Securities Regulation Daily Full court probes status of SEC’s ALJs
Wednesday, May 24, 2017

Full court probes status of SEC’s ALJs

By Mark S. Nelson, J.D.

The full D.C. Circuit heard oral arguments in Raymond Lucia’s case asking the court to deviate from an earlier, and now vacated, panel decision upholding the constitutionality of the SEC’s administrative law judges. The case was the first one heard on day that also featured oral arguments in the PHH case challenging the Consumer Financial Protection Bureau’s director-led structure and, at least indirectly, also raising the ALJ issue. Arguments in both cases came two days after the SEC stayed some ALJ proceedings where the respondent could appeal to the Tenth Circuit, which had previously held the SEC’s ALJs are inferior officers subject to the Appoints Clause (Raymond J. Lucia Companies, Inc. v. SEC, May 24, 2017).

Significant authority. The bulk of Mark Perry’s argument for Lucia and Mark Stern’s argument for the government centered on whether the SEC’s ALJs exercise significant authority. This is the touchstone for whether a person is an inferior officer for purposes of the Appointments Clause in numerous Supreme Court decisions, including Buckley v. Valeo.

Perry opened by telling the court the SEC’s ALJs preside over trial-like proceedings while exercising significant authority. According to Perry, the securities laws and the Administrative Procedure Act mandate a ruling in Lucia’s favor. He even noted an SEC press release describing the agency’s ALJs as holding many powers. He further noted that despite the fact the Commission "may" review initial decisions of ALJs, the Commission does not review very many.

But Perry and Stern would each face repeated questions from the court about what exactly makes an SEC ALJ an officer. Finality? The ability to bind third parties and the government? The presence or absence of powers listed by the Supreme Court in Freytag?.

Landry demoted? The en banc rehearing panels in Lucia and PHH are slightly differently composed: Judge Randolph, who previously took senior status on the court and had authored the concurrence in Landry, the case on which much of the earlier panel decision in Lucia turns, sat on the original panel in PHH and, thus, sat on the rehearing panel in that case; but Judge Randolph was not part of the rehearing panel in Lucia. Chief Judge Garland also did not participate in either Lucia or PHH.

While the composition of the Lucia panel did not eliminate questions about the D.C. Circuit’s Landry precedent, questioning was somewhat limited. At one point, the government’s Stern said the government had assumed that the court wanted to hear arguments about what would happen in the absence of Landry; he said Freytag would lead to the same conclusion that the SEC’s ALJs are constitutional. The court’s order granting en banc rehearing had asked if Landry should be overruled.

Counsel for Lucia had in earlier briefing criticized Landry as a decision that should be overruled. Landry can be read as having established the finality of ALJ decisions as the D.C. Circuit’s touchstone for whether an ALJ is an inferior officer, although Judge Randolph’s concurring opinion in Landry implied that the majority had misread the Supreme Court’s opinion in Freytag by placing too much emphasis on finality.

Consequences of SEC loss. In Free Enterprise, Justice Breyer’s dissent listed the various ALJ positions in the federal government in detail and suggested how legal challenges to those positions could upset government functioning. Likewise, the dissenting judge in the Tenth Circuit’s Bandimere opinion posited that an SEC loss could impact ALJs across the federal government.

Lucia’s counsel, Perry, observed during his argument in chief that more than 100 ALJs could be impacted by an SEC loss on the question of whether they are inferior officers under the Constitution. He explained that these are ALJs that, like the SEC’s ALJs, oversee adversarial proceedings. Perry also noted the data was not part of the record in Lucia’s appeal, but was being offered in reply to a question from the court about whether the case impacted only the SEC’s ALJs. The government’s Stern said in reply to a similar question that he was unsure how Perry derived the data.

The court also inquired about the consequences of removing at least one of the "for cause" removal protections involved here. As one judge put it: whose for cause removal must go? That judge suggested the Merit Selection Protection Board’s and not the ALJs’.

Other questions probed whether an SEC loss could result in ALJs losing their tenure protections. Two judges debated indirectly whether footnote 10 in Free Enterprise had one or two parts; the footnote said ALJs were not at issue in that case, but it also mentioned that ALJs may perform adjudicative functions, a point one judge said could supply a future argument over the ALJs’ tenure protections. The court also suggested that Perry’s data on the number of ALJs potentially affected by an SEC loss omitted Social Security Administration ALJs.

Perry had observed the possibility that two or three layers of for cause removal could be involved in the SEC ALJ case. Stern, in one of the lighter moments in court, mentioned a law review that posited the court should appoint all ALJs.

In another lighter moment (that began with a heavy question), a judge asked Perry whether an SEC ALJ has more authority than a judge who can sentence a person to death or prison without decision by any higher authority. Perry replied that Lucia received a lifetime professional ban from the SEC’s ALJ and closed his rebuttal by citing the statute he argued should help win the case for Lucia. With respect to that statute, Perry told the judge the law says he is right and the judge is wrong, which drew equal laughter to Stern’s mention of the law review article.

The case is No. 15-1345.

Attorneys: Mark Perry for Raymond J. Lucia and Raymond J. Lucia Companies, Inc. Mark Stern for the U.S.

Companies: Raymond J. Lucia Companies, Inc.

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