SEC Declares All Is Okay Because Its ALJs Are Just Employees and Not “Inferior Officers”

On September 3, 2015, the SEC issued its first ruling addressing the constitutionality of its administrative law judges, in In the Matter of Raymond J. Lucia Cos., Inc., File No. 15006.  The opinion can be read here: SEC Opinion in In the Matter of Raymond J. Lucia Companies.  In substance, the SEC argued that its ALJs are “employees,” not “inferior officers” within the meaning of Article II of the Constitution.  In that respect, it disagreed with two federal courts that have addressed the merits of that issue, each of which found it “likely” that the ALJs are inferior officers, and therefore subject to Article II’s Appointments Clause.  See SDNY Court Ups the Ante, Allowing Duka Injunctive Action To Proceed on Appointments Clause Issue, and Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding.

The SEC now says “no,” arguing that its ALJs are sufficiently like the FDIC ALJ’s that were found not to be inferior officers in a split D.C. Circuit opinion in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000).  That was an argument rejected by the two courts.  The SEC wrote:

Our consideration of this question is guided by the D.C. Circuit’s decision in Landry v. FDIC, which addressed whether ALJs should be deemed inferior officers or employees.  Landry held that, for purposes of the Appointments Clause, ALJs at the Federal Deposit Insurance Corporation (“FDIC”) who oversee administrative proceedings to remove bank executives are employees rather than inferior officers. Landry explained that the touchstone for determining whether adjudicators are inferior officers is the extent to which they have the power to issue “final decisions.”  Although ALJs at the FDIC take testimony, conduct trial-like hearings, rule on the admissibility of evidence, have the power to enforce compliance with discovery orders, and issue subpoenas, they “can never render the decision of the FDIC.”  Instead, they issue only “recommended decisions” which the FDIC Board of Directors reviews de novo, and “[f]inal decisions are issued only by the FDIC Board.”  The ALJs thus function as aides who assist the Board in its duties, not officers who exercise significant authority independent of the Board’s supervision.  Because ALJs at the FDIC “have no such powers” of “final decision,” the D.C. Circuit “conclude[d] that they are not inferior officers.”

The mix of duties and powers of the Commission’s ALJs are very similar to those of the ALJs at the FDIC. Like the FDIC’s ALJs, the Commission’s ALJs conduct hearings, take testimony, rule on admissibility of evidence, and issue subpoenas.  And like the FDIC’s ALJs, the Commission’s ALJs do not issue the final decisions that result from such proceedings. Just as the FDIC’s ALJs issue only “recommended decisions” that are not final, the Commission’s ALJs issue “initial decisions” that are likewise not final.  Respondents may petition us for review of an ALJ’s initial decision, and it is our “longstanding practice [to] grant[] virtually all petitions for review.”  Indeed, we are unaware of any cases which the Commission has not granted a timely petition for review.  Absent a petition, we may also choose to review a decision on our own initiative, a course we have followed on a number of occasions.  In either case, our rules expressly provide that “the initial decision [of an ALJ] shall not become final.”  Even where an aggrieved person fails to file a timely petition for review of an initial decision and we do not order review on our own initiative, our rules provide that “the Commission will issue an order that the decision has become final,” and it “becomes final” only “upon issuance of the order” by the Commission.  Under our rules, no initial decision becomes final simply “on the lapse of time” by operation of law; instead, it is “the Commission’s issuance of a finality order” that makes any such decision effective and final.  Moreover, as does the FDIC, the Commission reviews its ALJs’ decisions de novo.  Upon review, we “may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part,” any initial decision.  And “any procedural errors” made by an ALJ in conducting the hearing “are cured” by our “thorough, de novo review of the record.”  We may also “hear additional evidence” ourselves, and may “make any findings or conclusions that in [our] judgment are proper and on the basis of the record.”  For this reason, although ALJs may play a significant role in helping to shape the administrative record initially, it is the Commission that ultimately controls the record for review and decides what is in the record.  As we have explained before, we have “plenary authority over the course of [our] administrative proceedings and the rulings of [our] law judges—before and after the issuance of the initial decision and irrespective of whether any party has sought relief.”

Opinion at 30-31 (footnotes omitted).

The SEC rejected the argument, which the two courts found convincing, that the Supreme Court decision in Freytag v. Commissioner, 501 U.S. 868 (1991), supported the opposite conclusion, arguing that the “special trial judges” at issue in Freytag were more important than the SEC ALJs: “The far greater role and powers of the special trial judges relative to Commission ALJs, in our view, makes Freytag inapposite here.”  Opinion at 32.  The reasons for this view were:

First, unlike the ALJs whose decisions are reviewed de novo, the special trial judges made factual findings to which the Tax Court was required to defer, unless clearly erroneous.  Second, the special trial judges were authorized by statute to “render the [final] decisions of the Tax Court” in significant, fully-litigated proceedings involving declaratory judgments and amounts in controversy below $10,000.  As discussed above, our ALJs issue initial decisions that are not final unless the Commission takes some further action. Third, the Tax Court (and by extension the court’s special tax judges) exercised “a portion of the judicial power of the United States,” including the “authority to punish contempts by fine or imprisonment.”  Commission ALJs, by contrast, do not possess such authority.

Based on the foregoing, we conclude that the mix of duties and powers of our ALJs is similar in all material respects to the duties and role of the FDIC’s ALJs in Landry.  Accordingly, we follow Landry, and we conclude that our ALJs are not “inferior officers” under  the Appointments Clause.

Id. at 32-33 (footnotes omitted).

The reasoning is minimalist.  It ignores the decisions of the two federal courts.  It does not address the array of powers the SEC ALJs have that may differ from FDIC ALJs.  It does not explain why it believes that the differences it found between the “special trial judges” in Freytag and its own ALJs are of sufficient importance to warrant a different result.  And it does not discuss other Supreme Court decisions addressing when adjudicative officials should be considered to be “inferior officers.”  See Challenges to the Constitutionality of SEC Administrative Proceedings in Peixoto and Stilwell May Have Merit.

None of this is surprising.  There was zero chance the SEC was going to rule against its own appointments of ALJs.  That is one reason why decisions of several federal courts that the SEC should be given the chance to address the issue before the courts did, while perhaps lawyerly, seem so pointless.  But nothing about this opinion presents a compelling argument that the ALJs are mere employees, given the broad array of powers they have in determining how administrative cases are litigated and ultimately decided.  And, because the SEC essentially chooses to adopt the rationale of the majority in Landry v. FDIC rather than address the hard issues itself, it is unlikely that any appellate court outside of the D.C. Circuit, where Landry was decided, should, or would, be swayed by what the Commission had to say on the issue.

Straight Arrow

September 4, 2015

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One thought on “SEC Declares All Is Okay Because Its ALJs Are Just Employees and Not “Inferior Officers”

  1. Pingback: SEC Hit with Double Whammy Rulings Barring It from Commencing Challenged Administrative Proceedings | Securities Diary

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