Hold the Phone: SEC Takes One Last Stand Before the Tenth Circuit regarding the Constitutionality of the SEC’s Administrative Law Judges

Last week, the United States Securities and Exchange Commission filed a petition for rehearing en banc with the Tenth Circuit Court of Appeals, imploring the court to reconsider a divided panel’s ruling on the unconstitutionality of its administrative law judges in Bandimere v. SEC.  In that ruling (detailed here), the Tenth Circuit overturned the Commission’s sanctions against Mr. Bandimere because the SEC administrative law judge (“ALJ”) presiding over Mr. Bandimere’s case was an inferior officer who should have been constitutionally appointed (rather than hired) to the position, in violation of the Appointments Clause of the United States Constitution.

Primarily relying on its prior submissions and Judge Monroe G. McKay’s dissent in the panel’s original ruling, the SEC argues that the original decision reflects a fundamental misunderstanding of the role of ALJs and Supreme Court precedent, and risks throwing essential features of the agency into disarray. In particular, the SEC questioned the majority’s opinion that Freytag v. Commissioner, 501 U.S. 868 (1991), was dispositive in equating special trial judges of tax court to the ALJs to find that the ALJs are inferior officers who must be constitutionally appointed.  The SEC distinguishes the roles of its ALJs from those of the special tax court trial judges by noting differences in their power and function.  First, the special trial judges are vested with authority, including the power to enforce compliance with their orders, that is different in degree and kind from the powers given to ALJs.  For example, both the special trial judges and ALJs have the power to issue subpoenas, but unlike the special trial judges, ALJs have no authority to enforce subpoenas.  ALJs can only request the Commission to seek enforcement of the subpoenas in district court.  In addition, unlike the special trial judges, ALJs cannot use contempt power—a hallmark of a court—to enforce any order it may issue.  Second, the function between the special trial judges and ALJs differ because the Tax Court in Freytag was required to defer to the special trial judge’s factual finding unless “clearly erroneous, whereas the SEC decides all questions of fact and law de novo.

The SEC also contends that its use of ALJs strongly reflects Congress’s judgment in enacting the Administrative Procedure Act, which codified the use of hearing examiners and similar employees to act as aides to politically accountable agency heads, because ALJs assist agency heads in their adjudicative functions. Since the SEC is essentially reasserting its original arguments for an en banc hearing, it appears the potential rehearing will be determined by each circuit judge’s own interpretation of the roles of the SEC ALJs.

The Tenth Circuit’s decision at the end of 2016 created a circuit split with the D.C. Circuit’s ruling in Raymond James Lucia Cos. Inc. v. SEC, No. 15-1345 (D.C. Cir. Aug. 9, 2016).  There, the D.C. Circuit rejected defendant-appellant’s position that the SEC ALJs violated the Appointments Clause.  However, the D.C. Circuit recently vacated that opinion and agreed to rehear the case en banc.  The Tenth Circuit’s decision on whether to rehear the case, therefore, could be crucial to fate of the SEC ALJs.  If the D.C. Circuit reverses its original decision and the Tenth Circuit refuses to rehear this case, then the only two circuit courts to have reached the issue of the constitutionality of the SEC ALJs on the merits would have ruled against the SEC.