Not So Fast: The Tenth Circuit Creates a Split by Denying the Constitutionality of the SEC’s Administrative Law Judges

court decision

Just before the clock struck 2017, the United States Court of Appeals for the Tenth Circuit weighed in on the constitutionality of the United States Securities and Exchange Commission’s (“SEC” or “Commission”) administrative law judges. In Bandimere v. SEC, the Tenth Circuit overturned Commission 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 to the position in violation of the Appointments Clause of the United States Constitution.

The SEC originally brought an administrative action against Mr. Bandimere in 2012, alleging he violated various securities laws. An SEC ALJ presided over the fast paced, “trial-like” hearing, and the ALJ ultimately found Mr. Bandimere liable, barred him from the securities industry, imposed civil penalties and ordered disgorgement.  The SEC reviewed that decision and reached the same result.  Mr. Bandimere, therefore, appealed the SEC’s decision to the Tenth Circuit.

In its order, the Tenth Circuit analyzed the Appointments Clause, delved through decades of case law to give examples of inferior officers, and reviewed Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991).  In Freytag, the Supreme Court held that special trial judges in Tax Court were inferior officers based on three characteristics: (1) position was established by law; (2) the duties, salary and means of appointment were specified by statute; and (3) the special trial judges exercise significant discretion in carrying out important functions.

In Bandimere, the Tenth Circuit found that the SEC ALJs had the same three characteristics: (1) the office of the SEC ALJ was established by law; (2) statutes set forth SEC ALJs’ duties, salaries, and means of appointment; and (3) SEC ALJs exercise significant discretion in performing important functions, such as the authority to shape the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, receiving evidence, ruling on dispositive and procedural motions, issuing subpoenas, presiding over trial-like hearings, issuing initial decisions, finding liability, imposing sanctions, and entering defaults.  The Tenth Circuit, therefore, found that SEC ALJs are inferior officers under the Appointments Clause and set aside the SEC’s opinion against Mr. Bandimere.  Notably, the Tenth Circuit’s opinion was not unanimous, as one Circuit Judge dissented, arguing that the SEC ALJs’ duties are far different than the special trial judges in Freytag, and therefore not inferior officers under the Appointments Clause.  Given the divided opinion, the SEC may (and can) petition the Tenth Circuit for rehearing so this may not be the final decision on this issue from the Tenth Circuit.

Nevertheless, the Tenth Circuit’s decision departs from 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 plaintiff’s position that the SEC ALJs violated the Appointments Clause because the Court found that SEC ALJs are merely employees, rather than officers of the United States largely because SEC ALJs cannot “render final decisions.”  Thus, the D.C. Circuit and Tenth Circuit are in direct odds with one another regarding the SEC ALJs (not to mention all the district court opinions touching this issue).

Due to the split in the Circuits, 2017 may be the year that the Supreme Court weighs in to resolve this issue.