D.C. Circuit Rejects Challenge to Appointment of SEC ALJs

While the Commission’s venue selection determinations have been repeatedly challenged, each of the decisions in favor of the agency at the circuit court level has failed to reach the merits of the Constitutional claim. Rather, the actions have been dismissed for lack of jurisdiction. In contrast, district courts have reached the merits of the Appointments Clause claim regarding the appointment of SEC ALJs and ruled against the agency.

In Raymond J. Lucia Companies, Inc. v. SEC, No. 15-1345 (D.C. Cir August 9, 2016) however, the circuit court reached the merits. The Commission prevailed. The Circuit Court held that the agency had not violated the Appointment Clause when retaining its ALJs.

The case was before the court on a petition to review a decision of the Commission from an administrative proceeding. The proceeding alleged that the firm violated the antifraud provisions of the Advisers Act in marketing its retirement wealth strategy to prospective clients. Following a hearing the ALJ issued an initial decision finding liability on one of four charges. Sanctions were imposed, including a life time bar. The Commission sua spontre remanded the case for further findings on the three charges the ALJ had not addressed. A revised initial decision was issued. After granting a petition for review the SEC concluded that petitioners had violated the antifraud provisions. It also rejected a claim that the administrative proceeding was unconstitutional because the ALJ had been appointed in violation of the Appointments Clause.

The Circuit Court considered the Appointments Clause issue, noting that the government had not claimed that the agency decision could be upheld if the presiding ALJ was unconstitutionally appointed. The Commission acknowledges that the ALJ was not appointed in accord with the Clause. It did not argue harmless error.

The Appointments Clause provides that the President “shall nominate, and with the Advice and Consent of the Senate, shall appoint . . . Officers of the United States, whose Appointments are not herein otherwise provided for . . . but the Congress may by Law vest the Appointment of such inferior Officers . . . in the President alone . . .” All officers of the United States are to be appointed in accord with the Clause unless provided for elsewhere in the Constitution. This includes executive officers, judicial officers and those of administrative agencies. Only those who are “lesser functionaries” need not be selected in accord with the Clause. This is an important structural safeguard of the Constitution, the court noted.

Generally, the appointee is considered an Officer rather than an employee if he or she exercises “significant authority pursuant to the laws of the United States.” (internal citations omitted). In assessing the appointee’s authority, it is important to look at the facts of the particular case and also the duties of the person. If the appointee’s position was established by law and the position’s duties are specified by statute the critical question is the meaning of “substantial authority.” Three criteria are considered: 1) the significance of the matters resolved by the official; 2) the discretion they exercise in reaching their decisions; and 3) the finality of those decisions.

Here the critical question is the finality of the decisions. Under Exchange Act Section 78d-1 the Commission has the authority to delegate any of its functions to a division, an individual or an employee. Section 78d-1(c) specified that when the ALJ’s determination is not reviewed it “shall . . . be deemed the action of the Commission.” Petitioner claims that this provision substantiates their point regarding the Appointments Clause. Under the Commission’s rules, however, “[u]ntil the Commission determines not to order review . . . there is no final decision that can ‘be deemed the action of the Commission.’” 15 U.S.C. Section 78d-1(c). Therefore the initial decision only becomes final when the Commission issues the finality order. “Put otherwise, the Commission’s ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit.” Accordingly, they need not be appointed in accord with the Appointments Clause. The petition for review was denied.

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