Federal Appeals Court Rules that SEC’s “In-House” Court System is Unconstitutional

Federal Appeals Court Rules that SEC’s “In-House” Court System is Unconstitutional

Federal Appeals Court Rules that SEC’s “In-House” Court System is Unconstitutional

The U.S. Court of Appeals for the Tenth Circuit ended 2016 with a bang last week when it ruled that the SEC’s long-standing practice of using “non-appointed” Administrative Law Judges (“ALJs”) to preside over agency enforcement hearings violates the Appointment Clause of the U.S. Constitution. The decision in Bandimere v SEC was accompanied by a forceful dissent and establishes a split of opinion among the Circuit courts, all of which helps to set the stage for an appeal to the U.S. Supreme Court later this year. If Bandimere is left to stand, or upheld on appeal, it will likely call into question the constitutionality of other federal agencies’ administrative hearing regimes, as well as the validity of thousands of ALJ decisions.

The specific issue addressed by the Tenth Circuit in Bandimere was whether the SEC’s ALJs are “Officers of the United States” within the meaning of the Appointment Clause, which requires that such positions be filled by appointment of the President, a court of law, or the head of a department. The SEC conceded that its ALJs were not appointed in conformity with the Appointment Clause, but disputed the need for such appointments on the grounds that its ALJs are mere employees of the federal government. It relied heavily on the fact that its ALJs do not have final decision-making authority. The Court’s majority was not persuaded; it concluded that the SEC’s ALJs are “inferior officers” of the United States because, among other things, they carry out “important functions” and “exercis[e] significant authority pursuant to the laws of the United States.” The dissent called the decision “sweeping,” and posited that all ALJs are now “at risk of being declared inferior officers.”

For the time being, the Bandimere decision only directly affects proceedings in the Tenth Circuit, but its impact will likely reverberate in other Circuits until such time as the Appointment Clause issue is addressed by the Supreme Court.