On Dec. 13, 2021, an en banc panel of the Fifth Circuit held that the Securities Exchange Act of 1934 (Exchange Act) does not preclude federal district courts from exercising subject matter jurisdiction over constitutional challenges to the statutory removal protections insulating administrative law judges (ALJs) employed by the Securities and Exchange Commission (SEC). The decision runs counter to conclusions several other circuits reached on the same question, setting up a circuit split for potential resolution of the question by the Supreme Court.

The plaintiff in the case, Michelle Cochran, is an accountant who was first charged by the SEC in 2016 for failing to comply with auditing standards issued by the Public Company Accounting Oversight Board (PCAOB).1 The SEC initiated enforcement proceedings before an ALJ, but while Ms. Cochran's case was pending, the Supreme Court decided Lucia v. SEC, holding that SEC ALJs are "Officers of the United States" under the Appointments Clause and, as such, must be appointed by the president, a court of law or a head of an administrative department.2In response, the SEC remanded all pending administrative cases — including Ms. Cochran's — for new proceedings before constitutionally appointed ALJs.

Upon remand, Ms. Cochran filed suit in federal district court to enjoin the SEC's continued enforcement proceedings against her, arguing that SEC ALJs, even if constitutionally appointed under the Appointments Clause, remain unconstitutionally insulated from removal because existing removal protections stifle the president's exercise of the Removal Power, a constitutional challenge that Lucia did not address.3 The district court dismissed this challenge for lack of subject matter jurisdiction, concluding that Section 78y of the Exchange Act strips federal district courts of such jurisdiction.4 A three-judge panel of the Fifth Circuit affirmed in a 2-1 split, and in October 2020, the Fifth Circuit agreed to rehear the case en banc.5 On Dec. 13, in a 9-7 decision,6 a majority of the full Fifth Circuit reversed the district court's order and remanded her case to the district court to permit Ms. Cochran to litigate her claim that the SEC enforcement proceeding against her is unconstitutional. In so doing, the Fifth Circuit deviates from five other circuits that have come down on the other side of that question.

The Fifth Circuit majority rejected the SEC's argument that Section 78y of the Exchange Act precluded federal district courts from exercising subject matter jurisdiction over such challenges. Although Section 1331 grants subject matter jurisdiction to federal district courts for "all civil actions arising under the constitution," the SEC contended that Section 78y of the Exchange Act, which sets forth a process for judicial review of final SEC orders, reflects Congress' intent to withdraw subject matter jurisdiction over ancillary district court constitutional challenges to proceedings, including Ms. Cochran's Removal Power claim.7 The Fifth Circuit disagreed, advancing three principal arguments supporting its position.

First, interpreting the text of Section 78y, the majority noted that the provision applies only to "a person aggrieved by a final order of the Commission."8 Ms. Cochran's claim is still pending, and the court observed the provision does not "say anything about people, [] like Cochran, who have claims that have nothing to do with any final order that the Commission might one day issue." The court went on to observe that the provision uses "permissive language" in providing that a claimant "may obtain review," concluding from that that it would be "troublingly counterintuitive to interpret § 78y(a)(1)'s permissive language as eliminating alternative routes to federal court review." Finally, the majority stated that other provisions of Section 78y show that Congress knew how to strip courts of jurisdiction. The absence of such explicit language in the provision in question shows that, in the majority's view, that result was not intended.

Beyond addressing the statutory text, the majority argued that the Supreme Court had already rejected a similar interpretation of Section 78y. In Free Enterprise Fund v. Public Co. Accounting Oversight Bd., the majority observed, an accounting firm subject to an investigation by the PCAOB sought to challenge the constitutionality of removal protections insulating PCAOB members.9 The Supreme Court rejected the government's contention that Section 78y implicitly stripped the district court of subject matter jurisdiction over the Removal Power claim.10In reaching that conclusion, the Supreme Court applied the three-factor analysis introduced in Thunder Basin Coal Co. v. Reich11 to determine whether Congress intended to preclude district courts from jurisdiction of a particular claim. Specifically, the factors ask whether preclusion would "foreclose all meaningful judicial review" of the claim, whether the claim is "wholly collateral to a statute's review provisions" and whether the claim is "outside the agency's expertise."12

Citing the similarities between the Free Enterprise Fund plaintiff's Removal Power claim and Ms. Cochran's Removal Power claim, and rejecting the distinction relied on by the dissent as well as other circuits that Free Enterprise Fund concerned a challenge to an administrative investigation while Ms. Cochran's case is an active enforcement proceeding,13 the Fifth Circuit held that the same analysis and result apply to Ms. Cochran's claim. The majority stated that "the consensus view is not always correct," and "the SEC's tallying of the circuits does not change our conclusion."

Turning to the Thunder Basin factors, the Fifth Circuit majority observed that because the SEC may not prevail administratively against Ms. Cochran on the merits, her case may terminate without a final order against her, threatening to render her constitutional claim unreviewable under the Section 78y scheme, depriving her of meaningful judicial review. With respect to the second factor, the Fifth Circuit majority held that Ms. Cochran's claim is "collateral to the relevant statutory-review scheme" because she seeks "structural" relief — relief from the authority of an Officer of the United States subject to an allegedly unconstitutional removal procedure — which is beyond the scope of relief provided by the statutory scheme containing Section 78y. Regarding the final factor, the Fifth Circuit concluded that Ms. Cochran's Removal Power claim is not within the agency's particular expertise.

In a lengthy concurrence, Judge Andrew S. Oldham agreed with the majority's interpretation of Section 78y but then commented on the supposed "anti-democratic" nature of administrative agencies like the SEC, contending they are structured to operate free from democratic accountability.

Writing for the dissent, Judge Gregg Costa remarked that the majority appeared to be "champing at the bit" to create a circuit split.14 Noting that in permitting judicial review of Ms. Cochran's constitutional challenge during the pendency of her administrative proceeding, the majority's decision contradicts decisions by at least five other circuit courts, each of which has held that an enforcement action defendant "may not mount a collateral attack against the agency proceeding in federal district court." And in so doing, according to the dissent, the majority "invents a new category of midenforcement review" for the first time in the SEC's 80-plus-year history.

Ms. Cochran's case has been remanded to the District Court for the Northern District of Texas for further proceedings on the merits of her Removal Power claim. In the meantime, the SEC will determine whether to seek certiorari in the case given the circuit split.


1.Cochran v. SEC, No. 19-10396, 2021 WL 5876747, *1 (5th Cir. Dec. 13, 2021).

2.138 S.Ct. 2044, 2051, 2055 (2018).

3.Ms. Cochran's primary claim targets the "multiple levels of protection against removal" protecting SEC ALJs, specifically, the requirement that the Merit Systems Protection Board (MSPB) find good cause to remove an SEC ALJ, the requirement that members of the MSPB remove an ALJ only for good cause, and the fact that SEC commissioners, who have powers of appointment over ALJs, cannot remove an ALJ without the approval of the MSPB, and who themselves cannot be removed by the president except for cause. Brief for Petitioner at 14, Cochran v. SEC, (No. 4:19-CV-066-A), 2019 WL 1359252. Ms. Cochran claims that multiple layers of protection against removal, when insulating Officers of the United States, violate Article II by unconstitutionally burdening the president's Removal Power. Id. at 2. Her brief references Justice Breyer's concurrence in Lucia. There he noted that the majority opinion in Lucia drives the reader to ask whether SEC ALJs, as Officers of the United States, are now within the holding of Free Enterprise Fund, which stated that the two layers of for-cause removal protections insulating members of the PCAOB unconstitutionally burdened the president's Removal Power, in part because PCAOB members are Officers of the United States. Lucia, 138 S.Ct. at 2060 (Breyer, J. concurring) (discussing Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010)).

4.Cochran, 2021 WL 5876747, at *1.

5.See Kramer Levin, Fifth Circuit Agrees to Rehear En Banc Whether Federal Courts Can Decide Constitutionality of Removal Protections for SEC's Administrative Law Judges, Nov. 11, 2020. https://www.kramerlevin.com/en/perspectives-search/Fifth-Circuit-Agrees-to-Rehear-En-Banc-Whether-Federal-Courts-Can-Decide-Constitutionality-of-Removal-Protections-for-SECs-Administrative-Law-Judges.html.

6.Judge Ho was recused and did not participate in the decision.

7.Ms. Cochran also raised a due process claim before the district court, but she did not include the issue in her en banc briefing, and for this reason the Fifth Circuit affirmed dismissal of that claim, concluding that Ms. Cochran had abandoned it. Cochran, 2021 WL 5876747, at *2 n.4.

8.15 U.S.C. § 78y(a)(1) ("a person aggrieved by a final order of the Commission entered pursuant to this chapter may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or the District of Columbia Circuit ..").

9. 561 U.S. 477, 492 (2010).

10.Cochran, 2021 WL 5876747, at *4.

11.510 U.S. 200 (1994).

12.Cochran, 2021 WL 5876747, at *10.

13.Tilton v. SEC, 824 F.3d 276, 281-91 (2d Cir. 2016); Bennett v. SEC, 844 F.3d 174, 186 (4th Cir. 2016); Bebo v. SEC, 799 F.3d 765, 774-75 (7th Cir. 2015); Hill v. SEC, 825 F.3d 1236, 1248, 1252 (11th Cir. 2016); Jarkesy v. SEC, 803 F.3d 9, 20, 30 (D.C. Cir. 2015); but seeGupta v. SEC 96 F. Supp. 2d 503 (S.D.N.Y. 2011) (denying a motion to dismiss an equal protection challenge to an SEC administrative proceeding). Plaintiff Rajat Gupta was represented in this action by Kramer Levin Naftalis & Frankel, LLP.

14.Cochran, 2021 WL 5876747, at *34.

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