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Does The Supreme Court’s Decision in Lucia Alter the Fairness of SEC Administrative Proceedings

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On June 21, 2018 the Supreme Court ruled that administrative law judges (“ALJs”) at the Securities and Exchange Commission (“SEC”) have been adjudicating cases without being properly appointed in accordance with the Appointments Clause of the Constitution. The case, Lucia, et al. v. Securities and Exchange Commission,[1] was brought by Raymond Lucia, who, after an administrative proceeding, was found by an ALJ to have violated certain provisions of the Investment Advisers Act of 1940, was fined $300,000 and received a lifetime bar from the investment industry.

SEC ALJs, Lucia argued, are “Officers of the United States” and are subject to the Appointments Clause of the Constitution, which requires that certain officers be appointed by the President of the United States, courts of law, or the heads of departments (or the department itself). ALJs at the SEC are appointed by members of its staff and as such, are not appointed with the proper authority required by the Appointments Clause. The SEC argued[2] that its ALJs are not officers but rather employees whose authority and responsibilities are inferior to those of officers. The question before the Supreme Court was whether the responsibilities and the authority of SEC ALJs fall within the definition of those that are understood to be officers of the United States and must be appointed in a manner that follows the requirements of the Appointments Clause.

The majority’s opinion applied two criteria in order to determine whether the ALJs should be considered officers: (i) whether they hold a continuing office that is established by law; and (ii) whether they exercise “significant authority” while discharging their duties. The opinion found that an ALJ met these two criteria. With respect to the first criteria, both parties conceded that ALJs hold a continuing office established by law. With respect to the second criteria, the Court found that ALJs are endowed with the authority to exercise “significant discretion” and have “nearly all the tools of federal judges.”[3] Having met both criteria, the ALJs were found to be officers of the United States within the meaning of the Appointments Clause.

Because the SEC ALJ in Mr. Lucia’s case was not properly appointed, the Supreme Court held that he was entitled to a new hearing. It also held that a different ALJ should preside over his hearing because the ALJ who presided over his case “cannot be expected to consider the matter as though he had not adjudicated it before.”[4]

While the SEC recently ratified the appointment of its five ALJs, the Supreme Court’s decision nevertheless calls into question the validity of the proceedings over which those ALJs are currently presiding. This is because the Supreme Court expressly declined to address Mr. Lucia’s contention that the ratification order by the Commission was invalid. “We see no reason to address that issue,” stated the Court, because “[t]he Commission has not suggested that it intends to assign Lucia’s case on remand to an ALJ whose claim to authority rests on the ratification order. The SEC may decide to conduct Lucia’s rehearing itself or it may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.”[5] Thus, it is possible that ALJs whose appointment was ratified by the Commission may still lack the necessary authorization required under the Appointments Clause, and it may be necessary for such Judges to undergo a completely new appointment process. Apart from its impact on ongoing cases, the Supreme Court’s decision also calls into question decisions previously issued by the SEC ALJs on the ground that their decisions, and any sanctions issued, may be invalid due to the improper manner by which they were appointed.

It is important to note that the Supreme Court’s decision in Lucia does not address a fundamental objection which has been raised to proceedings before SEC ALJs: i.e., that they are forums which are biased against defendants. Many defendants believe that they are not able to obtain a fair hearing in SEC administrative proceedings because such proceedings are presided over by judges who are employed by, and arguably operate under the control of, the agency which has brought the charges. This concern is reinforced by statistics which have shown that cases tried before ALJs have a much greater likelihood of resulting in findings of violations than those tried in federal court.[6] And it is the SEC staff which gets to choose the forum in which these cases are tried. Regardless of whether an SEC ALJ is appointed by the SEC staff or the five SEC Commissioners, this underlying concern remains unaddressed.

For more information on the topic discussed, contact Ralph A. Siciliano at siciliano@thsh.com or Daniel Altabef at altabef@thsh.com.

[1] Sup. Ct. Dkt. No. 17-130, slip op. at 10 (U.S. Sup Ct., June 21, 2018) (“Slip Op.”).

[2] The government reversed its position with respect to the question presented and declined to argue on behalf the SEC; the Court appointed an amicus curiae to brief and argue the case.

[3] Slip Op. at 8.

[4] Slip Op. at 12-13.

[5] Slip Op. at 13 n. 6.

[6] In 2015, the Wall Street Journal reported that the SEC won 90% of the cases brought before ALJs but only 69% of cases brought in federal court. See Jean Eaglesham, SEC Wins With In-House Judges, WALL ST. J. (May 6, 2015), http://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803



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