Securities Regulation Daily SEC fires back against Lucia in rehearing of ALJ battle
Monday, April 3, 2017

SEC fires back against Lucia in rehearing of ALJ battle

The SEC has filed a brief in response to Raymond J. Lucia Companies on rehearing of the D.C. Circuit’s determination that the SEC’s administrative law judges are not "inferior officers" whose appointment must comport with the U.S. Constitution. According to the Commission, ALJs function entirely as aides in the SEC’s decision-making process, and authority remains with the agency heads. Further, the Commission argued in support of Landry v. FDIC, in which the court found the ALJs of the Federal Deposit Insurance Corporation are employees that assist in the initial stages of adjudications and not constitutional officers (Raymond J. Lucia Companies, Inc. v. SEC, March 31, 2017).

Panel decision. A D.C. Circuit panel found that the Commission’s ALJ regime is similar to the FDIC regime the court upheld in Landry. Further, the panel said that the Commission has reasonably interpreted its own in-house regime as denying independent finality to its ALJs’ initial decisions and rejected Lucia’s arguments about the ALJs’ discretion because the Commission still controls the record. The court also found no basis for Lucia’s claim that Congress would have intended for the SEC’s ALJs to be inferior officers due to references in the securities laws to "officers of the Commission" because this phraseology is not necessarily equivalent to Article II’s "Officers of the United States." Moreover, the court credited the Attorney General’s Manual on the Administrative Procedure Act, which states that an agency has full decision-making power regardless of an ALJ’s initial decision.

Rehearing. The full D.C. Circuit vacated its earlier decision and agreed to rehear the case. The court asked the parties to brief the Appointments Clause issue and to address the validity of its Landry precedent. Early last month, Lucia filed a brief in support of its position that SEC ALJs are inferior officers and that the D.C. Circuit should overturn Landry.

ALJs not inferior officers. According to the SEC, the unanimous D.C. Circuit panel correctly held that the SEC ALJs are employees of the Commission and not inferior officers subject to constitutional appointment. ALJs lack delegated sovereign authority to act independently of the Commission and cannot bind the government, the Commission noted. Agency adjudicative practice was largely codified in the Administrative Procedure Act, with agencies employing hearing examiners, classified as Civil Service employees, to provide support for the administrative process without directly binding agencies. The subordinate role that Congress established for ALJs in the APA and their designation as "Civil Service employees" remains unchanged, according to the SEC.

The Commission argued that the Supreme Court’s Freytag decision holding that special trial judges of the Tax Court were properly appointed should not lead to questioning the constitutionality of the SEC’s longstanding administrative regime, as those officers are empowered to enter final decisions and enforce compliance. An ALJ has no authority to hold hearings and issue a decision independent of an assignment from the Commission, according to the SEC, and the Commission may take over the proceeding at any time, reopen the record to hear additional evidence on any question, and revisit de novo any ruling of fact or law. The Commission has ultimate discretion to decide whether and how to use ALJs and determine what types of issues they address, and ALJs are employees who assist in an adjudicatory process that culminates in final decisions by politically accountable agency heads, the SEC stated. Whether the Commission issues a new decision following review or embraces an ALJ’s decision, "ultimate decision-making authority remains with the Commission at all times," the SEC explained. According to the Commission, Lucia’s reliance on the Tenth Circuit’s decision in Bandimere holding that the SEC’s ALJs are inferior officers is not necessarily apposite, as the agency is currently seeking rehearing en banc of the decision.

Given these facts and precedential determinations, there is no persuasive reason to overrule the D.C. Circuit’s decision in Landry, the Commission concluded.

Related proceeding. In PHH Corporation v. CFPB, a separate matter currently pending before the D.C. Circuit, the CFPB used the services of an SEC ALJ. In its brief, the CFPB noted that, if the court in Lucia holds that the SEC’s ALJ was an improperly appointed inferior officer, it should require the parties to file supplemental briefs on the issue or vacate the order without addressing liability and remand for further consideration.

The case is No. 15-1345.

Attorneys: Kellam McChesney Conover (Gibson Dunn & Crutcher LLP) for Raymond J. Lucia Companies, Inc. and Raymond J. Lucia. Martin Vincent Totaro for the SEC.

Companies: Raymond J. Lucia Companies, Inc.

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