Important News for Publicly Traded Tech Companies: The Supreme Court Will Decide the Constitutionality of the SEC’s ALJ Appointment Process
The U.S. Securities and Exchange Commission (“SEC”) is considered by many to be the nation’s top watchdog on Wall Street — sniffing out insider trading, market manipulation, and financial fraud. But the reality is that any publicly traded company is subject to SEC regulation and enforcement. The tech industry, with its ever-changing landscape, may become a hot bed of SEC enforcement activity, especially as companies continue to navigate uncharted waters such as crypto currencies and innovative “initial coin offering” funding methods.
Tech companies should be aware that a key part of the SEC’s enforcement
scheme will soon be reviewed by the Supreme Court. On January 12, 2018, the
Supreme Court granted certiorari in Raymond
J. Lucia Companies, Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016), cert granted, 2018 WL 386565 (U.S. Jan.
12, 2018) (No. 17-130). The central issue in the case is whether SEC
administrative law judges (“ALJs”) are “officers of the United States” per the
Appointments Clause of the U.S. Constitution. If so, then ALJ decisions in
pending SEC enforcement actions — and pending enforcement actions in similarly
situated federal agencies — may be called into question.
The SEC has long
faced criticism that it wields an unfair advantage when it brings
enforcement actions before its own ALJs in internal administrative courts that
lack the same rights and protections afforded to defendants in federal courts.
ALJs are capable of imposing significant financial sanctions and lifetime employment
bans, and while their decisions are not final until approved by the SEC Commissioners,
they are rarely overturned. Despite wielding this broad power, ALJs are not
subject to the same accountability checks as are other government officers, such
as department heads and judges, because they are not appointed by the President,
but were instead hired by SEC staff and are treated as regular federal
In December 2013, an SEC ALJ fined Mr. Lucia and his company $300,000
and barred him from working as a broker or investment adviser. Lucia appealed
and argued, as many before him have, that the ALJ was an “inferior officer,”
rather than an employee, and was therefore not legitimately appointed pursuant
to the Appointments Clause in the U.S. Constitution. Under the Appointments
Clause, such inferior officers must be appointed either by the President, the
head of the agency, or a court of law. See
U.S. Const. art. II, § 2, cl. 2. The case made its way to the D.C. Circuit, which
disagreed with Lucia, finding that ALJs were not inferior officers and
therefore were properly appointed. But
shortly thereafter, the 10th Circuit, in Bandimere
v. SEC, 844 F.3d 1168 (10th Cir. 2016), ruled that ALJs are Officers of the United States who
must be appointed pursuant to the Appointments Clause. Lucia filed a petition for writ of certiorari
in the Supreme Court and, in an interesting turn of events, the government — in
its reply brief opposing certiorari — changed its stance mid-briefing and agreed
with Lucia that ALJs are inferior officers
and urged the Supreme Court to grant certiorari to resolve the circuit split.
After the government announced its change of heart, the SEC has taken a
number of steps to attempt to remedy the alleged deficiency in its appointment
process. The day after the government filed its reply brief, the SEC Commission
ratified the appointment of its ALJs, ostensibly to cure any Appointments
Clause issues going forward. It also instructed ALJs to reconsider their
actions in all open proceedings, provide an opportunity for the parties to
submit additional relevant evidence, and determine whether to ratify those actions. Because of its change in stance, the government
has recommended that the Supreme Court appoint an amicus curiae to defend the D.C. Circuit’s judgement.
With so many factors up in the air, many questions will likely remain
unanswered until the Supreme Court makes its ruling. For example: Does the
SEC’s ratification of ALJ appointments satisfy the Appointments Clause? Are SEC
litigants’ constitutional rights adequately addressed by having ALJs reconsider
their past actions in pending cases? Will the SEC use the opportunity to reopen
unfavorable ALJ decisions? What is the retroactive effect of a Supreme Court ruling
that ALJs are officers, on defendants
whose cases were fully adjudicated before improperly appointed ALJs?
At the very least, defendants with administrative cases pending before
the SEC may want to consider raising similar constitutional challenges to ensure
these claims are preserved for appeal, in case the Supreme Court rules the ALJ
appointment process was unconstitutional. Litigants before other agency administrative
courts may also be wise to examine the appointment process of those
adjudicators for constitutional deficiencies and raise constitutional
challenges if appropriate.
A Supreme Court ruling that ALJs are in fact inferior officers may
increase the President’s ability to influence the SEC’s enforcement
regime. Currently, the SEC’s five Commissioners
are appointed by the President with the advice and consent of the Senate. By
requiring ALJs to be appointed by either those Commissioners or the President
himself, rather than being treated merely as federal employees, the President may
gain a more direct line of influence into the SEC’s administrative courts.
Although this may prompt objections about politicization, it could also have
the ancillary effect of lessening the “home court advantage” that the SEC may
currently enjoy in its administrative courts.
With the SEC’s rising interest in the tech industry, such companies will
be well served by monitoring these trends to be best prepared in case the SEC
comes knocking on their door. We will continue to monitor and report on developments
in this case.