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WBK Industry News - Litigation Developments

10th Circuit Strikes Down SEC Administrative Law Judges as Unconstitutional Under Appointments Clause

A three-judge panel of the U.S. Court of Appeals for the 10th Circuit, in Bandimere v. SEC, ruled that the Securities and Exchange Commission’s (“the SEC”) administrative law judges (“ALJs”) are unconstitutional. The divided panel concluded that the five ALJs employed by the SEC are “inferior officers” within the meaning of the Appointments Clause of the Constitution. Because the SEC’s ALJs were not constitutionally appointed, they held office in violation of the Appointments Clause.

The Appointments Clause provides that the President shall appoint Officers of the United States by and with the advice and consent of the Senate. However, Congress may vest the power to appoint inferior officers to the President alone or to the “Heads of Departments,” such as the Director of the SEC. Federal employees who are not subject to the Appointments Clause may be hired directly by agencies. The Appointments Clause embodies separation of powers and promotes public accountability by identifying the public officials who appoint officers.

As is relevant here, the SEC’s ALJs are not appointed by the President, a court of law or the head of a department. They are instead hired through an internal merit selection process administered by the Office of Management and Budget. Accordingly, the sole question considered by the panel was whether the SEC’s ALJs are “inferior officers” under the meaning of the Appointments Clause.

Relying on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the seminal Supreme Court authority on “inferior officers” under the Appointments Clause, the two judge majority concluded that SEC’s ALJs are “inferior officers.” Supporting its conclusion, the panel explained that the office of the SEC’s ALJs was established by law, and that the ALJs “carry out important functions, and exercise significant authority.” Moreover, the governing statutes and regulations give the SEC’s ALJs duties comparable to the duties of special trial judges deemed “inferior officers” in Freytag. The SEC, for example, has authority to delegate “any of its functions” except rulemaking to its ALJs.

Because the ALJ who presided over Mr. Bandimere’s administrative hearing was not appointed by the President, a court of law or a department head, he held his office in conflict with the Appointments Clause. Accordingly, the panel set aside the SEC’s enforcement order, holding that the underlying decision had been issued by an unconstitutional ALJ.

Bandimere stands as one of several recent challenges to SEC enforcement actions under the Appointments Clause. This past August, the U.S. Court of Appeals for the D.C. Circuit came to the opposite conclusion—that the SEC’s ALJs are employees, not constitutional officers. See Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016). The U.S. Court of Appeals for the Fourth Circuit recently had occasion to address this issue, but withheld judgment on the constitutional legitimacy of ALJ appointments, finding that it lacked jurisdiction absent the SEC’s issuance of a final administrative order. See Bennett v. SEC, No.15-2584 (Dec. 16, 2016). The Fourth Circuit’s opinion echoes the result reached by the Eleventh Circuit in June 2016, in Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016).

As a consequence of this circuit split, and due to the potential impact of the Bandimere ruling on the more than two dozen federal agencies that utilize ALJs, this issue is likely to be heard by the Supreme Court in the near term.

The WBK Firm regularly advises and represents companies throughout the United States in administrative enforcement actions and matters of administrative law.