Article II Complications Surrounding Sec-Employed Administrative Law Judges

By Rossidis, Thomas C. | St. John's Law Review, October 1, 2016 | Go to article overview

Article II Complications Surrounding Sec-Employed Administrative Law Judges


Rossidis, Thomas C., St. John's Law Review


INTRODUCTION

The country's top white collar defense attorneys spend a great deal of time arguing their cases before a Securities and Exchange Commission ("SEC") administrative law judge ("ALJ"). Even though the function of an ALJ closely resembles that of an Article III judge, the SEC is showing no signs of reducing administrative actions, as ALJs can hear evidence, decide factual issues, apply legal principles, and issue initial decisions at an accelerated rate.1 This is especially noticeable as the "[e]nforcement activity in the first half of fiscal year 2015 indicates that the [SEC] is on track for another strong year of new enforcement actions filed."2 This record level of enforcement activity by the SEC is credited to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").3 As a result of Dodd-Frank's central purpose-"[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices"4-in 2014 alone, the SEC initiated nearly 1,000 new investigations and filed 755 new enforcement actions.5

Defense attorneys, however, came prepared. In a forum where the SEC wins nearly 100% of the time, enforcement action defendants began challenging administrative proceedings against them in federal court. Such defendants received a pivotal decision from the Northern District of Georgia in June 2015 and more recently in November 2015.6 In both cases, district court Judge Leigh Martin May found that the SEC ALJ hiring process was likely to be unconstitutional because the ALJs were not appointed by the SEC Commissioners pursuant to Article II of the Appointments Clause.7 Therefore, since Judge May's initial decision, the SEC has been under a flurry of constitutional attacks, as the SEC's breach in "its use of [ALJs] has drawn other defendants like moths to a flame."8

There are two constitutional attacks in particular that gained traction, both of which concern the executorial powers of Article II. The first issue is whether SEC-hired ALJs are considered "inferior Officers" of the United States whose appointment shall be in compliance with the Appointments Clause:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . 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.9

If the United States Supreme Court decides SEC ALJs are inferior officers, then these ALJs are unconstitutionally appointed because the United States Constitution limits the power to appoint inferior officers to three sources: "the President alone," "the Heads of Departments," and "the Courts of Law."10 SEC ALJs are currently hired by the dual efforts of the SEC Office of Human Resources and the Office of Personnel Management.11 Both offices conduct their duties and make decisions without any influence from the SEC Commissioners, thus making the ALJs' appointment unconstitutional.12 In contrast, if the Supreme Court determines that SEC ALJs are mere employees, then the constitutional appointment framework does not affect the way ALJs are hired and the Article II Appointments Clause claim fails.13

Analogous to SEC ALJs, in Freytag v. Commissioner of Internal Revenue, the Supreme Court addressed whether special trial judges ("STJs") are inferior officers.14 Concluding STJs are inferior officers because they are "established by Law" and "specified by statute,"15 the Court considered both the Framers' intent behind the Appointments Clause-to address the "manipulation of official appointments"16-and the purpose of the Clause-to "ensure that those who wielded [the power to appoint] were accountable to political force and the will of the people. …

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