D.C. CIRCUIT RULES THE SEC’S IN-HOUSE FORUM IS CONSTITUTIONAL

Multiple federal circuit courts have previously ruled that they did not have jurisdiction to hear a collateral challenge to the constitutionality of the SEC’s administrative proceedings before an Administrative Law Judge (“ALJ”) and that the respondents must raise challenges to the forum’s constitutionality as an appeal after the administrative proceeding concludes. In Raymond J. Lucia Companies, Inc. v. SEC, however, the D.C. Circuit became the first federal appellate court to consider the merits of the issue and concluded that the SEC’s administrative forum’s use of ALJs—who are not appointed by the President—does not violate the Appointments Clause, which requires the President to appoint all “Officers of the United States.”

The SEC instituted an administrative action against Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (“petitioners”) alleging violations of the Investment Advisers Act of 1940. An ALJ heard the case, concluded that the petitioners were liable based on one of the four charged misrepresentations, and imposed sanctions. The SEC granted a petition for review, found that the petitioners committed anti-fraud violations, imposed the same sanctions as the ALJ, and concluded that its ALJs are employees, not Officers, and that their appointment did not violate the Appointments Clause. Petitioners then sought review with the D.C. Court of Appeals, which agreed with the SEC’s determination.

The D.C. Circuit explained that the Appointments Clause applies to judicial Officers but not employees or other “lesser functionaries,” and that an appointee is only an Officer if he or she exercises “significant authority pursuant to the laws of the United States.” The criteria for determining whether an appointee is an Officer are: “(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.” The D.C. Circuit determined that the SEC’s ALJs do not issue final decisions and thus cannot be Officers within the meaning of the Appointments Clause.

The D.C. Circuit agreed with the SEC that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case. The D.C. Circuit relied heavily on its 2000 decision in Landry v. FDIC, which held that ALJs of the FDIC were not Officers because they could only issue “recommending decisions” that are then forwarded to the FDIC Board of Directors for a final decision. After determining that the SEC’s use of ALJs passed constitutional muster, the D.C. Circuit also affirmed the finding of liability and lifetime industry bar sanction against the petitioners.

View the opinion - Raymond J. Lucia Companies, Inc. v. SEC, No. 15-1345, 2016 U.S. App. LEXIS 14559 (2d Cir. Aug. 9, 2016).