Lucia v. SEC, No. 17-130 (U.S. June 21, 2018)
In a 7-2 decision, the U.S. Supreme Court held that the Securities and Exchange Commission’s (SEC) administrative law judges (ALJs) are “Officers of the United States” and thus subject to the Appointments Clause of the U.S. Constitution. The clause requires that all “Officers of the United States” be appointed by the president, “Courts of Law” or “Heads of Department.” The Supreme Court thus held that the appointment of the SEC’s ALJs by SEC staff, and not the commission itself, violated the Appointments Clause.
Writing for the majority, Justice Elena Kagan determined that the case was controlled by the Court’s precedent in Freytag v. Commissioner, 501 U.S. 868, 880-81 (1991), which found that “special trial judges” (STJs) of the U.S. Tax Court — adjudicative officials who exercise very similar functions as the ALJs — fell under the category of “Officers of the United States.” Critically, both the STJs in Freytag and the ALJs here exercised “significant authority pursuant to the laws of the United States,” based on an inquiry into “the extent of power an individual wields in carrying out his assigned functions.” Even though neither STJs nor ALJs could issue final decisions that would bind the agency, they could, among other things, preside over adversarial hearings, take testimony, and prepare proposed findings and opinions — in the course of which both exercised significant discretion. The Court also reasoned that the ALJs had more autonomy because their decision could automatically become binding under SEC rules if the commission denied review. Additionally, both held “continuing office[s] established by law.”
Thus, as in Freytag, the Court held that ALJs are “Officers of the United States” whose appointment must comply with the requirements of the Appointments Clause. The Court further determined that the appropriate remedy for the petitioner in this case — who had previously been found by an ALJ to have violated the Investment Advisers Act — was a new hearing before a properly appointed ALJ.