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Appellate Court Holds SEC’s ALJs Require Appointment Under the Constitution

Saturday, January 14, 2017

In a recent decision by the U.S. Court of Appeals for the 10th Circuit, the SEC’s hiring process for administrative law judges (“ALJs”) was found to be in violation of the Appointments Clause of the U.S. Constitution.  Bandimere v. SEC, No. 15-9586, at 2 (December 27, 2016).  Relying on Supreme Court precedent in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the 10th Circuit held that ALJs are deemed to be inferior officers and as a result, they must be appointed by the President, a court of law, or a department head, in accordance with the Appointments Clause.  Bandimere, No. 15-9586, at 22.  In light of the fact that the U.S. Court of Appeals for the District of Columbia Circuit ruled differently on this issue last year, the U.S. Supreme Court will likely need to offer guidance to the lower courts.

David F. Bandimere petitioned the 10th Circuit to review an order of the SEC in which an SEC ALJ found that Bandimere was liable for breaking various securities laws, “barred him from the securities industry, ordered him to cease and desist from violating securities laws, imposed civil penalties, and ordered disgorgement.”  Id. at 3.  Bandimere argued that the ALJ had no authority to preside over his hearing as the ALJ had not been appointed consistent with the Appointments Clause.  Id.  The 10th Circuit agreed.

In its 37-page decision, the Court provided an overview of the Appointments Clause.  The Appointments Clause specifically states:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

U.S. Const. art. II Section 2, cl. 2.

The Supreme Court has held that while the Appointments Clause signifies checks and balances, it also embodies separation of powers as it defines distinct roles for the various branches of government in appointing officers.  Bandimere, No. 15-9586, at 7.  The highest Court has also concluded that the Framers intended to limit the power of any one branch to make appointments, in an effort to ensure that those who exercised that power would ultimately be held to account to the will of the people.  Id.  Consequently, the Court has held that inferior officers require appointment as articulated in the Appointments Clause.  Id. at 22.

The SEC conceded Bandimere’s point that the ALJ who presided over Bandimere’s hearing was not appointed as required by the Appointments Clause.  Id. at 14.  The SEC argued that its ALJ did not require appointment consistent with the Appointments Clause however, as the Commission had ultimate decision-making authority over any matter heard before one of its ALJs.  Id. at 23-24.  The SEC used this fact to support its argument that SEC ALJs are employees rather than inferior officers, and therefore are not required to be appointed as laid out in the Constitution.  Id.

The 10th Circuit disagreed and stated that having final decision-making power is not a determinative factor as to whether a public servant requires appointment.  Id. at 28.  The Court advised that while final decision-making power is relevant in determining whether the public servant exercises significant authority, other factors should be considered as articulated in FreytagId.  More specifically, as the Supreme Court determined was the case with the public servants at issue in Freytag, the SEC ALJs occupy offices established by law, they have duties, salaries, and means of appointment specified by statute; and they “exercise significant discretion while performing ‘important functions’ that are ‘more than ministerial tasks.’”  Id. at 22.  As a result, the 10th Circuit granted Bandimere’s petition for review.  Id. at 3.  Hopefully, the U.S. Supreme Court will grant a writ of certiorari and subsequently offer a bright line rule of law on this issue. Please click here to access the 10th Circuit’s decision.

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