Supreme Court to Hear Challenge to Legality of SEC Judges

On behalf of Wolf Popper LLP

Most judges become judges by winning an election, or by receiving an appointment by an elected official, such as a governor, a legislature, or even being nominated by the President of the United States.  However, there are some judges that are appointed by administrative agencies, such as the Securities and Exchange Commission (“SEC”), instead of by elected officials.

A case currently before the U.S. Supreme Court, Lucia v. Securities and Exchange Commission, No. 17-130 (set for argument on April 23, 2018), addresses the legality of the use of Administrative Law Judges (“ALJs”) by the SEC.  Several U.S. Courts of Appeal are split on the subject.

What is the issue in the case? On January 12, 2018, the Supreme Court agreed to hear the case.  According to the SEC, the question at stake is “[w]hether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause [of the Constitution].”

The argument involves a bit of history.  Congress has given the SEC the power to delegate enforcement proceedings to a hearing officer, and so the SEC often assigns ALJs to hear these proceedings.  Indeed, the vast majority (over 80%) of the SEC’s enforcement proceedings are now presented to these ALJs.  The decision of the ALJ almost always becomes the final decision of the SEC.

This particular case begins with certain registered investment advisors who marketed a “wealth-management strategy” to manage retirement savings.  Following allegations that they had engaged in misleading and deceptive conduct in marketing their “strategy,” these advisors were charged with securities laws violations and SEC administrative proceedings were commenced.  Following comprehensive proceedings which included the testimony of witnesses, cross-examinations, documentary evidence, and other hearings, the advisors were found to have willfully engaged in deceptive conduct, materially misleading investors in violation of the Investment Advisors Act.  

The advisors believe that the proceedings are unlawful because the ALJs are acting as “Officers of the United States” without being appointed pursuant to the Appointments Clause of the Constitution.  (The Appointments Clause states that a judge must be appointed “by the President, the head of a department, or a court of law.”)   

The enforcement of the securities laws of the United States is vested in the SEC and the SEC is authorized under those securities laws to hold administrative proceedings to deal with alleged violations.  Because the SEC has historically assigned ALJs to hold such hearings, a decision could impact the SEC’s enforcement of the securities law.

What will happen in this case? The SEC will likely see a change in the process by which ALJs are appointed and also in the way in which ALJs may be removed.  Importantly, since ALJs play significant roles throughout the different departments of the government, a decision could have widespread ramifications affecting far more than just the SEC.

The briefs submitted by the parties, including the SEC, as well as those submitted by more than a dozen Amicus Curiae, emphasize that the current legal procedures and the challenges to the ALJs have created disruption in government proceedings and request the Supreme Court to provide guidance.