJs exercised “significant authority” sufficient to trigger Appointment Clause requirements. The Court did not provide any further substance for other agencies to use to try to determine if their respective ALJs’ authority meets triggers these requirements. As the Morrison & Foerster memo puts it, “other agencies hoping the court would offer a bright-line rule to clarify when administrative judges are deemed officers for appointments clause purposes are left, as the court acknowledged, with little guidance.”
In other words, in the wake of the Lucia decision, a host of unanswered questions remain. The Morrison Foerster attorneys conclude their memo by saying, “In short, we can expect court dockets to be full with cases interpreting Lucia for years to come.”
One possibility is that the SEC may just pull the plug on its administrative processes. In a June 25, 2018 memo about the Lucia decision (here), attorneys from the Morgan Lewis law firm note that “the SEC may already have decided that litigated administrative enforcement proceedings are more trouble than they are worth. Since the time of Lucia’s cert petition, “the agency has brought almost all of its contested enforcement actions in federal court” rather than its administrative courts, and “has largely confined its administrative docket to settled matters and to the minority of cases involving suspensions and bars of regulated entities and persons that can only be brought administratively.”