Supreme Court Holds That SEC’s Administrative Law Judges Were Unconstitutionally Appointed

June 27, 2018

The U.S. Supreme Court recently held, in Lucia v. SEC,1 that Administrative Law Judges (ALJs) for the U.S. Securities and Exchange Commission (SEC or Commission) are officers of the United States who must be appointed consistent with the Appointments Clause of the U.S. Constitution. Under the Appointments Clause: “principal officers” must be appointed by the President with the advice and consent of the Senate; “inferior officers” must be appointed by the President, a court of law or a department head; and employees below inferior officers may be appointed through other means.2 Because the ALJ in the petitioner’s case was appointed by the SEC staff, the Court found his appointment to be unconstitutional, and thus the decision of the U.S. Court of Appeals for the D.C. Circuit was reversed and the case was remanded for further proceedings. 

To determine officer status, courts have looked to whether the individual in question occupies a position established at law that is “continuing and permanent, not occasional or temporary”3 and whether the individual exercises “significant authority.” Although the SEC, while the case was on judicial review,4 reappointed its ALJs in a manner consistent with the Appointments Clause, the Court’s decision calls into question proceedings conducted by unconstitutionally appointed ALJs before that date. It is unclear precisely how many cases will be affected, but under the Supreme Court’s decision any proceedings that are affected must be conducted in front of a different, properly appointed ALJ. Moreover, while the Court limited its decision to the SEC’s ALJs, the opinion’s reasoning could call into question the constitutionality of other agencies’ ALJs as well. 

Case Background 

The Lucia case arose out of an administrative proceeding brought by the SEC alleging violations of the Investment Advisers Act of 1940 in connection with the marketing of a retirement strategy that, according to the SEC, “used misleading slideshow presentations to deceive prospective clients.” The ALJ assigned to adjudicate this administrative proceeding imposed US$300,000 in penalties and a “lifetime ban from the investment industry.” The petitioner appealed the ALJ’s decision to the full Commission, arguing that the ALJ was unconstitutionally appointed. After the Commission rejected his argument, he then appealed to the U.S. Court of Appeals for the D.C. Circuit, again challenging the validity of the proceeding on the grounds that the ALJ had not been properly appointed pursuant to the Appointments Clause. 

Disagreement in the Courts of Appeals 

Whether SEC ALJs were properly appointed turns on whether they qualify as “Officers of the United States” or employees. The federal courts of appeals have divided over this issue. In Bandimere v. SEC,5 the U.S. Court of Appeals for the Tenth Circuit held that the SEC’s ALJs are inferior officers and that their appointment by SEC staff was inconsistent with requirements of the Appointments Clause. By contrast, in Lucia, the D.C. Circuit held that the ALJs were employees.6 The Supreme Court granted certiorari to resolve this conflict.

The Supreme Court’s Decision 

When the case arrived at the Supreme Court, the federal government changed its position and argued that the SEC ALJs were in fact unconstitutionally appointed.7 Agreeing with the petitioner and the government, the Supreme Court concluded that the SEC ALJs are officers and thus that their appointment by SEC staff violated the Appointments Clause. 

Guiding the Court’s analysis was its 1991 decision in Freytag v. Commission of Internal Revenue,8 in which the Court had found that the special trial judges of the United States Tax Court (STJs) were officers rather than mere employees. In Freytag, the Court reasoned that, because the STJs could “take testimony, conduct trials, rule on the admissibility of evidence, and ... enforce compliance with discovery orders,” they, therefore, exercised “significant discretion” over “important functions.” 

Writing for the majority, Justice Kagan observed that SEC ALJs were “near-carbon copies” of the STJs found to be officers in Freytag, with “equivalent duties and powers … in conducting adversarial inquiries.” Further, Justice Kagan noted that SEC ALJs may at times wield even more extensive authority than the STJs at issue in Freytag, since, for example, an SEC ALJ’s decision becomes final and binding when the SEC declines review.9 Accordingly, if the STJs in Freytag were officers, then the ALJs “must be too.”

Upon this determination of officer status, the Court concluded that the administrative proceeding at issue was “tainted with an appointments violation” and that petitioner, having made a timely challenge, was entitled to a new “‘hearing before a properly appointed’ official.” The Court added that this new hearing could not be before the ALJ who had previously heard the petitioner’s case, irrespective of whether that ALJ had since received or will subsequently receive a constitutional appointment. 

Justice Thomas filed a concurring opinion, agreeing as to the officer status of the ALJs but also seeking to adopt a more expansive definition of officer. Justice Breyer filed a partial concurrence, agreeing with the result but based on alternative statutory grounds that, under the Administrative Procedures Act, the SEC may not delegate to its staff the ability to appoint ALJs. Justice Sotomayor filed a dissenting opinion arguing that the SEC ALJs are not officers subject to the Appointments Clause where they lack the ability to “make final, binding decisions on behalf of the [g]overnment” without approval of the SEC. 

Practical Implications 

The Supreme Court’s decision has already had a significant effect on pending SEC matters and is likely to have a broader impact on other agencies as well. 

The SEC had substantially increased its use of ALJs in administrative proceedings in the years following the passage of the Dodd-Frank Act. The validity of those administrative proceedings is now susceptible to an Appointments Clause challenge, but only to the extent that a timely challenge is still available in individual cases. Going forward, the SEC has already addressed the root of the problem by appointing the ALJs consistent with the Appointments Clause. But, in cases where a proper challenge may be brought, the party will be entitled to a new hearing before a different ALJ. 

In response to the Court’s decision, on June 21, 2018, the SEC entered an order staying for 30 days “any pending administrative proceeding initiated by an order instituting proceedings that commenced the proceeding and set it for hearing before an [ALJ] including any such proceeding currently pending before the Commission.”10 However, the order “does not preclude the Commission from assigning any proceeding currently pending before an [ALJ] to the Commission itself or to any member of the Commission at any time.” 

The Supreme Court’s ruling leaves a few additional questions unanswered: First, the Court’s reasoning is likely to affect other agencies that utilize ALJs and other forms of administrative judges. For instance, thousands of social security and immigration cases are resolved by ALJs each year. If the appointment procedure for those judges is susceptible to Lucia’s logic, the government will likely repair the way they are appointed, but pending cases subject to a timely challenge could still result in significant litigation. Second, the Court did not address whether the “for cause” removal protections that SEC ALJs enjoy might also raise a constitutional problem that could render their actions invalid. Thus, even though the SEC has cured the appointment process for its ALJs, they might still face another round of attack based on those removal restrictions. 


1) No. 17-130.
2) Buckley v. Valeo, 424 U.S. 1, 126 (1976).
3) United States v. Germaine, 99 U.S. 508, 511-12 (1879).
4) Order, In re: Pending Administrative Proceedings, 33-10440 (Nov. 30, 2017).
5) 844 F.3d 1168 (10th Cir. 2016). For further information on the Bandimere case, please refer to Dechert OnPoint, Tenth Circuit Court of Appeals Finds SEC’s Process for Designating Administrative Law Judges to be Defective, Causing Split with DC Circuit
6) Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).
7) In light of the fact that the government had changed its position, the Court appointed an attorney to argue that the ALJs’ appointment was constitutional.
8) 501 U.S. 868 (1991).
9) By contrast, an STJ’s opinion in a major case would always require the review of a regular Tax Court judge.
10) Order, In re: Pending Administrative Proceedings, 33-10510 (June 21, 2018).

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