Roger K. Morris, Staff Editor
There are 1,792 administrative law judges (ALJs) employed across 34 different federal agencies—five of those judges are employed by the Securities and Exchange Commission (SEC). Those five judges, and their predecessors, have decided thousands of adjudications, and the Supreme Court is likely to take a case as soon as this term that could unravel those decisions, and, potentially, decisions by ALJs across multiple other agencies.
The SEC initiated an enforcement action against Mr. Raymond Lucia for alleged violations of anti-fraud provisions of the Investment Advisers Act. The SEC ordered a public hearing to be conducted by an ALJ. That ALJ issued an initial decision which found liability and imposed sanctions, including a lifetime industry ban of Mr. Lucia. The SEC reviewed the ALJ decision and again found that Mr. Lucia had committed anti-fraud violations and imposed the same sanctions as the ALJ. Mr. Lucia argued that the presiding ALJ was not appointed in accordance with Article II, and, thus, the proceeding had been unconstitutional.
Article II of the Constitution contains what is known as the Appointments Clause which states:
“He (the President) shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”
To put it in modern parlance, the President must by the one who selects “all Officers of the United States” unless the mode of appointment is provided elsewhere in the Constitution. Employees or other “‘lesser functionaries’ need not be selected in compliance with the strict requirements of Article II.” The basic issue is whether an SEC judge is an “inferior officer” that must be appointed by the President or just another employee of the SEC? The mode the SEC utilizes to select administrative law judges is not in dispute: a bureaucratic process conducted “by the SEC’s Office of Administrative Law Judges and not by the President.” Therefore, if it is determined that these judges are “officers” defined by Article II then their appointments are invalid because the President did not make them. If that were the case then thousands of SEC adjudications would have been decided by illegitimate ALJs.
What differentiates “employees and lesser functionaries”” from “inferior officers” is that officers exercise “significant authority pursuant to the laws of the United States.” The Supreme Court has addressed once before the issue of inferior officers and employees in Freytag v. Comm’r, Internal Revenue. In that case the Court reviewed the ability of the Tax Court to appoint special trial judges (STJs) and found that STJs were inferior officers because (1) the position was established by law, (2) “the duties, salary, and means of appointment are specified by statute, and (3) the STJs “perform more than ministerial tasks.”
The D.C. Circuit ruled on Mr. Lucia’s arguments in August of 2016 and found that the SEC’s ALJs are not “officers” because “they do not have the power to issue final decisions.”Therefore, the President was not, in the view of the court, needed to appoint SEC ALJs and the SEC ruling about Mr. Lucia was valid. The court used three criteria to make to evaluate the scope of an SEC ALJs authority and whether or not the judge performed more than ministerial duties pursuant to Freytag: (1) the significance of the matters before the judges, (2) the discretion used in reaching a decision, and (3) the finality of their decisions. The third factor was the deciding one.
In the court’s view, the decisions rendered by SEC ALJs are not final because the statute reserves to the Commission “‘a discretionary right to review the action of any’ ALJ as it sees fit.” The decisions by SEC ALJs, in the view of the D.C. Circuit, are no more than “recommended decisions” that require the SEC to affirmatively act on every case by issuing an order on whether or not to review. Only when the SEC decides not to review or upholds the ALJ’s decision does the ALJ’s decision become final. That lack of finality, in the view of the court, was dispositive and indicated that SEC ALJs do not perform more than ministerial tasks. Because the ALJs only perform ministerial tasks, the court reasons, they are to be considered employees of the SEC and not officers of the United States. In the view of the court, the STJs in Freytag, in at least some cases, had the authority to issue final decisions, and so they exercised enough authority to be officers requiring Presidential appointment. In June, the D.C. Circuit reviewed this decision en banc and split 5-5.
The Tenth Circuit reviewed a similar issue regarding SEC ALJs but reached the opposite conclusion: SEC ALJs are constitutional officers and their appointments contravene the Constitution. The court in Bandimere v. Sec. & Exch. Comm’n concluded that the finality of decisions was meant to be only one factor in determining whether someone is an inferior officer or an employee. The court felt that the SEC ALJs were no different than the STJs in Freytag. The court used the three Freytag factors and found: (1) the SEC ALJs are established the law through the Administrative Procedure Act and Securities and Exchange Act of 1934, (2) the statute establishes their duties, salaries, and means of appointment, and (3) the ALJs “exercise significant discretion in performing ‘important functions.’” The finality of decisions was considered relevant in determining whether significant authority is exercised, but that was not found to mean that “every inferior officer must possess final decision making power.” SEC ALJs take testimony, regulate document production and deposition, rule on the admissibility of evidence, receive evidence, rule on motions, issue subpoenas, preside over trial-like hearings, and make findings which the SEC considers with great weight during agency review. Despite the lack of finality that prevented the D.C. circuit from finding that SEC ALJs were officers, the Tenth Circuit found that the total authority these ALJs was enough to find that SEC ALJs possess “significant authority” greater than ministerial duties and should be considered “inferior officers.”
This past month the Fifth Circuit deepened the circuit split by joining the Tenth Circuit in concluding that a plaintiff was likely to succeed on a claim challenging the constitutionality of ALJs serving the Federal Deposit Insurance Corporation (FDIC).FDIC ALJs also possess a similar lack of finality in their decisions, but the court held that was not dispositive. Much like SEC ALJs, FDIC ALJs conduct trials, rule on evidence, and preside over trial-like hearings. These powers are “more than ministerial tasks.” The Freytag factors, the court indicated, suggest that FDIC ALJs are constitutional officers that should be appointed by the President.
Following the recent en banc decision, Mr. Lucia has filed a petition asking for Supreme Court review and many experts think that the Court is likely to take up this issue in the coming term, especially considering the Fifth Circuit’s recent opinion.Currently, the Circuits that have found ALJs unconstitutional have called into question all prior adjudications by those judges and current administrative processes. Considering the important role the administrative state plays in government and commerce, immediate clarification is needed by the Supreme Court. If that were to happen, thousands of administrative adjudications could be at stake. Depending on the breadth of that potential decision, not only could the SEC be affected, but also other agencies that appoint their ALJs in similar fashion and given those judges similar authority like the FDIC.
 J.D. expected May 2019
 Carmen Germaine, Circuits Split Widely on SEC Judges’ Constitutionality, Law360 (Jan. 3, 2017, 10:31 PM), https://www.law360.com/articles/876758/circuits-split-widely-on-sec-judges-constitutionality.
 Sarah A. Good & Laura C. Hurtado, Constitutionality of SEC’s Administrative Law Judges Headed to Supreme Court?, Harvard Law School Forum on Corporate Governance and Financial Regulation (Jan. 9, 2017), https://corpgov.law.harvard.edu/2017/01/09/constitutionality-of-secs-administrative-law-judges-headed-to-supreme-court/.
 Raymond J. Lucia Companies, Inc. v. Sec. & Exch. Comm’n, 832 F.3d 277, 282 (D.C. Cir. 2016).
 Id at 282-83.
 Id at 283.
 U.S. Const. art. II, § 2, cl. 2 (emphasis added).
 Lucia, 832 F.3d at 283 (quoting Buckley v. Valeo, 424 U.S. 1, 132 (1976)).
 Id at 284 (citing Freytag v. Comm’r, Internal Revenue, 501 U.S. 868, 880 (1991)).
 Good & Hurtado, supra note 3.
 Sarah A. Good & Laura C. Hurtado, Have SEC ALJs Been Operating Contrary to the U.S. Constitution?, Harvard Law School Forum on Corporate Governance and Financial Regulation (July 12, 2017), https://corpgov.law.harvard.edu/2017/07/12/have-sec-aljs-been-operating-contrary-to-the-u-s-constitution/.
 Bandimere v. Sec. & Exch. Comm’n, 844 F.3d 1168, 1174 (5th Cir. 2016) (citing Freytag, 501 U.S. at 880-82)).
 Freytag, 501 U.S. at 870 and 881-82.
 Alison Frankel, SCOTUS petition claims Justice memo is smoking gun on SEC ALJs, Reuters (July 24, 2017, 3:09 PM), https://www.reuters.com/article/us-otc-alj/scotus-petition-claims-justice-memo-is-smoking-gun-on-sec-aljs-idUSKBN1A92E4.
 Lucia, 832 F.3d at 284 (citing Tucker v. Comm’r, Internal Revenue, 676 F.3d 1129, 1133 (D.C. Cir. 2012)).
 Id at 285.
 Id at 287.
 Id at 285.
 Raymond J. Lucia Companies, Inc. v. Sec. & Exch. Comm’n, 868 F.3d 1021 (D.C. Cir. 2017) (en banc).
 Bandimere, 844 F.3d at 1188.
 Germaine, supra note 2.
 See id.
 Id at 1179.
 Id at 1184.
 Id at 1179-80.
 Id at 1188.
 Jack Newsham, More Trouble for ALJs Brewing in 5th Circ. FDIC Challenge, Law360 (Sept. 8, 2017, 3:37 PM), https://www.law360.com/articles/961888/more-trouble-for-aljs-brewing-in-5th-circ-fdic-challenge.
 Burgess v. Fed. Deposit Ins. Corp., No. 17-60579, 2017 WL 3928326, at 4 (5th Cir. Sept. 7, 2017).
 See id at 3 (citing Freytag, 501 U.S. at 881-82).
 Id at 3 (citing Freytag, 501 U.S. at 881).
 Id at 2.
 Alison Frankel, New 5th Circuit decision on ALJ constitutionality adds urgency to SCOTUS bid, Reuters (Sept. 12, 2017, 3:15 PM), https://www.reuters.com/article/us-otc-alj/new-5th-circuit-decision-on-alj-constitutionality-adds-urgency-to-scotus-bid-idUSKCN1BN2P2.
 Sarah A. Good & Laura C. Hurtado, Circuit Split Cries Out for Supreme Court Review, Pillsburylaw.com (June 29, 2017), https://www.pillsburylaw.com/en/news-and-insights/sec-alj-supreme-court-review.html.
*Featured image by Scott S, licensed under CC By 2.0