June 22, 2017 Practice Points

SEC ALJs Found Unconstitutional by Tenth Circuit, under Review by D.C. Circuit

The forthcoming D.C. Circuit decision will either create a circuit split, or create unanimous circuit opposition to the SEC ALJs.

By Charles Dell’Anno – June 22, 2017

The constitutionality of the U.S. Securities and Exchange Commission’s (SEC) use of administrative law judges (ALJ) has been scrutinized by two U.S. courts of appeals recently, with the Tenth Circuit finding that they are unconstitutional. The Tenth Circuit found that the SEC ALJs violated the Appointments Clause, and subsequently denied the SEC’s request for rehearing en banc. Additionally, on May 24, 2017, the full D.C. Circuit heard argument on this issue after granting en banc review of a prior panel decision that opposed the Tenth Circuit’s holding. The forthcoming D.C. Circuit decision will either create a circuit split, or create unanimous circuit opposition to the SEC ALJs.

In Bandimere v. Securities and Exchange Commission, 884 F.3d 1168 (10th Cir. 2016), the Tenth Circuit found that the ALJ presiding over an SEC in-house enforcement action, held that office unconstitutionally, and set aside the SEC decision in that case. To determine whether the SEC ALJs were “inferior officers” under the Appointments Clause, the Tenth Circuit applied a three-part test from the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991). The court found that: (i) the SEC ALJ position was established by law; (ii) the duties, salary, and means of appointment are specified by statute; and (iii) the SEC ALJs exercise significant discretion in carrying out . . . important functions.” Bandimere, 884 F.3d at 1179. As a result, the ALJs are “inferior officers” that must be appointed by the president with advice and consent of the Senate as opposed to being hired by the SEC. The majority of the Tenth Circuit denied the SEC’s petition for rehearing en banc on May 3, 2017, with two circuit judges writing in dissent.

After the Tenth Circuit panel decided Bandimere, the D.C. Circuit granted en banc review and vacated a panel decision that found the SEC ALJs constitutional. On May 24, 2017, the en banc court heard argument on the matter. The en banc decision from the D.C. Circuit could further weaken the SEC’s position with regard to its in-house enforcement proceedings or create a circuit split, potentially ripening the issue for Supreme Court review.

Charles Dell’Anno is an associate with Nixon Peabody LLP in Boston, Massachusetts.

Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).