SEC Enforcement, ALJs and the Appointments Clause – Part II


This is the second of two articles reviewing the arguments of the parties in SEC v Raymond J. Lucia Companies, Inc., v. Securities and Exchange Commission, No. 15-1345 (D.C. Cir. Argument May 24, 2017). In that case the en banc Court will consider whether the SEC’s ALJs must be appointed to their positions in accord with the Constitution’s Appointments Clause, Art. II, sec. 2, cl. 2. The Petitioners’ arguments were presented in the article published yesterday. Below are those presented by the Securities and Exchange Commission in its brief.

Respondent’s Brief

SEC Administrative Law Judges are civil service employees of the agency, not Officers of the United States. The federal securities laws vest the adjudicative powers of the SEC exclusively in the Commission whose five members are appointed by the President. The Commission has broad authority in exercising its functions and may employ its employees as deemed appropriate. Regardless of the task delegated to an employee, however, sole and exclusive authority remains with the Commission.

The Commission has chosen to employ ALJs to “assist in the adjudication of matters . . . That practice is discretionary.” In making this choice the agency has the authority to decide what role, if any, ALJs or others may undertake in assisting with the implementation of Commission adjudicative powers. Final decisions in adjudicative matters remain at all times with the agency, not those who assist it such as ALJs: “In no circumstance can an ALJ issue a decision that in any respect commits the Commission to a particular view of the law or facts, or in any other way inhibits the Commission’s discretion to decide the case . . .” as it deems appropriate.

The Commission’s authority is reflected in the manner in which adjudications are typically conducted. The Commission’s review of an ALJ initial decision is de novo – the agency is free to resolve the case in any manner deemed appropriate. Yet even if the Commission choses not to conduct a plenary review, the determination of the ALJ is not final and effective until the Commission issues a finality order.

This view of Commission ALJ’s is consistent with its historical use of ALJs and that adopted by Congress in the APA. First, employees comparable to current ALJs, but originally called “examiners” or “hearing examiners,” have long assisted federal agencies by developing administrative records and crafting the initial determination.

Second, when enacting the APA Congress considered various proposals regarding the adjudicative function of agencies. One, for example, was to create an administrative court. After considering this and other alternatives Congress, in the APA, provided for examiners that would be appointed by each agency in accord with “’the civil-service and other laws.’” The Supreme Court in Ramspeck v.Federal Trial Exam’rs Conference, 345 U.S. 128 (1953), a case in which examiners challenged aspects of the Civil Service Commission’s regulations applicable to them, rejected the claim and upheld the regulations as reflecting the intent of Congress. This reading of the APA is also consistent with the structure of the Act which makes it clear that “as employees, ALJs function to assist – but not to bind – politically accountable agency heads in the exercise of their adjudicative powers,” according to the Commission. While the name “hearing examiner” was changed to administrative law judge in 1978 by Congress, their subordinate role remained the same.

Petitioners’ efforts to analogize SEC ALJs to Article I judges, as well as their reliance on the Supreme Court’s decision in Freytag, is misplaced. Freytag centered on the role of special trial judges. Originally the Tax Court was established as the Board of Tax Appeals. It was an independent agency that adjudicated disputes regarding tax assessments. Subsequently, Congress re-established the Board as the Article I Tax Court in the Tax Reform Act of 1969. The commissioners were renamed “special trial judges.” Their authority was enhanced, empowering them to issue final and enforceable judgments of the Tax Court in specified classes of cases. They were thus Officers within the meaning of the Appointments Clause.

Commission ALJs are not Article I judges as in Freytag. Article I judges, for example, have the ability to enforce discovery orders through the power of contempt, a point Freytag found significant. In contrast, SEC ALJs have no such authority.

Finally, Petitioners’ claim that each branch of the federal government has recognized that ALJs are in fact the equivalent of an Article I judge is incorrect. Congress did not make such an acknowledgement. This claim is contrary to the fact that Congress classified ALJs as Civil Service employees in the APA. Equally clear is the fact that the DOJ Office of Legal Counsel has not made such an acknowledgement. Rather, in an opinion not cited by Respondents, that office concluded that the Department of Education’s ALJs are employees of that department. Finally, the Supreme Court has not acknowledged that ALJs are in fact Officers within the meaning of the Clause, a point reflected by the Court’s decision in Ramspeck. To the contrary, this Court’s decision in Landry faithfully followed Freytag as did the earlier panel decision in this case concluding that SEC ALJs are not Officers within the meaning of the Appointments Clause. Rather they are Civil Service employees as Congress concluded when enacting the APA.

Recent Commission Enforcement Actions: Recently, the Commission announced the following actions which will be discussed later this week:

SEC v Chan, Civil Action No. 1:17-cv-03605 (S.D.N.Y. Filed May 15 ,2017)(action charging former co-head of the CMBS trading desk at Nomura Securities with fraud).

SEC v. Im, Civil Action No. 1:17-cv-03613 (S.D.N.Y. Filed May 15, 2017)(same as above).

In the Matter of Emerald Isle Exploration, Ltd., Adm. Proc. File No. 3017982 (May 12, 2017)(offering fraud action).

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