On June 21, 2018, the Supreme Court of the United States (“Supreme Court”) held that the U.S. Securities Exchange Commission’s (“SEC”) Administrative Law Judges (“ALJs”) are “Officers of the United States” whose appointment must meet the requirements of the Constitution’s Appointments Clause. Accordingly, pursuant to the Appointments Clause, the SEC ALJs must be appointed by the SEC itself, as the “Head of the Department.” It is unclear whether this impacts any of the current ALJs at FERC.
The Supreme Court’s decision addresses an administrative proceeding (the “Proceeding”) instituted by the SEC against Raymond Lucia (“Petitioner”). In the Proceeding, the SEC alleged that Petitioner violated the Investment Advisers Act (“Act”) by using misleading slideshow presentations to deceive prospective clients. After adjudicating the case, Judge Cameron Elliot, an SEC ALJ, issued an initial decision finding that Petitioner had violated the Act. On appeal to the SEC, Petitioner argued that the Proceeding was invalid because Judge Elliot was not constitutionally appointed. Specifically, Petitioner argued that the SEC’s ALJs are “Officers of the United States” and therefore subject to the Appointments Clause. The Appointments Clause requires that only the President, “Courts of Law,” or “Heads of Departments” can appoint “Officers.” However, the SEC traditionally left the appointment of its ALJs to SEC staff members. The SEC rejected Petitioner’s argument and instead concluded that SEC’s ALJs are “mere employees” and not “Officers of the United States.” According to the SEC, the ALJs, as employees, do not “exercise significant authority independent of [its own] supervision,” and so, special appointment (i.e., as required by the Appointments Clause) is not required. The United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) affirmed the SEC’s finding. After Petitioner’s additional request for rehearing en banc, the D.C. Circuit denied Petitioner’s claim again. Notably, the D.C. Circuit’s decision regarding the Petitioner’s case conflicted with a separate opinion from the United States Court of Appeals for the Tenth Circuit. Subsequently, Petitioner sought review from the Supreme Court to decide this circuit split.
The Supreme Court reversed the D.C. Circuit’s opinion and resolved the circuit split by holding that the SEC’s ALJs are “Officers of the United States,” subject to the Appointments Clause. In reaching this conclusion, the Supreme Court relied on prior precedent, Freytag v. Commissioner. In Freytag, the Supreme Court held that the United States Tax Court’s “special trial judges” (“STJs”) are officers subject to the Appointments Clause. In deciding the present case, Supreme Court Justice Elena Kagan, writing for the majority, compared the STJ and SEC ALJ positions and concluded that both roles exercise “significant discretion” in carrying out important functions, such as taking testimony, conducting trials, ruling on evidentiary issues and enforcing discovery orders. The majority further stated that the SEC’s ALJs exercise significant discretion because the SEC may choose not to review an ALJ’s decision, which then makes the ALJ’s decision final. Representing the dissent, Supreme Court Justice Sonia Sotomayor, joined by Supreme Court Justice Ruth Bader Ginsburg, argued that the SEC’s ALJs are not subject to the Appointments Clause because they lack the authority to make final, binding decisions — only the SEC has that authority.
A copy of the Supreme Court’s opinion is available here.