On June 21, 2018, the Supreme Court of the United States invalidated the process that the Securities and Exchange Commission ("SEC") had been using to appoint administrative law judges. Staff from the SEC had selected administrative law judges as “employees” of the Commission through a hiring process. Last Thursday, the Supreme Court held that SEC administrative law judges were “officers of the United States” and therefore subject to appointment only by the president, courts, or agency heads. Because this ruling could call into question the validity of the decisions rendered by other administrative law judges beyond the SEC, the impact of this decision could be far-reaching.
Thursday’s case involved an administrative proceeding against Raymond Lucia and his investment company. Mr. Lucia had marketed a retirement strategy called “Buckets of Money,” which the SEC contended used misleading statements to deceive potential clients. After a hearing in front of an administrative law judge, who had been hired by SEC staff, the administrative judge issued an initial decision imposing sanctions, including civil penalties and a lifetime bar from the investment industry. Mr. Lucia appealed first to the SEC and then to the Court of Appeals for the D.C. Circuit, arguing that the administrative law judge’s decision was invalid because the judge was an “officer” of the United States, but had not been appointed by the president, a court, or an agency head. Both the SEC and the D.C. Circuit were unconvinced by this argument – ruling that administrative law judges were “employees” and thus could be appointed without the need for a special, high-level appointment. The Supreme Court, in a 7-2 decision, reversed those rulings, basing its reasoning on a case from 1991 that involved tax court “special trial judges.” Given the administrative judges’ powers, functions, and discretion, the Supreme Court found that the administrative law judges of the SEC, like the tax court special trial judges, were “officers” of the United States and hence required appointment beyond the SEC staff level.
In an interesting twist, the SEC Commissioners “ratified” the appointments of the SEC’s current administrative judges, curing the issue presented in the Lucia case. For Mr. Lucia, the decision means that he gets another hearing in front of a different judge. It is not clear what happens to other decisions made prior to the Commission’s ratification of the other administrative law judges, but as of June 22, the SEC stayed related pending administrative proceedings for at least 30 days.
As an aside, the case could also affect proceedings brought before the Consumer Financial Protection Bureau ("CFPB"), as the CFPB has a similar way in which its administrative judges are appointed.
The case is Lucia v. Securities & Exchange Comm’n, No. 17-130 (June 21, 2018).
Stay tuned for additional developments.
This client alert is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact any of the attorneys in our Financial Services & Investment Management Practice Group, or the attorney with whom you normally consult.