They hold hearings. They issue subpoenas. They adjudicate. In the 2016 fiscal year, they ordered $12.4 million in disgorgement and $14.5 million in civil penalties. They are the U.S. Securities and Exchange Commission’s (SEC) administrative law judges.
Administrative proceedings are commonly used by agencies to adjudicate claims or enforcement actions quicker than if the agency filed in federal court. Cases are heard before administrative law judges, or ALJs, instead of Article III judges on the federal bench. While the SEC faces numerous challenges to the partiality of its ALJs and its rules of practice, there is a preliminary challenge—are the SEC’s ALJs constitutional at all?
Hiring v. Appointing
Currently, the SEC’s ALJs are selected by the current Chief ALJ of the SEC, subject to the ALJ hiring process set forth by the Office of Personnel Management. Under the view that ALJs are employees of the SEC, this approach is perfectly fine. However, if ALJs are deemed “inferior officers,” then this selection process is unconstitutional.
The issue derives from the Appointment Clause of the Constitution. The Appointment Clause gives the President the power to appoint “primary officers,” subject to confirmation by the Senate. The clause gives Congress the power to vest appointment power for inferior officers in the President, judicial courts, or heads of departments. Thus far, there is no definitive test to determine what positions are inferior officers as opposed to mere employees.
In Bandimere v. SEC, the Tenth Circuit determined that SEC ALJS are inferior officers under the Appointment Clause. The court relied upon three facts from Freytag v. Commissioner of Internal Revenue, where the Supreme Court determined that the Tax Court’s special trial judges were inferior officers. The court wrote in Bandimere:
Those three characteristics exist here: (1) the position of the SEC ALJ was “established by Law”; (2) “the duties, salary, and means of appointment . . . are specified by statute”; and (3) SEC ALJs “exercise significant discretion” in “carrying out important functions.”
However, the D.C. Circuit reached the opposite result in Raymond J. Lucia Companies v. SEC. Here, the court determined that ALJs were employees of the SEC by primarily focusing on the fact that the ALJs’ decisions were subject to final review by the SEC Commissioners (who are primary officers).
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 public benefit.
So where does this leave the law? Clearly, one circuit on its own cannot change the structure of a federal agency. If the Supreme Court concludes that the SEC’s ALJs are inferior employees, Congress would need to take swift action to create an appropriate avenue to appoint ALJs to avoid overwhelming the federal docket with cases that would have been resolved in administrative proceedings.