Conflict of interest in SEC administrative law judges
🔹 I. Introduction
The role of SEC Administrative Law Judges (ALJs) is central in enforcing securities laws through internal adjudicatory proceedings. However, their impartiality and potential conflicts of interest have come under significant legal scrutiny in recent years, particularly in the context of:
Due process rights of respondents,
Appointments Clause challenges,
Bias and structural independence.
The conflict of interest concern primarily focuses on:
The method of appointment and oversight of ALJs.
The potential influence of the SEC over its in-house judges.
Whether structural or procedural issues deprive respondents of a fair trial.
🔹 II. Legal Framework
Appointments Clause (U.S. Const. art. II, § 2, cl. 2)
— Governs who can appoint "Officers of the United States."
— ALJs have been challenged as "inferior officers" improperly appointed.
Administrative Procedure Act (APA)
— Guarantees impartial decision-making by ALJs.
— Prohibits ex parte communications and bias.
Due Process Clause (5th Amendment)
— Ensures fair procedures, including neutral adjudicators.
🔹 III. Key Cases Addressing ALJ Conflict of Interest and Structural Concerns
1. Lucia v. SEC, 585 U.S. ___ (2018)
Facts:
Raymond Lucia was found to have violated securities laws in an SEC administrative proceeding.
He challenged the constitutional validity of the ALJ who presided, arguing the ALJ was not properly appointed under the Appointments Clause.
Ruling:
The Supreme Court held that SEC ALJs are "inferior officers", not mere employees.
Therefore, they must be appointed by the President, a court of law, or a department head (here, the SEC Commissioners).
Because Lucia’s ALJ was appointed by SEC staff, the appointment was unconstitutional.
Significance:
Struck at the heart of SEC ALJ structure.
Raised serious concerns about independence, conflicts, and fairness in administrative adjudications.
Cases decided by improperly appointed ALJs had to be reheard.
2. Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021), aff’d sub nom. Axon Enterprise, Inc. v. FTC, 598 U.S. 175 (2023)
Facts:
Michelle Cochran challenged the SEC’s in-house court process, alleging it was unconstitutional before the administrative proceeding concluded.
She argued that SEC ALJs have dual layers of removal protection, insulating them from Presidential control, violating the separation of powers.
Ruling:
The court permitted pre-enforcement judicial review of constitutional claims.
The Supreme Court later affirmed in Axon, holding that parties can go to federal court to challenge the structure of agencies like the SEC without first completing administrative proceedings.
Significance:
Empowered litigants to challenge ALJs' authority early.
Highlighted the issue of ALJ insulation from accountability as a potential conflict of interest concern.
3. Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016)
Facts:
David Bandimere challenged the SEC’s ALJ appointments as unconstitutional under the Appointments Clause (similar to Lucia).
Ruling:
The Tenth Circuit agreed that ALJs are “inferior officers” and were unconstitutionally appointed.
Created a circuit split with the D.C. Circuit (later resolved in Lucia).
Significance:
Undermined confidence in SEC's internal process.
Reinforced concern that improperly appointed judges inherently carry a structural conflict of interest.
4. Hill v. SEC, 114 F. Supp. 3d 1297 (N.D. Ga. 2015)
Facts:
Charles Hill challenged the SEC’s administrative process, arguing ALJs were not appointed in accordance with the Appointments Clause.
He also claimed bias and lack of impartiality, creating a conflict of interest.
Ruling:
The district court agreed that there was a strong likelihood the appointment was unconstitutional.
Issued an injunction against the proceedings.
Significance:
Highlighted procedural due process violations.
Showed that conflicts can arise not just from bias but from improper legal structures that prevent accountability or neutrality.
5. Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016)
Facts:
The Tilton sisters challenged the SEC's in-house adjudicative process, alleging constitutional infirmities, including lack of impartiality.
Ruling:
The Second Circuit rejected their pre-enforcement challenge, holding that constitutional claims had to be reviewed after the administrative process concluded.
Did not address the merits of the bias or conflict of interest claims.
Significance:
While the claim was procedurally denied, the case reflected growing concern about fairness and impartiality of ALJs.
This procedural bar was later removed by the Supreme Court in Axon.
6. Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022)
Facts:
George Jarkesy challenged his in-house SEC proceeding on several constitutional grounds:
Right to a jury trial
Unconstitutional delegation of power to the SEC
Improper removal protections for ALJs violating the President’s authority.
Ruling:
The Fifth Circuit sided with Jarkesy on all counts, declaring:
SEC’s use of ALJs for enforcement violated the Seventh Amendment.
Congress improperly delegated legislative authority to the SEC without an intelligible principle.
ALJs were unconstitutionally protected from removal.
Significance:
A major blow to the SEC’s adjudicative process.
Raised foundational questions about agency power, neutrality, and structural conflict.
🔹 IV. Key Themes in Conflict of Interest Concerns
| Theme | Explanation |
|---|---|
| Appointments Clause Violations | ALJs must be properly appointed to ensure lawful authority and avoid conflict. |
| Removal Protections | ALJs’ double-layer removal protections may insulate them from oversight, creating structural conflicts. |
| Due Process and Bias | ALJs employed by and answerable to the SEC may lack true impartiality. |
| Structural Accountability | Lack of transparency and independence undermines confidence in fairness. |
| Pre-Enforcement Challenges | Litigants can now raise conflict and structural challenges before hearings conclude. |
🔹 V. Conclusion
Conflicts of interest in SEC administrative law judges have emerged as a constitutional crisis in administrative law. Courts have increasingly scrutinized whether SEC ALJs:
Were properly appointed,
Can be adequately removed, and
Are impartial and structurally independent enough to ensure fair hearings.
Recent Supreme Court and appellate decisions like Lucia, Axon, and Jarkesy show that conflicts of interest are not limited to personal bias but extend to systemic flaws in the structure and oversight of the administrative judiciary.
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