SEC’s administrative law judges and constitutional challenges
⚖️ Overview: SEC Administrative Law Judges (ALJs) & Constitutional Challenges
The Securities and Exchange Commission (SEC) employs Administrative Law Judges (ALJs) to adjudicate enforcement actions against securities law violators. ALJs preside over hearings, make findings of fact, and recommend sanctions.
However, the constitutional status of SEC ALJs has been challenged on grounds of separation of powers and due process, focusing on whether SEC ALJs are "Officers of the United States" under the Appointments Clause or mere employees, and on their removal protections.
🏛️ Key Legal Issues
Appointments Clause (Article II, Section 2) — Are SEC ALJs "Officers" who must be appointed by the President, courts, or heads of departments?
Removal Protections — Do SEC ALJs have protections that infringe on the President’s power to supervise the executive branch?
Due Process Concerns — Are ALJs sufficiently independent yet fair?
⚖️ Key Cases and Their Explanations
1. Lucia v. SEC, 585 U.S. ___ (2018)
Facts:
Mark Lucia was sanctioned by an SEC ALJ. He challenged the constitutionality of the ALJ’s appointment, claiming the ALJ was an "Officer of the United States" who should have been appointed by the SEC Commissioners (head of the department), not hired as a mere employee.
Issue:
Are SEC ALJs “Officers” under the Appointments Clause requiring proper appointment by a principal officer?
Held:
Yes. The Supreme Court held that SEC ALJs are “inferior officers” and therefore must be appointed in accordance with the Appointments Clause (by the President, courts, or department heads). The ALJ was improperly appointed, so the proceeding was invalid.
Importance:
Struck down SEC ALJs’ appointment method.
Affirmed ALJs’ significant authority makes them officers, not employees.
Requires SEC to properly appoint ALJs to comply with the Constitution.
2. Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016)
Facts:
Bandimere challenged SEC ALJ’s removal protections, arguing that SEC’s ALJs had unconstitutional protections from removal that limited the President’s ability to supervise.
Issue:
Are SEC ALJs’ removal protections unconstitutional?
Held:
The Tenth Circuit found removal protections problematic, suggesting they infringe on executive power, but did not invalidate the ALJ’s decisions outright.
Importance:
Raised early serious constitutional concerns about for-cause removal protections of SEC ALJs.
Influenced later courts to scrutinize SEC ALJs’ independence.
3. Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022)
Facts:
Jarkesy challenged SEC’s use of administrative proceedings before ALJs, alleging unconstitutional appointment of ALJs and excessive protections from removal.
Issues:
Did SEC violate the Appointments Clause?
Are SEC ALJs’ protections from removal unconstitutional?
Does SEC’s administrative enforcement violate due process?
Held:
The Fifth Circuit ruled:
SEC ALJs are “Officers” under the Appointments Clause (reaffirming Lucia).
ALJs’ for-cause removal protections violate the separation of powers.
SEC’s administrative enforcement regime violates the Constitution because it allows an agency to prosecute and adjudicate without a jury trial or adequate constitutional protections.
Importance:
First federal appellate court to strike down SEC’s administrative enforcement system as unconstitutional.
Highlights growing judicial skepticism of SEC ALJs’ independence and fairness.
4. Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016)
Facts:
Hill appealed the SEC ALJ’s decision; he argued ALJs are not properly appointed.
Issue:
Whether SEC ALJs must be appointed consistent with the Appointments Clause.
Held:
The Eleventh Circuit held that SEC ALJs were employees, not officers, and thus their appointments did not violate the Appointments Clause.
Importance:
Contradicted Lucia and other courts on ALJs’ status.
This split was resolved by the Supreme Court in Lucia in favor of ALJs as officers.
5. Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010)
Facts:
Though not about the SEC, this case deals with administrative enforcement and removal protections.
Issue:
Are members of the PCAOB (an SEC-created body) protected from presidential removal, violating separation of powers?
Held:
The Court held that dual layers of protection (Board members removable only for cause, and PCAOB members removable only for cause by the Board) violated the Constitution.
Importance:
Highlights constitutional limits on removal protections for administrative officers.
Provides important precedent for challenges like those in Bandimere and Jarkesy.
6. Sanchez v. SEC, 2023 (pending, district court level)
Facts:
An ongoing case challenging the constitutionality of SEC ALJ removal protections post-Lucia.
Importance:
Illustrates ongoing legal uncertainty and continuing constitutional challenges.
Courts increasingly scrutinize SEC ALJ independence and removal protections.
🔑 Summary of Constitutional Principles
| Principle | Explanation | Case(s) |
|---|---|---|
| Appointments Clause | SEC ALJs are “Officers” who must be properly appointed | Lucia, Jarkesy |
| Removal Protections | Excessive for-cause protections violate separation of powers | Bandimere, Jarkesy, Free Enterprise Fund |
| Due Process | SEC ALJ proceedings must provide fair process, not undermine rights | Jarkesy |
| Conflicting Jurisprudence Resolved | Earlier rulings holding ALJs as employees overruled | Hill v. SEC vs Lucia |
🧾 Practical Impact
The SEC has had to change appointment procedures for ALJs post-Lucia.
Courts are closely scrutinizing removal protections for ALJs, possibly requiring reform.
Constitutional challenges have raised concerns about the fairness and legitimacy of SEC administrative enforcement.
RELATED Blog
0 comments