June 21, 2018

Supreme Court Decides Lucia v. Securities and Exchange Commission

On June 21, 2018, the Supreme Court of the United States decided Lucia v. Securities and Exchange Commission, No. 17-130, holding that the Securities and Exchange Commission’s administrative law judges are subject to the U.S. Constitution’s Appointments Clause.

To enforce U.S. securities laws, the SEC often initiates administrative proceedings over which administrative law judges (ALJs) employed by the SEC preside. These judges hear and decide these enforcement actions with the “authority to do all things necessary and appropriate” and to ensure “fair and orderly” adversarial proceedings. The judges issue an initial decision after a hearing, which the Commission can review upon request or sua sponte, but if it decides not to review, the decision becomes final and is “deemed the action of the Commission.”

In this case, the SEC charged Raymond Lucia with violating securities laws. The Commission assigned a staff-selected ALJ to hear the case. After the hearing, the ALJ issued a decision finding violations of the law and imposing sanctions. The Commission reviewed the initial decision and remanded for additional fact finding by the ALJ on three other claims. The ALJ then made additional findings and issued a revised initial decision with the same sanctions. On appeal to the Commission, Lucia argued that the administrative proceeding was invalid because the ALJ had not been constitutionally appointed. The Appointments Clause requires the President, “Courts of Law,” or “Heads of Departments” to appoint “Officers of the United States.” The Commission decided that the ALJ was not an “Officer,” but rather an employee with lesser responsibilities not subject to the Appointments Clause and rejected Lucia’s argument that the proceeding was invalid. After rehearing en banc, the Court of Appeals for the D.C. Circuit split evenly, resulting in a per curiam order rejecting Lucia’s argument.

The Supreme Court found that two prior decisions—United States v. Germaine, 99 U.S. 508 (1879), and Buckley v. Valeo, 424 U.S. 1 (1976) (per curiam), established the framework for distinguishing employees and officers subject to the Appointments Clause. To qualify as an officer, the person must occupy a “continuing” position established by law and must exercise “significant authority” under the laws of the United States. The Court further found that its analysis in Freytag v. Commissioner, 501 U.S. 868 (1991), controlled the result in this case. In Freytag, U.S. Tax Court “special trial judges” (STJs) could issue final decisions of the Tax Court in “comparatively narrow and minor matters.” In major matters, although they could preside over hearings, they could not issue final decisions but could propose findings and an opinion for a regular Tax Court judge to consider. The Supreme Court determined that those STJs were officers. Even though they could not issue final decisions, the Court found that they had significant duties and discretion in presiding over adversarial hearings. They took testimony, conducted trials, rule on compliance with discovery orders, and generally carried out these functions with significant discretion.

Similar to the STJs in Freytag, the Court held that the SEC ALJs hold continuing offices established by law and exercise the same “significant discretion” in carrying out “important functions.” Both had authority to ensure a fair and orderly adversarial hearing akin to federal district court judges. The ALJs (like STJs) conducted trials, took testimony, ruled on the admissibility of evidence, and had the power to enforce discovery orders. The ALJs (like STJs) also issued decisions, prepared proposed findings, legal conclusions, and remedies. Yet in contrast to Tax Court cases, where a regular Tax Court judge must always review an STJ’s opinion in a major case, the SEC ALJ opinions may be adopted and become the “action of the Commission” without any review by the Commission.

Because the ALJ heard and decided Lucia’s case without a proper constitutional appointment, the Court ordered a new hearing by a new, properly appointed ALJ or by the Commission itself.

In a concluding footnote, the Court noted that during the pendency of the case, the SEC issued an order purporting to ratify the prior appointments of its ALJs. The Court declined to address the validity of that order or its effect on the case, noting that the SEC had not indicated who would preside over Lucia’s case on rehearing.

Justice Kagan delivered the opinion of the Court in which Chief Justice Roberts and Justices Kennedy, Thomas, Alito, and Gorsuch joined. Justice Thomas filed a concurring opinion in which Justice Gorsuch joined. Justice Breyer filed an opinion concurring in the judgment in part and dissenting in part, in which Justices Ginsburg and Sotomayor joined in part. Justice Sotomayor filed a dissenting opinion in which Justice Ginsburg joined

Download Opinion of the Court.
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