SEC ALJ Says He Lacks Authority To Decide Key Constitutional Challenges

On May 14, 2014, in In the Matter of Charles L. Hill, Jr., File No. 3-16383, SEC administrative law judge James Grimes ruled that he had no authority to decide that a portion of the Dodd-Frank Act allowing the SEC to commence civil actions against unregulated persons in its administrative law court was unconstitutional.  That could have a bearing on the issue of the standing of SEC administrative targets to bring federal court challenges to those proceedings.  ALJ Grimes did decide that he could address the constitutionality of the double layer of tenure protection provided to SEC ALJs against Presidential removal power, and, not surprisingly, ruled that he held his position constitutionally.  But he declined to offer any view on Mr. Hill’s arguments that the Dodd-Frank Act improperly delegated authority to the SEC, and that he had been denied a Seventh Amendment right to a jury trial.  The Order is available here: Order Denying Respondent’s Motion for Summary Disposition on Constitutional Issues.

On the issue of his authority to rule, he wrote:

After receiving Mr. Hill’s motion, I directed the parties to address “whether I have the authority to rule on Mr. Hill’s constitutional challenges.” . . .  The Division responded that I have authority to rule on Mr. Hill’s challenges. . . .  Mr. Hill disagrees. . . .

Subsequent to instructing the parties to address my authority to rule on Mr. Hill’s constitutional challenges, it came to my attention that the Commission has repeatedly held that it lacks the authority “to invalidate the very statutes that Congress has directed [it] to enforce.” . . .  It has recently reaffirmed this interpretation of its authority. . . .  The Commission thus operates on the assumption that its “governing statutes are constitutional” “[u]nless and until the courts declare otherwise.”

It follows from the foregoing that I lack the authority to rule on the constitutionality of particular provisions of the Exchange Act.

ALJ Grimes nevertheless concluded that he could address the issue of constitutionality of the double-layer of tenure protection afforded to SEC ALJs because that involved protections under 5 U.S.C. § 7521, which is not part of the Exchange Act.  He did so even though: “It would be incongruous . . . if I were unable to address the constitutionality of a provision of the Exchange Act, an Act I am regularly required to construe, but able to address the constitutionality of Section 7521, a provision I do not normally encounter.”

Turning to the double-layer of tenure protection, he “assumed” that ALJs are “inferior officers” of the Executive Branch, noting that “[b]oth parties have presented strong arguments in support of their positions.”  Nevertheless, he found that the double-layer of protection given to SEC ALJs against removal by the President does not make them unconstitutional because SEC ALJs “exercise only adjudicatory functions” that are “limited to a specific subject matter.”  In doing so, he relied almost exclusively on the Supreme Court’s decision in Morrison v. Olson, 487 U.S. 654 (1988), which addressed the constitutionality of the independent special prosecutor statute, and said “the real question is whether the removal restrictions are of such a nature that they impede the President’s ability to perform his constitutional duty, and the functions of the officials in question must be analyzed in that light.”  Id. at 691.  Because “the Commission’s administrative law judges exercise only adjudicatory functions,” and “their jurisdiction is limited to a specific subject matter and they ‘lack[] policymaking or significant administrative authority'” (quoting Morrison), “the dual-tenure protection afforded administrative law judges does not unconstitutionally impair the President’s ability to remove executive branch officials because those particular officials do not perform functions ‘central to the functioning of the Executive Branch'” (again quoting Morrison).

ALJ Grimes concludes: “Furthermore, taken to its logical end, Mr. Hill’s argument would mean that almost no independent agency could use administrative law judges.  If “‘a page of history is worth a volume of logic,’” however, it is unlikely this could be the case.”  Although he says that SEC ALJs are “not among ‘those who execute the laws,’” he does not address at all the critical role of SEC ALJs as part of what is probably the second most significant law enforcement agency in the federal government — the SEC — and the many respects in which SEC ALJs exercise significant discretion in the operation of that law enforcement process.

But ALJ Grimes chose not to offer any view on the other two constitutional challenges raised by Mr. Hill: (1) that “by giving the Commission the discretion to choose whether to seek civil penalties against unregulated individuals either administratively or in district court, Congress impermissibly delegated legislative power to the Commission”; and (2) that “by giving the Commission authority to bring an administrative action against an unregulated individual, Congress infringed on his Seventh Amendment right to a jury.”

On these issues, ALJ Grimes concluded that the limits on his authority to address constitutional issues preclude him from addressing those arguments.  Interestingly, in reaching this conclusion, he also implicitly holds that the SEC itself has no power to reach those issues, because the grounds for limiting his authority apply equally to the Commission.  That gives significant ammunition to those trying to get judicial review of these constitutional issues, because the standing to do so depends in part on whether the SEC has the power to address them as part of the normal administrative adjudication process.

Straight Arrow

May 15, 2015

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2 thoughts on “SEC ALJ Says He Lacks Authority To Decide Key Constitutional Challenges

  1. Pingback: SEC ALJ James Grimes Issues Important Discovery Order Against SEC | Securities Diary

  2. Pingback: Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding | Securities Diary

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