United States: Appeals Court Decision Creates Circuit Split On The Constitutionality Of The SEC Administrative Law Process

The 10th Circuit Court of Appeals closed out 2016 with a bang when it ruled that the SEC's use of administrative law judges violates the Constitution. In Bandimere v. SEC,1 the Court held in a 2-1 decision that SEC Administrative Law Judges ("ALJs") are "inferior officers" who hold their positions in violation of the Appointments Clause.2 This ruling creates a split of authority among the Circuits that will likely lead to a review by the Supreme Court.

Until then, defendants in SEC administrative law proceedings should object to the administrative proceeding process as being unconstitutional, and thus preserve their rights. Raising the argument and preserving it during an administrative law proceeding could mean the difference between being stuck with an adverse ALJ decision and being able to challenge the constitutionality of the SEC's administrative law process in federal court after a final determination is made in the SEC's administrative law proceeding.


Bandimere reached the 10th Circuit by way of petition after an SEC ALJ found (and the Commission affirmed on review) that David Bandimere, a Colorado businessman, was liable for violating securities laws. The Commission issued an opinion barring him from the securities industry, imposing civil penalties and ordering disgorgement. During the proceedings, the Commission not only found Bandimere's defenses to the allegations unpersuasive, it also rejected Bandimere's constitutional argument that the SEC's ALJs hold their positions in violation of the Appointments Clause.3

Other respondents in similar circumstances had attempted to challenge the constitutionality of the SEC's administrative law process by filing collateral lawsuits in federal court. These collateral lawsuits often failed for lack of jurisdiction because federal courts were precluded from entertaining arguments that had not been raised and exhausted in administrative proceedings. Instead of filing a collateral suit, however, Bandimere wisely raised the constitutional argument during the administrative proceedings. Once the Commission reviewed the decision of the SEC ALJ and made a final determination, Bandimere was able to present his argument on appeal to the 10th Circuit.4

In Bandimere, the 10th Circuit set aside the Commission's opinion and found the SEC's ALJ appointment process to be unconstitutional. The Court's decision hinged on the status of SEC ALJs and the distinction between "inferior officers" and "employees" -- the latter being exempt from the Appointments Clause. In this case, the SEC conceded that its ALJs were not constitutionally appointed, and relied on the argument that its ALJs were "employees" who need not be appointed by the President, a court of law or a department head. However, the 10th Circuit disagreed and held that SEC ALJs are in fact "inferior officers."5 This ruling marks a clear departure from the 2016 decision in Raymond J. Lucia Cos., Inc. v. SEC,6 in which the D.C. Circuit Court of Appeals unanimously held that SEC ALJs are "employees" for purposes of the Appointments Clause.

A Bona Fide Circuit Split

The rift between the 10th Circuit and D.C. Circuit rulings boils down to the Courts' different interpretations of the criteria used for determining the status of ALJs. As the 10th Circuit majority explained, "the Supreme Court has not stated a specific test for inferior officer status."7 In Bandimere, the Court relied on Freytag v. Comm'r of Internal Revenue,8 an analogous case in which the Supreme Court found that the Tax Court's Special Trial Judges ("STJs") were "inferior officers" for purposes of the Appointments Clause.  

In Freytag, the Supreme Court used a three-part test to determine the status of the STJs. This test focused on whether: (1) the STJ position was "established by law" in the Administrative Procedure Act (the "APA"); (2) statutes set out the duties, salaries and hiring process for the STJs; and (3) STJs "exercise significant discretion" in "carrying out ... important functions."9 Using the same test, the Bandimere majority concluded that SEC ALJs, like the Tax Court's STJs in Freytag, meet the criteria for "inferior officer" status. First, the SEC ALJ position was established by the APA. Second, the 10th Circuit found various statutes that set forth the SEC ALJs' duties, salaries and hiring process. Third, and perhaps most important to its analysis, the Court found that SEC ALJs "exercise significant discretion" in "carrying out important functions."10 Regarding this third requirement, the Court took note of a long list of SEC ALJ duties, which include, inter alia, shaping the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, ruling on procedural and dispositive motions, issuing subpoenas, determining liability and imposing sanctions.11

Having found that SEC ALJs meet all three Freytag requirements, the 2-1 majority held that SEC ALJs are "inferior officers" who hold their positions in violation of the Appointments Clause.12 As mentioned earlier, this decision is in direct conflict with the D.C. Circuit's decision in Lucia, which had been issued only a few months prior.

In Lucia, which also included a discussion of the Freytag three-part test, the D.C. Circuit took a different approach in determining whether SEC ALJs exercise "significant discretion" in "carrying out important functions."13 The Court indicated that once an appointee meets the first two threshold requirements (that the position is established by law and the position's duties, salary and means of appointment are set forth in a statute), then "'the main criteria for drawing the line between inferior officers and employees ... 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.'"14 Here, the D.C. Circuit relied heavily on its decision in Landry v. FDIC,15 where the Court held that Federal Deposit Insurance Corporation ("FDIC") ALJs were "employees" and not "inferior officers" because they lacked final decision-making power.16 In Lucia, the D.C. Circuit found that because SEC ALJ decisions are subject to review by the Commission, SEC ALJs, like FDIC ALJs, do not have final decision-making power. Therefore, the Court concluded, SEC ALJs are "employees" for purposes of the Appointments Clause.17

Essentially, the difference between the D.C. Circuit and 10th Circuit rulings is that the D.C. Circuit found the issue of final decision-making authority to be dispositive, whereas the 10th Circuit found that the overall duties of SEC ALJs are both extensive and important enough to confer "inferior officer" status. Although the 10th Circuit did not find the issue of final decision-making authority to be dispositive, the Court noted that about ninety percent of SEC ALJ decisions become final without any review by an SEC Commissioner18 -- suggesting that SEC ALJs have de facto final decision-making authority.

Where Do We Go from Here?

The D.C. Circuit is currently considering whether to grant a rehearing en banc in Lucia, and the 10th Circuit's ruling in Bandimere is also likely to lead to a similar request for a rehearing. It is also likely that other Circuit Courts of Appeals will consider the issue. Ultimately, all signs point to a Supreme Court review of the constitutionality of the SEC administrative law process.

Critics of the 10th Circuit decision point out that if SEC ALJs are found to hold their positions in violation of the Constitution, then potentially hundreds, if not thousands, of prior SEC decisions will be in jeopardy of being invalidated.19 In addition, as Judge McKay pointed out in his Bandimere dissent, a finding that SEC ALJs are inferior officers could potentially mean that "all federal ALJs are at risk of being declared inferior officers."20 Indeed, should the Supreme Court agree with the 10th Circuit ruling, significant changes in U.S. administrative law could result.

Taking heed of these concerns, common sense dictates that the Supreme Court will seek to resolve the Circuit split in a manner that is least disruptive to the administrative law system, which many refer to as the "fourth branch of government." However history has shown that it is difficult to predict which direction the Supreme Court will sway – especially when its membership is in a state of flux as it is now. Perhaps the Supreme Court will simply order the SEC to modify its appointment process, and hold that any ruling finding the SEC ALJ process to be unconstitutional will only apply prospectively, not retroactively. Such an approach would solve the appointment process problem while preserving the SEC's ability to uphold previously entered orders.

Special thanks to Herrick law clerk Clifford A. Tatum for his assistance in preparing this alert.


1 Bandimere v. SEC, 15-9586, 2016 WL 7439007 (10th Cir. Dec. 27, 2016).

2 U.S. Const. art. II, § 2, cl. 2.

3 In the Matter of David F. Bandimere, Exchange Act Release No. 9972, 2015 WL 6575665, at * 19 (Oct. 29, 2015).

4 This issue was also addressed by the Second Circuit Court of Appeals in Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016). In March 2015, the SEC initiated administrative proceedings against private equity magnate Lynn Tilton and certain investment firms for alleged violations of the Investment Advisers Act. Tilton responded by filing suit in federal district court, alleging that the SEC's ALJs hold their positions in violation of the Appointments Clause. The district court dismissed her complaint for lack of subject matter jurisdiction.  In Tilton, the Second Circuit affirmed the decision of the district court, holding that Tilton had to first raise the constitutional issue in the administrative proceeding and receive a final decision on the issue before seeking federal court review. Id. at 291.

5 Bandimere,  2016 WL 7439007, at *21.

6 832 F.3d 277 (D.C. Cir. 2016).

7 Bandimere, 2016 WL 7439007, at *4.

8 501 U.S. 868 (1991).

9 Id., at *8.

10 Bandimere, 2016 WL 7439007, at 8.

11 Id.

12 Id. at 21.

13 Lucia,832 F.3d at 285.

14 Id. (quoting Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)).

15 204 F.3d 1125 (D.C. Cir. 2000).

16 Id. at 1133.

17 Lucia, 832 F.3d at 287.

18 Bandimere, 2016 WL 7439007, at *14.

19 See, e.g., Bandimere, 2016 WL 7439007 at *25 (McKay, J., dissenting); David Migoya, Appeals Court Ruling could Nullify Hundreds of Decisions by SEC Judges in Colorado and 5 other States (Jan. 17, 2017, 5:40 PM), http://www.denverpost.com/2016/12/28/appeals-court-sec-decisions.

20 Bandimere, 2016 WL 7439007, at *25.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.