Solicitor General Disagrees with SEC and Argues that Administrative Law Judges Must be Appointed

The Office of the Solicitor General, through a brief in response to a writ for certiorari, has taken the position that Securities and Exchange Commission (SEC) Administrative Law Judges (ALJs) are “inferior officers” within the meaning of the Appointments Clause of the U.S. Constitution.  In doing so, the Solicitor General abandoned the position taken by the SEC in lower federal courts, where the agency had argued that ALJs were mere “employees” and thus did not have to be appointed.

Last year, in SEC v. Raymond J. Lucia Cos., the defendant investment advisor challenged sanctions imposed by the SEC for violations of securities laws to the U.S. Court of Appeals for the D.C. Circuit.  The advisor argued before a three-judge panel that the SEC administrative hearing was an unconstitutional procedure because the ALJ that presided over the hearing was an inferior officer.  Inferior officers must be appointed pursuant to the Appointments Clause of the Constitution.  The panel disagreed with the advisor, finding that the SEC ALJs were mere employees, not inferior officers, because they did not exercise “significant authority pursuant to the laws of the United States.”  In doing so, the Court focused on the SEC ALJ’s inability to issue “final decisions” on behalf of the Commission.  An en banc D.C. Circuit reheard the constitutional challenge, but split equally on the issue, meaning the initial three-judge panel opinion stands.  The D.C. Circuit’s Lucia decision created a split with the Tenth Circuit, which found that the SEC ALJs were inferior officers rather than employees.

In the Lucia, the Solicitor General also requested the Supreme Court appoint amicus curiae to defend the SEC’s original position concerning its ALJs.  With few exceptions, the Solicitor General has the final decision-making authority on positions the United States government takes before the Supreme Court.  Often the Solicitor General will take a position that aligns with the underlying agency involved in the case, but they are not required to do so.  On November 30, 2017, the day after the Solicitor General’s brief was filed, the SEC issued an inter-agency order purporting to ratify the agency’s “prior appointment” of the five ALJs currently assigned to preside over SEC administrative hearings.  The SEC press release concerning the order claims that by “ratifying the appointment of its ALJs, the Commission has resolved any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause.”

Given the circuit split, and the position taken by the Department of Justice in the Solicitor General’s brief, it is very likely that the Supreme Court will take up the Appointments Clause issue in the 2018 term.  Should the Supreme Court hear the case, its decision could well impact other agencies beyond the SEC that utilize ALJs in administrative proceedings, such as the Federal Reserve, CFPB, and HUD.

The Solicitor General’s certiorari brief is available here.