On June 26, 2017, the United States Court of Appeals for the D.C. Circuit issued a ruling which virtually ensures that the U.S. Supreme Court will take up a key aspect of the SEC's in-house administrative enforcement process. In denying review of an earlier panel decision in Raymond J. Lucia v. SEC, which held that the administrative law judges (ALJs) who oversee the SEC's in-house enforcement proceedings are properly appointed, the Court solidified a split on the question with the Tenth Circuit, which held in a separate case last year that the appointment of the SEC ALJs was unconstitutional. Fittingly, the D.C. Circuit's most recent decision was issued by an equally divided court in a 5-to-5 vote, reflecting the deep divisions between and within the courts of appeal over this question and underscoring the need for Supreme Court review.

Challenging the SEC's Administrative Enforcement Process: The Appointments Clause

Constitutional challenges to the appointment of SEC ALJs are one of several ways in which respondents in SEC administrative enforcement actions have fought the SEC's in-house enforcement process. Critics of the process contend that administrative enforcement actions before in-house SEC ALJs – rather than actions filed in federal court, before a federal judge, under the FRCP – limit respondents' ability to take discovery, deprive them of a jury trial and otherwise give the SEC an unfair "home court" advantage. Efforts by the SEC in July 2016 to revise the procedural rules applicable to administrative proceedings in a more defendant-friendly fashion did little to quell complaints, and various challenges to the SEC's administrative enforcement system continue to work their way through the courts.

The specific question presented in Lucia and similar cases is whether the SEC's current system of appointing ALJs to hear enforcement actions violates the Constitution's Appointments Clause. The Appointments Clause requires that "officers" of the United States be appointed by the President, with the advice and consent of the Senate or, in the case of so-called "inferior officers," by the President, the courts, or heads of administrative agencies. SEC ALJs are selected through an internal SEC administrative process but are not appointed by the Commission. Should the Supreme Court find that SEC ALJs are "inferior officers," the way in which ALJs are selected would appear to violate the Appointments Clause.

A Split Among the Circuits

In the initial Lucia decision, a three-judge panel concluded that the SEC's use of ALJs did not violate the Constitution's Appointments Clause. On February 16, 2017, however, the D.C. Circuit granted rehearing en banc and vacated that judgment, a decision which was later reversed by the divided court on June 26, 2017. In contrast, the Tenth Circuit held in Bandimere v. SEC that the use of ALJs by the SEC violated the appointments clause. The SEC's subsequent request for an en banc review of the Tenth Circuit's decision was rejected by the court, likely teeing up a petition to the Supreme Court this summer.

Other circuits, such as the Second Circuit in Tilton v. SEC, have failed to reach the question of whether the SEC's use of ALJs violates the Appointments Clause, instead finding that federal courts have no jurisdiction to hear a challenge to the SEC's ALJ appointments scheme during the pendency of an SEC administrative proceeding.

The wide range of opinions held by the federal circuit courts on this critical question likely guarantees Lucia and Bandimere a spot on the Supreme Court's docket next term.

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