On December 27, 2016, the Tenth Circuit Court of Appeals (the federal appeals court covering Utah, Colorado, Wyoming, Oklahoma, Kansas, and New Mexico) issued a decision in Bandimere v. United States Securities and Exchange Commission, ruling that the U.S. Securities and Exchange Commission’s (SEC) Administrative Law Judges (ALJs) hold their offices “in violation of the Appointments Clause” of the United States Constitution. The Constitution requires “inferior Officers” to be appointed only by the President, the courts, or “the Heads of Departments.” The Tenth Circuit concluded that the SEC’s ALJs, who preside over all administrative enforcement actions brought by the SEC, are “inferior Officers” given how much power and discretion they are given. The SEC’s ALJs are not appointed by the President, the courts, or the head of the SEC. Thus, the court found that the ALJ presiding over the enforcement action at issue (in which the respondent was found liable for securities fraud, barred from the securities industry, and ordered to pay civil penalties and disgorgement) “held his office unconstitutionally when he presided over [the respondent’s] hearing.” The court then “set aside the SEC’s opinion,” rendering the enforcement action, and all the penalties imposed, a complete nullity.
The Tenth Circuit is the first federal court of appeals to reach this conclusion. The Court of Appeals for the D.C. Circuit recently reached the opposite conclusion, finding that ALJs were mere “employees” and not “inferior officers,” meaning there is a direct split in the Circuits. Generally when there is such a split on an issue with implications as significant as those presented here, it is likely that the Supreme Court will take the issue up to resolve the conflict. The government can also request a rehearing by the Tenth Circuit, or a rehearing “en banc,” meaning that the entire panel of Judges on the Tenth Circuit would hear the case.
The immediate effect of the Bandimere decision is that SEC enforcement actions against parties within the Tenth Circuit are in a very uncertain state. The SEC faces the possibility of expending substantial resources prosecuting proceedings before ALJs that, barring a change in the law, will ultimately be deemed legal nullities. The SEC has the option of pursuing claims in the federal district courts, but has been reluctant to do so as its success rate is generally much higher in administrative proceedings. The broader implications of the Bandimere decision could include the ultimate invalidation of the SEC’s administrative enforcement proceedings nationwide. Any party facing SEC enforcement actions certainly should raise the Bandimere decision and challenge the ALJ’s constitutional authority. The dissenting Judge in the Bandimere case warned that the implications could be even more dramatic and ultimately impact “the 1,537 Social Security Administration (SSA) ALJs, who collectively handle hundreds of thousands of hearings a year.”
We will continue to monitor all developments relevant to this decision and will provide additional client alerts when appropriate.