Today, the United States Supreme Court sent shock waves through the securities industry as well as the United States Securities and Exchange Commission’s (“SEC”) enforcement program when it held that SEC administrative law judges (“ALJ”) are “inferior officers,” and must be chosen pursuant to the appointments clause of the United States Constitution. That is, the President with the advise and consent of the United States Senate may appoint “all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” See United States Constitution Article 2, Section 2, Clause 2. Although this decision was centered on an appeal involving an SEC ALJ, it may also effect other federal agencies that use in-house judges.
Initially, the case involved a former investment adviser who was sanctioned by an SEC ALJ. See Lucia v. SEC, https://www.supremecourt.gov/opinions/17pdf/17-130_4f14.pdf. The United States Court of Appeals for the District of Columbia had held that SEC ALJs were not subject to the appointments clause; however, the United States Court of Appeals for the 10th Circuit had found differently. Justice Elena Kagan authored the opinion and found that the SEC’s ALJs were very similar to tax court trial judges where the Supreme Court had previously found those judges to be inferior officers subject to the appointments clause.
Now that the Supreme Court has opened this door with the finding ALJs are inferior officers, the SEC’s ALJ’s will have to be appointed pursuant to the appointments clause in the future, and it calls into question what, if anything, will happen to the ALJs at other federal agencies. Further, there will be the question of prior SEC cases, the Supreme Court stated that not every appointments clause violation requires a new hearing. However, time will tell.
Additionally, although Justice Kagan specifically said it was not being addressed in this case, we may also shortly see that, since the SEC’s ALJs are now considered inferior officers subject to the appointments clause, they may also now be subject to removal by the SEC Chairman for good cause. Such a result may provide significant power to the president to fire such ALJs at will, maybe even in a Tweet. As for Mr. Lucia, well, he now gets a re-trial before either the full SEC or a new ALJ appointed pursuant to the appointments clause, who will determine if his “Buckets of Money” program is real or made-up.
In short, the Supreme Court has upended how the SEC does business. Of course, we will follow how the SEC responds.