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  • Tenth Circuit Splits With D.C. Circuit On Constitutionality Of SEC ALJs
    On December 27, 2016, the United States Court of Appeals for the Tenth Circuit, in a two-to-one decision, created a split in the U.S. Courts of Appeals concerning the constitutionality of the appointments of SEC Administrative Law Judges (“ALJs”).  In granting a petition for review from an SEC opinion upholding the findings of an ALJ, the Tenth Circuit held that the SEC’s ALJs are inferior officers of the United States, and thus subject to the Appointments Clause in Article II of the U.S. Constitution, which requires that inferior officers be appointed directly by the President, a federal court, or a department head.  Bandimere v. SEC, — F.3d —, 2016 WL 7439007 (10th Cir. 2016).  The SEC conceded that the process for hiring its ALJs—through the SEC’s Office of Human Resources—did not satisfy the Appointments Clause.  The Tenth Circuit therefore set aside the SEC’s order, which had found David Bandimere, a Colorado businessman and investor accused of promoting Ponzi schemes, liable for, among other things, securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934.  The resulting conflict among Courts of Appeal may lead to Supreme Court consideration of the issue.

    In reaching this result, the Tenth Circuit had to address the D.C. Circuit’s conflicting precedent from August 2016 holding that the SEC’s ALJs were employees (who are not subject to the Appointments Clause) rather than inferior officers of the United States.  See Raymond J. Lucia Cos. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).  The D.C. Circuit had held that the primary factors in distinguishing between employees and inferior officers are:  (1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions.  The D.C. Circuit analyzed the statutory and regulatory framework underpinning the powers of SEC ALJs, and concluded that SEC ALJs do not have the power to issue final decisions, noting that an ALJ’s decision “becomes final when, and only when, the Commission issues the finality order,” an affirmative act which must occur in every case.  See also D.C. Circuit Upholds Constitutionality of SEC Administrative Proceedings, Shearman & Sterling LLP Client Publication (Aug. 16, 2016).

    The Tenth Circuit rejected this analysis, reasoning that the D.C. Circuit had improperly distinguished the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), by focusing exclusively on the fact that the SEC ALJs cannot issue final decisions.  The Tenth Circuit noted that the SEC ALJs’ findings did, in fact, appear to carry considerable weight—though they were not technically final—and that, in any event, finality was not dispositive under Freytag.  Rather, according to the Tenth Circuit, the Supreme Court required a broader examination of whether the duties of SEC ALJs are indicative of inferior officers.  Here, the Tenth Circuit found that the SEC ALJs are authorized and have a duty to administer oaths, coordinate proceedings by consolidating them and determining their schedule, examine witnesses, exercise significant authority over SEC subpoenas, order and regulate depositions, make evidentiary determinations, and prepare factual findings and legal determinations, among other powers.  The Tenth Circuit thus held that, because (1) the SEC ALJ position was established by law, (2) SEC ALJ duties, salary, and means of appointment are specified by statute, and (3) SEC ALJs carry out their authorized role and duties with significant discretion, they are inferior officers rather than mere employees of the United States. 

    We anticipate that the SEC will ask for a rehearing en banc before the full U.S. Court of Appeals for the Tenth Circuit, which may lead to an appeal to the U.S. Supreme Court, particularly if a split with the D.C. Circuit remains.  In the meantime, the Bandimere decision underscores that the constitutionality of SEC ALJs remains subject to significant dispute.