On June 21, 2018, the United States Supreme Court issued its decision in Lucia v. Securities and Exchange Commission, holding that the U.S. Securities and Exchange Commission’s (SEC) administrative law judges (ALJs) are “Officers of the United States,” subject to the Appointments Clause of the Constitution. This is a straightforward decision for Mr. Lucia, who is now entitled to a new hearing before a new ALJ. It is also simple for the SEC going forward: the ALJs must be appointed by the Commission itself, rather than hired as employees by SEC staff members.
In recent years, the SEC has increasingly initiated enforcement actions as administrative proceedings rather than in the courts, to be held in front of an SEC staff-appointed ALJ as opposed to a traditional judge and jury. The ALJ would conduct the hearing and issue an initial decision that the Commission could review or choose not to review. If the Commission chose not to review the initial decision, it would issue an order that the initial decision had become final.
The Court of Appeals for the District of Columbia Circuit had ruled against Lucia’s claim that the ALJs were improperly appointed, while the Tenth Circuit had reached the opposite conclusion when presented with the same issue in a different case. The Court took the case to resolve the conflicting decisions. There is one unusual element in the history of this case. The solicitor general’s office, which had originally defended the SEC’s position, changed course after the 2016 presidential election and effectively supported Mr. Lucia’s position instead. In the face of that lack of support, the Commission issued an order ratifying the appointment of all of the ALJs in November 2017.
There are several unresolved issues going forward:
- What about administrative actions before improperly appointed ALJs that were not appealed on a timely basis? There is language in Lucia suggesting that Mr. Lucia was entitled to relief because of a “timely challenge” to the validity of the ALJ’s appointment. There may be room, however, for a long-shot argument that if an ALJ was improperly appointed, any decision is inherently invalid and therefore open to challenge.
- Are the November 2017 ratifications of the ALJ appointments by the Commission effective? In a footnote, the Court declined to address that question. This is a vital question in all enforcement actions pending before an ALJ, and presumably the reason the SEC has issued a 30-day stay of proceedings in all such matters.
- To what extent will the Lucia decision affect the ALJ system at other federal agencies? The decision does not go beyond the SEC, but the principles outlined in Justice Kagan’s majority opinion would seem to provide a basis to challenge the authority of ALJs in a number of federal agencies.
Michael Best’s Securities & Capital Markets and Litigation teams will be monitoring these issues closely going forward. If you have questions or concerns about administrative actions brought by the SEC, please contact a member of the Securities and Capital Markets team.