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D.C Circuit rejects constitutional challenge to SEC’s use of administrative law judges

Posted in CFPB Enforcement

A challenge to the constitutionality of the SEC’s use of administrative law judges (ALJ) was rejected by the U.S. Court of Appeals for the D.C. Circuit.  In Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, the petitioners contended that the SEC’s decision imposing sanctions for violations of the Investment Advisors Act should be vacated because the ALJ rendering the initial decision was an “inferior Officer” who, pursuant to the Appointments Clause of Article II of the U.S. Constitution, could only be appointed by the President, a court, or the head of a “Department.”  Since the ALJ was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the petitioners argued that the ALJ’s appointment was unconstitutional.

Pointing to statutory language which provides that an ALJ’s “action,” when not reviewed by the SEC, shall “be deemed the action of the Commission,” the petitioners argued that SEC ALJs were Officers and not employees because they had the ability to issue final decisions of the SEC.  The court rejected this argument, observing that under SEC rules, an ALJ’s decision does not become final until the SEC determines not to review the decision.  The court noted that even if a petition for review is not filed, the SEC “can always grant review on its own initiative, and so it must consider every initial decision, including those in which it does not order review.”

As we have previously noted, because the CFPB is housed within the Federal Reserve, it could be argued that Director Cordray is not a “Department” head who can appoint “inferior Officers” under the Appointments Clause.  Thus, if an Appointments Clause challenge were made to the CFPB’s use of an ALJ, it might be necessary for the CFPB to establish that its ALJ was an employee rather than an Officer.