On 27 December 2016, in Bandimere v. Securities and Exchange Commission, the federal appeals court in Denver, Colorado held that the administrative law judges ("ALJs") who preside over enforcement proceedings brought by the SEC are "Officers of the United States" but are not appointed in accordance with the Appointments Clause of the US Constitution. In thus concluding that the SEC's ALJs are unconstitutional, the court disagreed with the recent decision of the federal appeals court in Washington, D.C., in Raymond J. Lucia Companies, Inc. v. SEC, which we discussed in the last edition of this newsletter.
In Bandimere, the SEC brought an administrative enforcement action against a Colorado businessman alleging that he violated several federal securities laws. After the SEC concluded that he committed two securities fraud violations and two violations for failing to obtain proper securities registrations, the businessman argued to the federal appeals court that the SEC's determination was not valid because the ALJ that reached the initial decision in this case was not appointed in accordance with the Appointments Clause.
Under the Appointments Clause, "Officers of the United States" must be appointed by the President or, in the case of inferior officers, by certain other methods determined by statute. The SEC conceded that its ALJs are not appointed in accordance with the Appointments Clause, but argued that they are not subject to this constitutional provision because they are mere employees rather than inferior officers. The court relied heavily on a 1991 Supreme Court decision, Freytag v. Commissioner of Internal Revenue, that determined that special trial judges appointed by the US Tax Court are considered inferior officers rather than employees. Based on Freytag, the court ruled that SEC ALJs are also considered inferior officers because their position is established by law (the Administrative Procedures Act), their "duties, salary, and means of appointment . . . are specified by statute", and they "exercise significant discretion" in "carrying out . . . important functions", such as overseeing administrative proceedings.
The court determined that the federal appeals court in Lucia incorrectly placed too much weight on its determination that SEC ALJs cannot issue final decisions, without addressing the other aspects of their role that the Supreme Court identified as relevant in Freytag. One of the three judges deciding this case dissented, in part because of what he viewed as the far-reaching consequences that the court's decision would have for ALJs throughout the federal government. But the court explained that it was addressing only the narrow question at issue in this case about the status of SEC ALJs and not any questions about the potential consequences of that decision. Because of the significance of this decision, the SEC might ask for a rehearing en banc before the full court of appeals. Whether or not the SEC seeks en banc review, it could still ask the US Supreme Court to hear the case, especially in light of the split between this court and the federal appeals court in Washington, D.C. An en banc petition is already pending in the Lucia case. One way or another, it seems likely that the Supreme Court will eventually have to decide the issue.
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