Lucia v. Securities and Exchange Commission

Issues 

For the purposes of the Constitution’s Appointments Clause, are administrative law judges of the Securities and Exchange Commission officers, who must be appointed in accordance with the Constitution, or employees, who can simply be hired by the Securities and Exchange Commission?

Oral argument: 
April 23, 2018

This case asks the Supreme Court to decide whether the Administrative Law Judges (“ALJs”) of the Securities and Exchange Commission (“SEC”) are “Officers of the United States” within the meaning of the Appointments Clause of the Constitution. If the SEC ALJs are officers, then they cannot simply be hired like a regular government employee; instead, they must be hired according to the procedures required by the Appointments Clause. The SEC successfully argued before the D.C. Circuit that the ALJs are not officers; but following the election of President Trump, the U.S. Solicitor general switched the SEC’s position in this case. Both Raymond J. Lucia and the SEC now agree that the SEC ALJs are officers within the meaning of the Appointments Clause because the SEC ALJs have enough sovereign authority entrusted to their discretion to require the structural power-check of the appointment process. Anton Metlitsky, the Court-appointed amicus supporting the judgment below, argues that SEC ALJs are not officers because they do not have the power to make final decisions that bind either the SEC or third parties. The Court’s holding in this case could greatly impact the SEC’s enforcement regime and all the proceedings currently pending before SEC ALJs.

Questions as Framed for the Court by the Parties 

Whether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause?

Facts 

In response to a Securities and Exchange Commission (“SEC” or “Commission”) enforcement action before an Administrative Law Judge (“ALJ”), Raymond J. Lucia and his investment company, Raymond J. Lucia Companies, Inc. (collectively, “Lucia”) challenged the constitutional validity of the SEC’s ALJs.

Lucia disputed the categorization of SEC ALJs as employees rather than “Officers of the United States” under the Appointments Clause of the Constitution (Article II, Section 2, Clause 2). The Appointments Clause requires that officers—individuals who hold a certain quantum of sovereign authority within their discretion—be either appointed by the President and confirmed by the Senate, or, in the case of “inferior officers,” appointed by the head of a department in accordance with statutory authority. Because none of the SEC’s ALJs were appointed in this manner, Lucia argued that all proceedings before them are invalid.

By way of background, much of modern securities regulation can be traced to the Securities Exchange Act of 1934. This Act created the SEC, which is a commission composed of five members; the President appoints each member with the advice and consent of the Senate per the Appointments Clause. In 1962, Congress expanded the SEC’s power to delegate its regulatory functions by passing 15 U.S.C. 78d–1. Based on this authority, the SEC delegated, in part, the authority to hear administrative proceedings to SEC ALJs in 17 CFR 200.30-9. SEC ALJs issue “initial decisions” in these proceedings which must be finalized by an order from the Commission. Finally, the SEC retains the authority to review SEC ALJ decisions de novo either upon a party’s appeal or by the SEC’s own initiation.

In this case, the SEC’s Enforcement Division initiated an enforcement action before an SEC ALJ against Lucia and his investment company, alleging they committed fraud in violation of the Investment Advisers Act. After evaluating the evidence, the ALJ issued an initial decision finding Lucia’s investment company liable for fraud and Lucia liable for aiding and abetting that fraud. The initial decision imposed $300,000 in fines, revoked their registration as investment advisors, and permanently barred Lucia from the profession. Following the ALJ’s decision, both Lucia and the SEC’s Enforcement Division petitioned for review by the SEC. Upon review, the Commission found that the petitioner had in fact violated the Investment Advisers Act, and the SEC additionally relied on a D.C. Circuit case, Landry v. FDIC, in rejecting Lucia’s argument that the SEC ALJ’s decision was unconstitutional because it violated the Appointments Clause.

On appeal, the D.C. Circuit addressed the question of whether SEC ALJs are “Officers of the United States.” A unanimous panel of the D.C. Circuit held that SEC ALJs are employees because, among other reasons, they do not exercise the degree of sovereign authority necessary to be categorized as an officer. Lucia’s petition for rehearing before the D.C. circuit sitting en banc was granted, but the panel decision was upheld by an equally divided court.

Lucia then petitioned the Supreme Court for certiorari, noting that the D.C. Circuit’s decision conflicted with a decision from the Tenth Circuit that SEC ALJs are officers. The U.S. Solicitor General, who represents the federal government before the Supreme Court, supported Lucia’s petition and switched the SEC’s position in this case to support Lucia. The Supreme Court granted certiorari, and, because both Lucia and the SEC agree that the SEC ALJs are officers, the Supreme Court appointed Anton Metlitsky, a New York appellate lawyer, to defend the D.C. Circuit’s decision and the SEC’s prior position that the SEC ALJs are not officers.

Analysis 

DOES THE CONSTITUTION TAKE A BROAD VIEW OF “OFFICERS”?

Lucia first asserts that the meaning of “officer” for the purposes of the Appointments Clause has been consistently, broadly defined to include “[e]very official whose position is ‘established by Law’ and who exercises ‘significant authority’” under the law. This broad definition, Lucia argues, is in fact consistent with historic definitions—found in eighteenth and nineteenth century dictionaries—of the word “officer,” which was defined, among other things, as “[a] person commissioned or authorized to perform any public duty.” Indeed, Lucia claims, this broad view is critical to maintain governmental accountability. A broad definition of the word “officer,” Lucia and the SEC contend, means that elected officials—who are clearly identified by and accountable to their constituents—are responsible for more, not less, appointment of officers through the Appointment Clause, which results in increased accountability because voters are better informed of any appointments. In fact, Lucia argues that “two centuries” of Supreme Court decisions support this view, defining “officer” to encompass, among others, engineers, assistant surgeons, extradition commissioners, and United States attorneys.

Metlitsky, the Court-appointed amicus curiae in support of the judgment below, counters by explaining that a broad view of the word “officer” does not, in fact, bolster accountability of elected officials tasked with appointing officers under the Appointments Clause. Metlitsky claims that the manner in which someone is hired—either through the Appointments Clause or through a regular, non-constitutional hiring method—does not significantly affect accountability. In other words, Metlitsky asserts, an employee’s behavior and performance, good or ill, reflects on the superior regardless if that employee is an “officer” or not. Moreover, Metlitsky claims that a broad view of the word “officer” calls into question long-standing congressional practices. Indeed, Metlitsky argues that this broad definition is vague and subjective, and it would consequently present an unworkable standard for courts to apply, which would complicate settled practice and precedent.

DO SEC ALJs EXERCISE “SIGNIFICANT AUTHORITY” UNDER FEDERAL LAW?

Both Lucia and the SEC assert that only persons who exercise “significant authority” under United States law are “officers” within the meaning of the Appointments Clause. Lucia and the SEC note that “significant authority,” as the Supreme Court explained in Freytag v. Commissioner, encompasses the exercise of substantive, important functions, like “tak[ing] testimony, conduct[ing] trials, rul[ing] on the admissibility of evidence, and hav[ing] the power to enforce compliance with discovery orders.” Indeed, both Lucia and the SEC claim that SEC ALJs exercise these kinds of functions when they conduct trial-type hearings—which involve, among other things, ordering the production of evidence, issuing protective orders, examining witnesses, and regulating the scope of cross-examination—and prepare “initial decisions” with regards to the factual and legal issues presented. Contrary to Metlitsky’s argument, Lucia and the SEC assert that the inability of the SEC ALJs to make final decisions that bind parties does not mean that the SEC ALJs do not exercise significant authority because the SEC ALJs still, ultimately, resolve disputes on behalf of the SEC. In fact, both Lucia and the SEC contend that the SEC ALJs are like the special trial judges in Freytag, who the Supreme Court held were “officers” within the meaning of the Appointments Clause.

On the other hand, Metlitsky argues that “significant authority,” although it does encompass the trial-type activities mentioned by Lucia and the SEC, requires a delegation to “exercise a portion of the sovereign authority of the United States.” Indeed, the key feature of “significant authority,” Metlitsky argues, is the ability for individuals who exercise it to bind parties—like the government, citizens, or companies—to acts made by those individuals. In fact, Metlitsky notes that there are a variety of acts that fit this description: filing enforcement actions against the government, issuing regulations against private parties, or entering final decisions in adjudications. SEC ALJs, Metlitsky contends, are not “officers” because they lack the authority to bind parties: they cannot bind the SEC because the SEC can review the SEC ALJs’ findings of fact and conclusions of law de novo, nor can the SEC ALJs issue a final decision that binds parties because the SEC must issue a “finality order” to give the SEC ALJs’ initial decisions binding effect. Metlitsky admits that the SEC often defers to SEC ALJs’ credibility determinations regarding factual issues, but notes this is a voluntary choice—and not a legal obligation—that the SEC makes. Further, Metlitsky counters Lucia and the SEC’s claim that SEC ALJs are like the special trial judges in Freytag by noting that the kinds of acts that both the SEC ALJs and Freytag’s special trial judges have in common—like taking testimony, conducting trials, or ruling on the admissibility of evidence—do not, ultimately, bind the parties in the adjudication. In fact, Metlitsky points out that Freytag’s special trial judges could issue their own final judgments and, crucially, enforce some of their own orders by holding parties in contempt; a power that the SEC ALJs lack. Because no parties are bound by any decision made by a SEC ALJ until the SEC itself issues a final order, Metlitsky argues that SEC ALJs do not exercise “significant authority” under federal law and are thus not “officers” within the meaning of the Appointments Clause.

HAS CONGRESS STATUTORILY DESIGNATED THAT SEC ALJs ARE “OFFICERS” WITHIN THE MEANING OF THE APPOINTMENTS CLAUSE?

Lucia further contends that Congress has, in fact, defined SEC ALJs to be “officers” within the meaning of the Appointments Clause through various statutes, including the Administrative Procedure Act (“APA”). Lucia claims that Supreme Court precedent dictates that the Appointments Clause must be followed whenever Congress “denominates an official an ‘officer,’” and that, here, Congress has termed SEC ALJs to be “officers” in federal securities laws, which describe them as “officers of the Commission.” Moreover, Lucia notes that the APA as enacted similarly described “officers” in such a way that SEC ALJs would fall within its definition. It is through this way, Lucia claims, that Congress has deemed SEC ALJs to be “officers” within the meaning of the Appointments Clause, independent of whether the SEC ALJs exercise “significant authority.”

Countering Lucia’s argument, Metlitsky claims that Congress has not, in fact, termed SEC ALJs to be “officers” within the meaning of the Appointments Clause. Metlitsky agrees that Congress has referred to SEC ALJs as “officers,” but asserts that Congress has never defined SEC ALJs to be “officer[s] of the United States.” This distinction, Metlitsky contends, is crucial because it is the latter designation that, in some circumstances, requires the use of the Appointments Clause method. Indeed, Metlitsky notes that the Supreme Court has long recognized instances in which statutes referred to individuals as “officers” outside the meaning of the Appointments Clause.

Discussion 

CONSEQUENCES FOR THE ADMINISTRATIVE STATE

Amici in support of Lucia differ on whether the holding in this case should apply only to SEC ALJs or, conversely, should apply to ALJs across all federal agencies. A number of amici in support of Lucia argue that the Court’s holding in Lucia need not upset the proverbial applecart because SEC ALJs are sufficiently different than ALJs employed by other agencies, such as those of the Social Security Administration (“SSA”). For example, the Chamber of Commerce of the United States posits that SEC ALJs have realized a dramatic gain in authority following the Dodd-Frank Act—a gain in authority that differentiates SEC ALJs from others. Likewise, the Washington Legal Foundation, supporting Lucia, limits their argument to SEC ALJs without discussing implications outside the SEC. Other amici in support of the petitioner argue that the entire concept of an ALJ writ large should be reexamined; billionaire businessman Mark Cuban, for example, argues in support of Lucia that legislative history and the text of the Administrative Procedure Act point in favor of subjecting every ALJ to the Appointments Clause. Similarly, the Cato Institute argues that ALJs across the regulatory spectrum should be subject to hiring and firing by the President.

The Association of Administrative Law Judges, in support of affirmance, argue that if the Court should hold SEC ALJs to be officers, then that holding should be limited only to SEC ALJs because to hold all SSA ALJs, of which there are more than 1,500, to be officers would essentially grind the regulation of Social Security to a halt. The Cornell Law Securities Clinic, in support of affirmance, agrees and posits that Lucia’s definition of officers is overbroad. This overbreadth, the Cornell Law Securities Clinic reasons, will in turn jeopardize not only the authority of thousands of ALJs across agencies, but also actors elsewhere in the government’s regulatory scheme, such as the Financial Industry Regulatory Authority (“FINRA”). FINRA exemplifies Lucia’s definition of officer’s excessive breadth, the Cornell Law Securities Clinic asserts, because FINRA is a non-governmental, not-for-profit regulatory organization—authorized by Congress—that would essentially be ruled unconstitutional under Lucia’s test. Likewise, the National Black Lung Association, in support of affirmance, argues that to hold that SEC ALJs are officers would likely mean that Department of Labor ALJs are officers—a decision that would create much longer backlogs in cases and endanger previous decisions if Lucia had retroactive effect.

THE INDEPENDENCE AND EXPERTISE OF ADMINISTRATIVE LAW JUDGES

The New Civil Liberties Alliance (“NCLA”) argues in support of Lucia that the SEC has undue influence over its ALJs, particularly via their hiring process, and, therefore, SEC ALJs should be officers under the Appointments Clause in order to ensure their independence from the SEC. The NCLA also takes issue with the fact that SEC ALJs are not permitted to consider challenges to SEC-promulgated rules or the underlying organic statutes, asserting that this limitation also detracts from the SEC ALJs’ independence. Finally, the NCLA asserts that SEC ALJs are, in fact, lacking the expertise usually put forth as a rationale for their utility because none have a securities-defense background. The solution, NCLA posits, is to ensure independence by eliminating SEC ALJs and giving their dockets to Article III judges. The Chamber of Commerce agrees, adding that the SEC has increasingly turned to their own ALJs— rather than Article III courts—for decisions in order to take advantage of a “home court advantage.” Finally, the Pacific Legal Foundation and the Cato Institute, supporting Lucia, argue that the delegation of authority in this case creates an untenable lack of accountability by creating a system where ALJs are dependent on their department head but not accountable to the public.

The National Organization of Social Security Claimants (“NOSCA”), in support of affirmance, asserts, on the other hand, that a holding that SEC ALJs, and by extension SSA ALJs, are officers would detract from the independence of ALJs. NOSCA argues that under such a system ALJs would be subject to excessive political pressure—in the case of SSA ALJs, pressure to deny applicants their Social Security benefits. Business professor David Zaring, in support of affirmance, agrees that the existing framework supports the independence of ALJs and argues that his empirical studies show that SEC ALJs find for the SEC no more than Article III judges. The Federal Administrative Law Judges Conference and the Forum of United States Administrative Law Judges, in support of neither party, maintain that Congress created both the Administrative Procedure Act and the concept of an ALJ in order to ensure fair, independent adjudication of citizens’ disputes—the amici argue that any Court holding must keep this in mind. Finally, the Administrative Law Scholars, in support of neither party, contend that ALJs are appropriately independent because Congress spent the 1930s and 1940s carefully calibrating the balance of authority between ALJs and their agencies.

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