Having the Last Word on the Last Word: SEC Says Its ALJs are “Mere Employees”

In what will surely not be the last word on this continuing controversy, on September 3, 2015, a majority of the members of the Securities and Exchange Commission held that the appointment process for the Commission’s administrative law judges (“ALJ”) does not violate the Constitution.  As we reported just last month, a federal judge in the Southern District of New York preliminarily enjoined a separate SEC administrative proceeding based in part on the judge’s view that the SEC ALJ appointment process is likely unconstitutional.  In light of the key role ALJs play in SEC proceedings and the number of administrative cases brought each year, the question is likely to be addressed at the appellate level and could have significant implications for the securities defense bar.

The issue came to the Commission through a securities fraud case involving former investment advisor Ray Lucia, Sr., host of the Ray Lucia financial talk radio show, and Raymond J. Lucia Companies, Inc. (the “Respondents”).  The SEC accused the Respondents of misleading prospective clients about the company’s “Buckets of Money” retirement wealth management strategy,  An SEC ALJ mostly agreed, ordering the Respondents to cease and desist from further violations and imposing civil penalties.  The Respondents raised several issues on appeal, including that the ALJ appointment process violates the Constitution.

On the constitutionality of the ALJ appointment process, the Respondents argued that under the  Appointments Clause, SEC ALJs are “inferior officers” who must be appointed by either the President, the head of a department, or a court of law.  Because SEC ALJs are not appointed by the President, a department head, or a court, the Respondents argued, the proceedings they conduct and any resulting orders are invalid and must be vacated.

In rejecting the Respondent’s arguments, the Commission relied on the decision of the United States Court of Appeals for the D.C. Circuit in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000).  In that case, the Court of Appeals upheld the constitutionality of the appointment process for FDIC ALJs, holding that the ALJs were simply employees, not inferior officers who would be subject to the Appointments Clause.  The court in Landry based its holding primarily on the fact that, while FDIC ALJs could conduct trial-like hearing and issue certain orders, the ultimate authority to issue a decision rested with the FDIC, not the ALJ.

Following Landry, the Commission held that SEC ALJs are no different than FDIC ALJs.  Although SEC ALJs can conduct hearings, take testimony, rule on the admissibility of evidence, and issue subpoenas, they may only issue “initial decisions.”  Ultimately, whatever a SEC ALJ decides, that decision only becomes final upon issuance of an order by the Commission itself, at which point it is the decision of the Commission, not the ALJ.  Consequently, in the Commission’s view, SEC ALJs are “mere employees” who aid in the Commission’s work.  The Commission thus rejected the Respondents’ arguments on the constitutionality of the ALJ appointment process, and upheld the ALJ’s findings and sanctions.  Two of the five commissioners dissented and indicated that a dissenting opinion would follow separately, with no clarification regarding which portion(s) of the opinion they took issue with.  Stay tuned for more updates as these issues unfold.