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Tenth Circuit ruling on constitutionality of SEC administrative judges: implications for CFPB

Posted in CFPB Enforcement

Just before year-end, the U.S. Court of Appeals for the Tenth Circuit, in Bandimere v. United States Securities and Exchange Commission, set aside an SEC decision finding the petitioner liable for violating various securities law on the grounds that the SEC’s administrative law judge (ALJ)  who conducted the proceeding was unconstitutionally appointed.  The Tenth Circuit held that the ALJ 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.”  The parties agreed that the process used by the SEC to hire ALJs in which an ALJ is selected by the SEC’s Chief ALJ did not qualify as an appointment by the President, a court, or the head of a “Department.”

In holding that the SEC’s ALJ was an “inferior officer” who must be appointed in accordance with the Appointments Clause, the Tenth Circuit created a circuit split, thus making the case a good candidate for U.S. Supreme Court review.  In August 2016, the U.S. Court of Appeals for the D.C. Circuit, in Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, rejected a similar constitutional challenge and ruled that the SEC’s ALJ was an “employee” rather than “inferior officer.”  As a result, the D.C. Circuit held that the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC commissioner was constitutional.  

The Tenth Circuit’s ruling might be used to support an Appointments Clause challenge to the CFPB’s use of ALJs.  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 the CFPB were unable to establish that its ALJ was an employee rather than an inferior officer, its ALJ might be deemed unconstitutionally appointed.