Tag Archives: SEC ALJs

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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SEC ALJ James Grimes Issues Important Discovery Order Against SEC

In In the Matter of Charles L. Hill, Jr., File No. 3-16383, SEC Administrative Law Judge James E. Grimes issued a subpoena requested by Mr. Hill requiring that the SEC produce materials relevant to Mr. Hill’s objections to using the SEC administrative law forum to pursue the enforcement action against him.  The Division of Enforcement and SEC Office of General Counsel (OGC) objected to the motion seeking the subpoena on what were plainly frivolous grounds.  ALJ Grimes properly rejected those objections and compelled the SEC to provide potentially important materials bearing on the fairness or constitutionality of the SEC’s administrative enforcement process.  See the order here: In re Hill Order Partially Granting Subpoena Request.

Recall that ALJ Grimes previously concluded that he lacked jurisdiction to consider some aspects of Mr. Hill’s constitutional challenge to the proceeding (see SEC ALJ Says He Lacks Authority To Decide Key Constitutional Challenges).  Following the issuance of that order, Mr. Hill commenced an action in federal court in the Northern District of Georgia to seek consideration of the constitutional issues the ALJ said he could not consider.  See Complaint in Hill v. SEC (N.D. Ga.).

The subpoena requested by Mr. Hill and opposed by the SEC covered a number of areas, but only two were addressed in yesterday’s order: (1) seeking documents identifying all SEC enforcement actions brought administratively against persons not subject to SEC regulatory oversight solely for alleged violations of section 14(e) of the Securities Exchange Act of 1934; and (2) seeking documents “that support, or reflect or are related to the allegations made by Lillian McEwen, a former SEC administrative law judge, as reported by the Wall Street Journal on May 6, 2015, that chief administrative law judge Brenda Murray ‘questioned [her] loyalty to the SEC’ as a result of finding too often in favor of defendants and that SEC administrative law judges are expected to work on the assumption that ‘the burden was on the people who were accused to show that they didn’t do what the agency said they did.'”  This second request relates to last week’s blockbuster Wall Street Journal article about the SEC’s possible unfair use of its administrative process to prosecute enforcement actions.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.

The objections raised to those aspects of the subpoena request were patently insufficient.  On the first request, the OGC argued the documents sought were “covered by attorney-client privilege and the work-product doctrine.”  Since the request on its face asked only for documents reflecting or reporting on public information (the actual filing of a proceeding), this objection was nonsensical (sanctionable, if the SEC can be sanctioned by its own ALJ).  ALJ Grimes appropriately gave the objection short shrift: “The identity of administrative proceedings is a matter of public record.  As such, documents that identify administrative cases . . . are not protected by the privileges asserted.”

On the second request, the OGC argued “‘[i]t is difficult to perceive how’ the requested documents could be relevant.”  Perhaps so if you are still in elementary school; but if you are a practicing lawyer, the relevance is obvious, since the information requested goes directly to a potential systemic bias imbued in SEC ALJs that would flout due process.  In response to the SEC’s perception problems, ALJ Grimes said no more than “I disagree,” and ordered production of any responsive materials.

The SEC OGC and Enforcement Division do themselves and the Commission no favors by making knee-jerk oppositions to discovery requests by respondents in administrative proceedings.  The very fact that the subpoenas must be approved by the ALJ before being served is a significant disadvantage for respondents as compared to federal court defendants (who can issue subpoenas to third parties, or make document requests of parties, without court approval).  It makes it worse that the SEC will routinely object to any attempt of a respondent to gather evidence through issuance of a subpoena.  It is obviously beyond the pale to do so on purely frivolous grounds.

Kudos to ALJ Grimes for his quick rejection of the SEC staff’s obstructive efforts.  The materials sought could have an important bearing on consideration of constitutional issues raised by Mr. Hill.  And, after the statements made by a former SEC ALJ, development of the record of possible misconduct relating to attempts to influence SEC ALJs to favor the SEC staff in administrative proceedings is essential.  Frankly, it is sad (but, unfortunately, not surprising) that in light of the charge made, the Commission itself has not already commenced an inquiry to assure that its own administrative proceedings have not been tainted by such bias.

Straight Arrow

May 22, 2015

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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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Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt

We discuss today the SEC’s pending consideration of a challenge to its administrative law process in In the Matter of Timbervest, LLC et al., File No. 3-15519.

Briefly, the case involved alleged violations of sections 206(1) and 206(2) of the Investment Advisors Act.  Timbervest is an Atlanta company that manages timber-related investments. The SEC alleged that in 2006 and 2007, company officers received unauthorized and undisclosed real estate commissions paid out of the pension plan assets of Timbervest’s largest client.  The SEC further alleges that in 2005-2006, Timbervest made an undisclosed and unauthorized sale of a timberland property from a fund holding that same client’s pension assets to another investment fund the firm managed.

The order instituting proceedings was issued in September 2013.  The administrative proceeding was tried before SEC Administrative Law Judge Cameron Elliot, who issued his Initial Decision in August 2014.  Mr. Elliot found for the Division of Enforcement in all respects except that he concluded two of the individual respondents lacked the scienter required for aiding and abetting the firm’s violations, and that the five-year statute of limitations in 28 U.S.C. § 2462 precluded the associational bars sought against the individuals and the revocation of Timbervest’s adviser’s license.  Both the respondents and the Division of Enforcement petitioned the SEC for review, and both petitions were granted.  In their ensuing filings, the respondents argued, among other things, that the administrative process was unconstitutional because SEC ALJs are executive officers who enjoy “two-tiered tenure protection,” although they dedicated only two paragraphs in their opening brief to this issue, and the Division of Enforcement responded with only one paragraph in its opposition brief.  In response, the Commission asked that the parties file supplemental briefs on that issue.

Those supplemental briefs have now been filed.  The Division of Enforcement’s supplemental brief is here, the respondents’ supplemental brief is here, and a supplemental notice of authority by the respondents is here.  The SEC recently scheduled oral argument on the case for June 8, 2015.  We know, of course, that the SEC is going to uphold the constitutionality of its own ALJs, so the result at this stage is not really in question.  But there will be an appeal to a court of appeals (either the D.C. Circuit or the Eleventh Circuit are possibilities), so it’s useful to see how convincingly the Division of Enforcement argued the constitutionality issue to the Commission.  By my measure, the arguments made are pretty weak, which still leaves to $64,000 Question: will a court of appeals or the Supreme Court really be willing to invalidate the SEC ALJ framework on the basis of this record?

The Division of Enforcement argued that “Commission administrative proceedings do not violate Article II of the Constitution” because “Commission ALJs are not constitutional officers – the only Court of Appeals to have considered the status of an agencys ALJs concluded they are employees, see Landry v. FDIC, 204 F.3d 1125, 1132-34 (D.C. Cir. 2002) – and therefore the removal framework applicable to them does not implicate Article II. And even if Commission ALJs were constitutional officers, the President exercises adequate control to satisfy the Constitution.”  Division Supplemental Br. at 1.

Let’s examine those arguments.

The Argument that “Commission ALJs Are Not Constitutional Officers”

The first argument – that the SEC ALJs are “employees” rather than “inferior officers” from a constitutional standpoint – seems particularly weak.  Perhaps if the SEC were writing on a blank slate this might be sustainable.  But it is not deciding this issue without controlling guidance.  There are a number of Supreme Court decisions out there that must be taken into account.  The Division’s brief does a poor job of addressing these binding precedents.

As we previously wrote (see Challenges to the Constitutionality of SEC Administrative Proceedings in Peixoto and Stilwell May Have Merit), the Supreme Court addressed similar issues in decisions in Freytag v. Commissioner, 501 U.S. 868 (1991), Weiss v. United States, 510 U.S. 163 (1994); Ryder v. United States, 515 U.S. 177 (1995); and Edmond v. United States, 520 U.S. 651 (1997).  Freytag ruled that special trial judges for the Tax Court were “inferior Officers” under the constitution, and not “employees” who assisted Tax Court judges in taking evidence and preparing a ruling – even though they lacked authority to render “final decisions” – because they exercised significant discretion in performing tasks like taking testimony, conducting trials, ruling on the admissibility of evidence, and deciding and ordering compliance with discovery orders.  Weiss noted that military judges were Officers of the United States because of their authority and responsibilities, but the issue was not contested by the parties.  Ryder ruled that that judges serving on the Coast Guard Court of Military Review were officers covered by the Appointments Clause, even though they were subject to review by a higher appellate court.  And Edmond explained that intermediate appellate military judges were not “principal officers,” because they were subordinate to a higher ranking officer below the President, were subject to oversight, and could not render final decisions, but plainly considered them to be “inferior officers.”

These cases negate many of the arguments made in the Division’s brief.  It mattered not that these other officials found to be executive officers were involved in a preliminary process; could not render final decisions; were subject to being reversed; served in an adjudicatory, rather than a “core executive” capacity; were subject to supervision by others; and even were “subordinate” to others.  All of the Division’s arguments that ALJs are “employees,” and not “executive officers” for those reasons simply cannot survive contrary Supreme Court precedent.

The invocation of the D.C. Circuit decision in Landry v. FDIC cannot change this.  In Landry, a split D.C. Circuit panel ruled that an FDIC ALJ was not an “inferior officer,” but was instead a mere “employee.”   The opinion questioned the usefulness of the Supreme Court’s guidance in Buckley v. Valeo, 424 U.S. 1, 126 n.162 (1976), that “any appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States.’”  But the Buckley language was the starting point for the analysis of this issue in Freytag, in which the Court found dispositive the “significance of the duties and discretion that special trial judges possess.”  501 U.S. at 881.  The Landry majority argued that the critical difference between the special trial judges in the Tax Court and the FDIC ALJs was that FDIC ALJs only made “recommendations” to the FDIC, and thus could never issue final decisions.  Not only did that misread Freytag, which focused on the array of “significant” “duties and discretion” of the special trial judges, and not final decision-making powers, but it also ignored the discussions in Weiss, Ryder, and Edmonds, which made it plain that being a final decision-maker was not a decisive factor in determining whether someone is an “inferior officer.”

But even accepting the Landry majority opinion on its face, it provides little assistance to the Division because in some cases SEC ALJs do make “final decisions” like the special trial judges of the Tax Court.  The FDIC was required to review every ALJ “recommendation.”  But the SEC can, and does, decline to review ALJ decisions, and in those cases, it matters little to constitutional analysis that these decisions require a ministerial Commission order to make them formally “final” and appealable.  Moreover, the SEC does not, and cannot realistically, review an ALJ’s management and oversight of the administrative trial itself, during which many “final decisions” are made on important issues that determine the record the SEC can review.  And, of course, the approach taken by a court of appeals panel – and a split one at that – hardly trumps the guidance of the Supreme Court on how to go about determining whether a government official is an “inferior officer.”

The final nail in the coffin of the Division’s argument that the D.C. Circuit decided once and for all in Landry that ALJs are only agency “employees,” and not executive “officers,” is laid out in the Timbervest respondents’ brief.  They point out that the Government itself admitted this is not so.  To avoid a writ of certiorari in Landry, the Government represented to the Supreme Court that the Landry court did not decide that issue.  Here is what the Solicitor General said: “The court of appeals did not purport to establish any categorical rule that administrative law judges are employees rather than ‘inferior Officers.’ . . .” Timbervest Respondents’ Br. at 16 (quoting the U.S. Government brief in opposition to the petition for writ of certiorari).

The Division’s brief presents another argument that carries little water on the “inferior officer” versus “employee” issue: that Congress already decided that ALJs are just employees, not executive officers, by its “placement of the position within the competitive service system,” and the courts must defer to that decision by Congress.  That is wrong in two respects.  First, there is no indication that Congress made any such decision when it placed ALJs within the overall civil service system, and the Division cites no support for that contention.  Second, and far more importantly, it should be wrong that Congress has the power to decide when double-tenure protection can prevent the President from influencing government officials simply by designating those officials to be mere “employees.”  The whole point of the separation of powers doctrine is to assure that Congress may not deprive the President of his constitutional authority to execute the laws; it would be bizarre if Congress could grant executive powers to officials and then insulate them from the President’s influence by exercising Legislative muscle.  The best the Division could muster on this point was language in Justice Souter’s concurring opinion in Weiss suggesting “deference to the principal branches’ judgment is appropriate” (Divison Br. at 8, quoting 510 U.S. at 194), but that is a slim reed that cannot, I believe, be sustained without doing serious harm to the separation of powers concept.

Freytag and the other Supreme Court cases make it crystal clear that whether an executive official is an “inferior officer” depends on the “significance of the duties and discretion” that the official possesses, not a Congressional designation.  The Division simply cannot avoid the obvious similarity – and near congruence – of the “duties and discretion” of SEC ALJs in comparison to the special trial judges at issue in Freytag.  The Court, which was otherwise divided, unanimously viewed the special trial judges as “inferior officers” within the meaning of the Constitution based on their duties, discretion, and overall role in executive department proceedings, which showed that they exercised “significant authority pursuant to the laws of the United States.”  The SEC ALJs have, in reality, at least as great, and almost surely greater, authority and discretion in SEC administrative law enforcement proceedings, and no argument made by the Division in its brief shows otherwise.

The Argument that “Even if Commission ALJs Were Constitutional Officers, the President Exercises Adequate Control To Satisfy the Constitution”

The Division’s argument that the President has adequate control over SEC ALJs faces only one major obstacle: the Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).  There, the Court found that a double layer of “for cause” protection for executive officers from removal by the President was constitutionally unacceptable.  The Division’s task is to identify differences that justify allowing double “for cause” protection for SEC ALJs despite the Free Enterprise Fund decision.  The Division is assisted here by footnote 10 of the opinion, which said: “our holding does not address that subset of independent agency employees who serve as administrative law judges. . . .   And unlike members of the Board, many administrative law judges of course perform adjudicative rather than enforcement or policymaking functions.”  561 U.S. at 507 n.10.

As we saw above, the mere fact that the SEC ALJs “perform adjudicative . . . functions” is not enough under Supreme Court precedent to prevent them from being executive officers performing executive functions.  And on this front, it does not help the Division that the SEC ALJs plainly serve as key players in the SEC’s law enforcement function.

The Division makes the argument, correctly, that the separation of powers doctrine does not create a rigid, formal structure of Branches hermetically-sealed from one another.  The Supreme Court recognizes that there are gray areas, and in such cases it is appropriate to conduct a functional analysis of the extent to which a statutory framework truly impairs a Branch from performing its constitutional duties.  Perhaps the best example of that is the special prosecutor case, Morrison v. Olson, 487 U.S. 654 (1988), which adopted a multifactor test to determine whether the statute that limited Executive control over the special prosecutor was consistent with the separation of powers doctrine.  The Division appropriately quotes Morrison’s statement that interference with removal of the special prosecutor can be acceptable if it does not “interfere with the President’s exercise of the ‘executive power’” or the duty to “take care that the laws be faithfully executed.”  Division Br. at 14 (quoting 487 U.S. at 689-90).

The Division’s brief goes on to draw distinctions between the PCAOB and the SEC’s administrative law judges, mostly by focusing on the PCAOB’s broader role in policymaking, as well as arguing that the PCAOB exercises power more independently than the ALJs.  Whether these are distinctions of constitutional dimension is not apparent, however, since in the realm in which the ALJs function, they have a high degree of independent control over a key law enforcement function, and the constitutional importance of whether they do or do not make policy (as opposed to performing other executive functions) is by no means clear.  But the point is sufficiently made that the analogy between the PCAOB and the ALJs is not so close that it is, in and of itself, compelling (as compared to the analogy of ALJs to the special trial judges in Freytag, which is so close that it is compelling).

Having made a credible showing that the unconstitutionality of the SEC ALJs does not follow inexorably from the Free Enterprise Fund decision, the Division turned to the argument that double insulation of the ALJs from Presidential removal does not significantly impair the President’s executive powers.  The Division makes five arguments.  Four of them are less than compelling; one is downright embarrassing.

First, the Division argues that the Commission decides when the ALJs get to decide cases, and the Commission has only one layer of “for cause” removal protection.  That formalistic argument would seem to carry little weight as part of a functional analysis, however.  From a realistic, functional standpoint, the Commission does – and in reality must – utilize the ALJs to do its enforcement work because it could not handle the workload without them. Put another way, the creation of the ALJs allows the Commission to expand its enforcement activity exponentially, and fueling that expansion with executive officers who cannot be influenced by the President has a real, functional effect on the President’s ability to execute the laws.

Second, the Division argues that “the functions that the Commission has assigned to its ALJs are limited in scope and do not rise to the level of core executive authority.”  Division Br. at 18.  This argument is, in essence, that because ALJs only adjudicate cases, and do not “make policy,” their activities do not significantly impair the President’s execution of the laws.  As the Division says: SEC ALJ adjudications “involve the application of the law to a discrete set of facts in individual cases.”  Id.  I see two problems with this argument. One, it runs headlong into the Supreme Court decisions (discussed above) that either hold, or assume, that officials performing adjudicative roles within an executive function are important facets of the President’s duty to oversee the faithful execution of the laws.  Two, overseeing individual prosecutions, finding facts in those cases, weighing the importance and implications of those facts under the law, and determining whether there are violations, and what remedies should be imposed if there are, are arguably the essence of “core executive authority” because law enforcement prosecutions are a core executive function.

Third, the Division argues that the President can “exercise constitutionally adequate control” over ALJ decisions because “the Commission retains ultimate authority over administrative proceedings” and “exercises sufficient control over SEC ALJs regardless of the limittations placed upon their removal.”  Division Br. at 19.  This is essentially a rehash of earlier points, and runs into the reality, and the buzzsaw of prior Supreme Court decisions, that adjudicators do, in fact, make essentially non-reviewable discretionary decisions that control how a case is presented to the Commission.  They mold the record the Commission gets to review, and that power substantially impacts – or certainly can substantially impact – the Commission’s substantive review powers.

Fourth, the Division argues that the double-tenure protection accorded to SEC ALJs is less extreme than the protection provided to the PCAOB members.  Id.  This is largely a one-paragraph throw-away point, as the Division makes no effort to explain how the difference it argues has a functional impact on Presidential control.

Fifth, “the Executive Branch’s use of tenure-protected ALJs for nearly seventy years establishes a gloss on the Constitution that supports the current removal framework.” Division Br. at 20.  The Division would have been better off leaving this out.  The SEC cannot seriously find that the structure of its administrative enforcement process should be deemed constitutional simply because it has been around for a long time.  The argument is revealing, however, because it reflects what the SEC staff – and probably the SEC itself – really thinks.  They could have written the point more eloquently if they said what they meant (paraphrasing the famous line in Treasure of the Sierra Madre): “Constitutional authority?  We don’t need no stinking constitutional authority.”

[The actual line in the movie is: “Badges?  We ain’t got no badges.  We don’t need no badges.  I don’t have to show you any stinkin’ badges!”  And, as a diversion, enjoy this clip, this one from Blazing Saddles, and this montage.]

Humphrey Bogart in Treasure of the Sierra Madre

Humphrey Bogart in Treasure of the Sierra Madre

Alfonso Bedoya as

Alfonso Bedoya as “Gold Hat” in Treasure of the Sierra Madre — He don’t need no stinkin’ badges.

Seriously, though, the Division’s discussion of why the double-tenure protection of ALJs does not significantly impair the President’s ability to control SEC administrative law enforcement decisions is light on focused analysis of the nature of those law enforcement decisions, the respects in which the Chief Executive may have an interest in influencing those decisions, and the ways in which he can achieve those goals notwithstanding the double-tenure protection.  That is the kind of functional analysis called for by Morrison v. Olson, and the Division brief fails to address those key issues.

Based on reviewing these briefs, this continues to be a close call. The hydraulics are in the Division’s favor – certainly before the Commission, but also before an ultimate court of appeals, which will stretch mightily to avoid undercutting the SEC ALJ framework, and presumably other similar independent agency administrative enforcement frameworks (executive agencies, however, would not present the double-tenure protection issue).

Straight Arrow

May 6, 2015

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