On 9 August 2016, in Raymond J. Lucia Companies, Inc. v. Securities and Exchange Commission, the federal appeals court based in Washington, D.C. held that the practice of having administrative law judges ("ALJs") preside over enforcement proceedings brought by the SEC does not violate the Appointments Clause of the United States Constitution. The court ruled that the SEC's ALJs are not "Officers of the United States" under the Appointments Clause, and thus need not be appointed by the procedures established by that provision of the Constitution.

In this case, the SEC brought an administrative enforcement action against Raymond J. Lucia and his investment company, Raymond J. Lucia Companies, Inc., for alleged violations of the Investment Advisers Act. The SEC claimed that Lucia and his company had deceptively presented their "Buckets of Money" retirement wealth-management strategy to prospective clients. As part of its enforcement action, the SEC ordered an ALJ to conduct a public hearing on these allegations. The ALJ found Lucia and his company liable on one of four alleged misrepresentations, fining them $300,000 in total, and imposed a lifetime ban f rom the industry on Lucia. After the petitioners appealed this decision to the SEC, the members of the SEC reviewed the decision de novo (that is, without deferring to the ALJ's opinion) and imposed the same penalties as the ALJ.

Under the Appointments Clause of the US Constitution, "Officers of the United States" must be appointed by the President or, in the case of inferior officers, by certain other methods that the Appointments Clause provides may be determined by statute. Because the SEC's ALJs are not appointed in accordance with the Appointments Clause, the court here had to determine whether they are considered "officers" subject to this constitutional provision, or, instead, mere employees who are not covered by these requirements. The court explained that based on precedent the primary criteria for determining whether a government official qualifies as an inferior officer as opposed to an employee are: "(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions and (3) the finality of those decisions." In applying this test to the ALJs here, the court, relying on its own precedent dealing with the method of appointment of the ALJs of a different governmental agency, focused entirely on the last of these factors — whether the ALJs issue final decisions. The court reasoned that, because the ALJs' decisions do not become final until the SEC issues a finality order affirming them, the ALJs do not make final decisions. The SEC "retained full decision-making powers" over the ALJs' decisions because "even when there is not full review by the Commission, it is the act of issuing the finality order that makes the initial decision the action of the Commission." The court explained that the "Commission can always grant review on its own initiative, and so it must consider every initial decision, including those in which it does not order review."

There have been several challenges in recent years to the SEC's reliance on ALJs that are not appointed in accordance with the Appointments Clause. The courts in these cases have generally ruled, either at the district court level or on appeal, that they lacked jurisdiction to hear these claims because the petitioners had not yet concluded their administrative proceedings before the SEC. The court's decision here is the first time that a federal appellate court has directly addressed the substantive issue of the constitutionality of the SEC's ALJs under the Appointments Clause. While federal appellate courts in other jurisdictions might rule differently, and the Supreme Court will probably have to decide this issue at some point, this decision is important and potentially influential because of the expertise that the federal appellate court in Washington, D.C. has in administrative law.

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