Supreme Court To Consider The Constitutionality Of The Hiring Process For The Sec's Administrative Law Judges

On January 12, 2018, the U.S. Supreme Court agreed to hear Lucia v. Securities and Exchange Commission, No. 17-130, in which the justices will decide whether the Securities and Exchange Commission’s (“SEC”) bureaucratic hiring process for its administrative law judges (“ALJ”) violates the U.S. Constitution’s Appointments Clause.

The case was brought by financial advisor Raymond Lucia who marketed a wealth-management strategy dubbed “Buckets of Money,” under which retirement savings were divided among assets of different risk levels and periodically reallocated.  The SEC instituted administrative proceedings against Lucia based on allegations that he had used misleading slideshow presentations to deceive prospective clients about how the Buckets of Money strategy would have performed under historical market conditions.  The proceedings were heard by an SEC ALJ and Lucia was charged with violations of the Securities Exchange Act, the Investment Advisers Act, and the Investment Company Act.  Thereafter, Lucia petitioned the SEC for review, which upheld the ALJ’s determination, and then petitioned the D.C. Circuit Court, which denied the petition.

Lucia filed his petition with the Supreme Court on July 21, 2017 arguing that the SEC’s ALJs are “Officers” within the meaning of the Appointments Clause, and thus must have been appointed by the President, not the SEC.  The Appointments Clause provides that the President shall nominate, and with the advice and consent of the Senate, appoint Officers of the United States.  An appointee is an Officer, and not an employee who falls beyond the reach of the Clause, if the appointee exercises significant authority pursuant to the laws of the United States.  Under the current system, ALJs are hired by the SEC’s Chief ALJ and approved by the SEC’s Human Resources Office.

The U.S. circuit courts are split over whether the SEC’s ALJs should be considered Officers.  The D.C. Circuit has held that ALJs are not Officers because their decisions are subject to review by the SEC; however, the Fifth and Tenth Circuits have expressly disagreed with this position and determined that ALJs are Officers because they carry out important functions and exercise significant authority pursuant to the laws of the United States.

The government has not put up much of a fight on the issue.  On November 29, 2017, the Justice Department filed its response to Lucia’s petition conceding that ALJs wield enough authority to qualify as Officers under the Appointments Clause.  This response was notably not signed by the SEC’s top lawyers, indicating their disapproval of the position.  In fact, the following day, in an attempt to cure constitutional problems in ongoing proceedings, the SEC announced that it had ratified its prior ALJ appointments and in doing so resolved any concerns that administrative proceedings presided over by ALJs violate the Appointments Clause.

In his reply brief filed on January 5, 2018, Lucia argued that the SEC’s post hoc ratification is not sufficient to cure the ALJ’s unconstitutional appointment in his case because, by its terms, the ratification only applies to actions currently pending before ALJs.  He further argued that the ratification has no effect on any other case either because SEC ALJs still have not been appointed in conformity with the Appointments Clause.  Lucia urged the Court to determine that the hiring of the SEC’s ALJs violates the Appointments Clause, which would resultingly overturn the decision against him.

The Supreme Court is set to hear oral argument on April 23, 2018.  A decision in Lucia’s favor would complicate the process for appointing ALJs and remove significant authority from the SEC.  It could also have an impact on other government agencies such as the Social Security Administration, Federal Deposit Insurance Corp., and the Consumer Financial Protection Bureau, which have similar systems for appointing their administrative law judges.

About Faruqi & Faruqi, LLP

Faruqi & Faruqi focuses on complex civil litigation, including:  securities, antitrust, employment, and consumer class actions. The firm is headquartered in New York, and maintains offices in Delaware, Pennsylvania, Georgia and California. Since its founding in 1995, Faruqi & Faruqi continues to serve as lead or co-lead counsel in high-profile cases that ultimately provide significant recoveries to investors, consumers and employees.

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About Megan Sullivan

Megan Sullivan is a Partner in the firm's New York office and focuses her pratice on securities litigation.

Posted by Megan Sullivan

Partner at Faruqi & Faruqi, LLP
New York Office
Tel: (212) 983-9330
Fax: (212) 983-9331

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