The SEC has historically used Administrative Law Judges (“ALJs”) to adjudicate enforcement proceedings brought by the commission. At present, a split exists in the circuit courts regarding whether this practice is constitutional and the issue may be decided by the Supreme Court this term.  The decision will likely hinge on the Court’s interpretation of whether ALJs are “employees” or “inferior officers.”  If deemed “inferior officers,” the use of ALJs under the current construct would be unconstitutional since their appointment has not historically been made in accordance with the Appointments Clause of the U.S. Constitution.  Such a ruling could jeopardize prior decisions rendered by ALJs. 

The two competing cases are Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) out of the U.S. Court of Appeals for the Tenth Circuit and Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016) out of the U.S. Court of Appeals for the D.C. Circuit.  The two courts reached opposite conclusions regarding whether an ALJ should be treated as an “inferior officer” that must be nominated in accordance with the requirements of the Appointments Clause of the Constitution.  All interested parties have filed petitions for certiorari, which are pending before the Court. 

In Bandimere, the SEC brought an enforcement action against David Bandimere, a Colorado businessman, for violation of various securities laws.  The matter was referred to an ALJ who, after a hearing, barred him from the securities industry and imposed civil penalties.  Bandimere challenged the ALJ decision by alleging, among other things, that the use of an ALJ violated the Appointments Clause of the Constitution, which provides:

        [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…

The Tenth Circuit examined the role and authority of an ALJ to determine whether they are more akin to an “inferior officer,” which “connotes a relationship with some higher ranking office or officers below the President” or whether they are merely subordinate employees.  The court ultimately determined that ALJs had “significant discretion” in “carrying out…important functions” in their role as quasi-judges, which is a hallmark characteristic of an “inferior officer” as defined in prior cases within the circuit.  Based on this determination, the SEC’s decision predicated on the ALJ opinion was set aside. 

By contrast, in Lucia, the D.C. Circuit held that ALJs were merely employees whose appointment did not need to comport with Constitutional requirements.  The court in Lucia instead believed that ALJs were more akin to employees because they lack “final decision making authority” even though their decisions carry significant weight and are generally adopted by the SEC.  In contrast to the 10th Circuit, the finality of the decision-making process is one of three criteria established in prior D.C. Circuit decisions to determine whether someone is defined as an “inferior officer.” 

The outcome of this debate will have a great impact on the forum for future SEC enforcement proceedings and potentially create opportunities for appeal in prior ALJ adjudications.

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