(Article from Securities Law Alert, September 2016)
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On August 9, 2016, in the first circuit court opinion to consider a constitutional challenge to the SEC’s in-house administrative enforcement tribunals, the D.C. Circuit affirmed the constitutionality of the SEC’s appointment of administrative law judges (“ALJs”). Raymond J. Lucia Cos. v. SEC, 2016 WL 4191191 (D.C. Cir. 2016) (Rogers, J.) (Raymond Lucia). The D.C. Circuit held the SEC’s ALJs are not “Officers of the United States” subject to the Appointments Clause of the United States Constitution because “no initial decision of [the SEC’s] ALJs is independently final” under the SEC’s regulatory framework.
SEC ALJs Are Not “Officers of the United States” for Purposes of the Appointments Clause Because They Lack the Authority to Issue Final SEC Decisions
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.[1] The D.C. Circuit explained that “[o]nly those deemed to be employees or other ‘lesser functionaries’ need not be selected in compliance with the strict requirements of Article II.” Raymond Lucia, 2016 WL 4191191.
As a general rule, “an appointee is an Officer, and not an employee who falls beyond the reach of the [Appointments] Clause, if the appointee exercises ‘significant authority pursuant to the laws of the United States.’” Id. (quoting Buckley v. Valeo, 424 U.S. 1 (1976)). The D.C. Circuit stated that under its precedent, “the main criteria for drawing the line between inferior Officers and employees not covered by the [Appointments] Clause are (1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.” Id. (quoting Tucker v. Comm’r of Internal Revenue, 676 F.3d 1129 (D.C. Cir. 2012)).
The D.C. Circuit noted that in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), it held that ALJs of the Federal Deposit Insurance Corporation (“FDIC”) were not Officers for purposes of the Appointments Clause “because their authority was limited by FDIC regulations to recommending decisions that the FDIC Board of Directors might issue.” Raymond Lucia, 2016 WL 4191191. Applying Landry, the D.C. Circuit determined the key question was whether SEC ALJs “issue final decisions” of the SEC. Id.
The D.C. Circuit found that pursuant to the governing statutory scheme, 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,” then 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 deemed it significant that the SEC “must affirmatively act—by issuing the order—in every case.” The court explained that the SEC’s “final action is either in the form of a new decision after de novo review or, by declining to grant or order review, its embrace of the ALJ’s initial decision as its own.” The court emphasized that the SEC “retain[s] full decision-making powers” over cases heard by the ALJs. The D.C. Circuit determined 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.”
Finding the SEC ALJ’s decisions to be “no more final than the recommended decisions issued by the FDIC ALJs” in Landry, the D.C. Circuit concluded that SEC ALJs are not “Officers of the United States” subject to the Appointments Clause.
[1] The Appointments Clause further states 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.” U.S. Const. art. II, § 2, cl. 2.