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Reforms to the SEC’s adjudicative process may be a Pyrrhic victory in light of Lucia decision

In July 2016, the SEC approved reforms to its in-house adjudicative process for administrative proceedings. SEC administrative proceedings are conducted by administrative law judges (ALJs) employed by the SEC, which has given rise to multiple complaints about bias and lack of fairness for respondents, in addition to the constitutionality of the ALJs themselves. A common complaint amongst respondents in SEC cases it hat administrative proceedings give the SEC a “home court advantage”, with almost a 90% success rate for the SEC.[1] The current reforms, according to the SEC, “are intended to update the rules and introduce additional flexibility into administrative proceedings, while continuing to provide for the timely and efficient resolution of the proceedings.”[2] The amendments include more preparation time for parties involved in a case, allow parties to take depositions, expansion of   recovery, and motions for summary disposition. Although these changes seem to make the process somewhat fairer for respondents, a question remains about the inherent fairness of having a case tried by an employee of the SEC.

A case regarding the constitutionality of the appointment of SEC judges was recently heard in the U.S. Court of Appeals for the D.C. Circuit, in Lucia v. SEC, with the court deciding in favor of the SEC. at issue was whether the ALJs employed by the SEC were constitutional Officers who were not appointed pursuant to the Appointments Clause of the U.S. Constitution.[3] For an appointee to be considered an Officer, they need to exercise “significant authority pursuant to the laws of the United States.”[4] The court used a three-prong test to distinguish between Officers and employees not covered by the clause: 1) the significance of the matters resolved; 2) the discretion exercised in reaching their decisions; 3) the finality of the decisions.[5]

The court’s decision turned on the third prong of this test—whether or not the decisions reached by the ALJs were final. Given that the SEC has discretion to review initial decisions and the decisions are subject to a finality order issued by the SEC, the SEC must make a final action by either making a new decision or embracing the ALJ’s initial decision as its own. Thus, the court concluded that the SEC retained full decision-making powers, and that the act of issuing the finality order is what makes an ALJ’s decision “final”. As the third prong was not satisfied, the court ruled that ALJs are not Officers within the meaning of the Appointments Clause.

Thus, despite the progress made with the SEC reforms, the Lucia ruling was a significant victory for the SEC and has vindicated its ever increasing use of in-house courts.

[1] Jean Eaglesham, The Wall Street Journal, ‘SEC Wins with In-House Judges’ (May 6, 2015) <http://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803>.

[2] Press Release, ‘SEC Adopts Amendments to Rules of Practice for Administrative Proceedings’ (July 13, 2016) <https://www.sec.gov/news/pressrelease/2016-142.html>

[3] U.S. Const. art. II, §2, cl. 2.

[4] Raymond J. Lucia Co. v. SEC (D.C. Circ. 2016), quoting Buckley v. Valeo, 424 U.S. 1, 132 (1976) at 9

[5] Lucia, citing Landry v. FDIC, 204 F.3d 1125 (D.C. Circ. 2000), Freytag v. Comm’r Internal Revenue, 501 U.S. 868, 880 (1991)