In several recent decisions we have covered (here and here), Federal Circuit Courts have unanimously ruled that respondents in an SEC enforcement action cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds. However, those prior opinions all were based on the narrow ground that district courts did not have jurisdiction to hear collateral challenges, and did not reach the merits of the constitutional challenge. In Raymond James Lucia Cos. Inc. v. SEC, No. 15-1345 (D.C. Cir. Aug. 9, 2016), the D.C. Circuit became the first federal appellate court to consider the merits and ruled in favor of the SEC. The court held that SEC administrative law judges are merely employees, rather than officers of the United States, and thus need not be appointed pursuant to the Appointments Clause of the Constitution. Their appointment satisfied constitutional scrutiny and could not provide grounds to throw out the results of the proceedings before them.
The SEC brought an administrative action against Raymond J. Lucia and Raymond J. Lucia companies (collectively, “Lucia”) for violations of the Investment Advisers Act and for misleading advertising. After a hearing, the ALJ ruled in favor of the SEC and imposed sanctions against Lucia. Lucia appealed the ALJ’s determination to the SEC, which ultimately found that Lucia had committed anti-fraud violations and imposed the same sanctions as the ALJ. The Commission also declined Lucia’s challenge to the constitutionality of the proceeding before the ALJ. Lucia then petitioned for review before the D.C. Circuit. Relying on a 2000 D.C. Circuit decision, Landry v. FDIC, 204 F.3d 1133-34 (D.C. Cir. 2000), Lucia argued that ALJs were subject to the Appointments Clause as officers of the United States because their decisions can become final if not reviewed. The D.C. Circuit rejected this argument, observing that the Commission always retains discretion to review decisions of its ALJs and, even if it chooses not to do so in the exercise of that discretion, the ALJ’s decision will not become the final ruling of the Commission until the Commission issues a finality order. And the court found nothing else in the scope of the authority conferred upon the ALJs that gave them the independent authority necessary to be deemed an officer of the United States.
While other Circuits will not be constrained to follow the D.C. Circuit’s ruling, as a practical matter the Lucia decision casts significant doubt on whether constitutional challenges to ALJs’ appointments will ever prove successful. Given its jurisdictional scope, the D.C. Circuit is viewed as the leading court on questions of federal agency administrative procedure and constitutional issues and the subjects of SEC proceedings will now have to overcome adverse precedent from both the SEC itself and the D.C. Circuit in seeking to persuade other federal courts to reach a different result. This decision thus further protects the SEC’s practice, which it has increasingly used to its advantage, of bringing proceedings in-house, where it is much more likely to receive favorable results than in federal court. It correspondingly increases the incentive for respondents to settle SEC enforcement actions rather than face likely unfavorable judgments, with, at least in the D.C. Circuit, one fewer avenue for overturning those judgments on appeal.