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U.S. Supreme Court, Securities, Constitutional Law, Administrative/Regulatory

Jan. 22, 2018

SEC ALJs and the accumulation of power

The U.S. Supreme Court will decide whether the Securities and Exchange Commission's use of administrative law judges violates the Constitution, a question that implicates the accumulation of legislative, executive and judicial powers.

This month, the U.S. Supreme Court announced that it will hear the appeal in Lucia v. SEC to decide whether administrative law judges are "Officers of the United States" under the U.S. Constitution's appointments clause, a question that implicates the modern Administrative State's accumulation of legislative, executive and judicial powers -- and its potential threat to liberty.

In 2012, the Securities and Exchange Commission accused Raymond Lucia and his investment company of violating federal securities laws and regulations. The SEC could have brought criminal or civil charges against Lucia in a court of law before an Article III judge and a jury. Instead, the SEC's enforcement division opted to bring an "administrative enforcement action" before one of the SEC's own administrative law judges. The judge heard testimony, considered and ruled on evidentiary objections, weighed evidence, made factual findings, and reached legal conclusions. Ultimately, the judge -- again, an SEC employee -- ruled in favor of the SEC and ordered sanctions: permanently barring Lucia from working as an investment advisor, revoking his (former) company's registration, and imposing civil penalties in the amount of $300,000.

Lucia argues that the administrative law judge's ruling cannot be sustained because: (1) the judge is an "officer of the United States" according to the appointments clause; but (2) he was not appointed through the requirements of the clause; and therefore (3) his ruling is void.

The appointments clause provides two ways for officers of the United States to be appointed: (1) presidential nomination and Senate confirmation; or (2) if Congress has provided "by Law," appointment by the president alone, the courts of law, or the heads of departments without the need for Senate approval.

No one disputes that the administrative law judge who heard Lucia's administrative action had not been appointed pursuant to the appointments clause. Therefore, the only question is whether the judge is an officer of the United States. The Constitution doesn't define that term, but the Supreme Court's precedent suggests that Lucia is correct: An administrative law judge is an officer of the United States.

In Freytag v. Commissioner of Internal Revenue, the Supreme Court held that an "officer" is any appointee who exercises "significant authority" pursuant to laws of the United States. There, the court concluded that the office of "special trial judge" within the U.S. Tax Court exercised significant discretion in carrying out its "important functions" -- taking testimony, conducting trials, ruling on admissibility of evidence, and having power to enforce compliance with discovery orders.

Despite the similar authority exercised by the administrative law judge in Lucia's case, the U.S. Court of Appeals for the D.C. Circuit affirmed the SEC's ruling. (But note that both the 5th Circuit and the 10th Circuit have followed Freytag, so the Supreme Court should resolve this circuit split. Also, with the change in presidential administrations, the government has changed its position and now agrees that administrative law judges are officers.)

So, aside from the important issue of Lucia's livelihood, what's the significance? What about this case presents the Supreme Court with a cert-worthy question? To understand the importance, consider the scope of authority exercised by the SEC here together with the ultimate purpose of the appointments clause and the Constitution's separation of powers.

In the proceedings below, the SEC -- an administrative agency within the executive branch -- carried out the powers of all three branches of government: legislative (adopting regulations that have the force of law); executive (charging and "prosecuting" Lucia for alleged violations); and judicial ("trying" the enforcement action in front of an administrative law judge, without a jury, and later, rejecting Lucia's appeal to the full commission).

This concentration of powers is, the Founders believed, dangerous to liberty. Indeed, as James Madison declared in Federalist 47, the "accumulation of all powers ... in the same hands ... may justly be pronounced the very definition of tyranny." And to prevent this concentration -- "to diffuse power the better to secure liberty" -- the Constitution divides the government's powers.

But the Constitution's mere "parchment barriers" between the branches do not alone guaranty liberty. Thus, the Constitution also gives "to each [branch] a constitutional control of the others." The "constant aim," Madison explained in Federalist 51, was "to divide and arrange the several [branches] in such a manner as that each may be a check on the other." In other words, the Constitution was designed to "provide some practical security for each [branch], against the invasion of the others."

The appointments clause was an important piece of this "practical security." As the Freytag opinion emphasized, "because the power of appointment to offices was deemed the most insidious and powerful weapon of eighteenth century despotism, ... manipulation of official appointments had long been one of the American revolutionary generation's greatest grievances against executive power."

Thus, the appointments clause is, the Supreme Court explained, among the significant structural safeguards of the "constitutional scheme." According to the 10th Circuit (in the case mentioned above), the clause "embodies both separation of powers and checks and balances." It separates power by "defining unique roles for each branch in appointing officers." And it ensures checks and balances by precluding appointments that lack cooperation between the executive and legislative branches.

The power exercised by these in-house judges runs afoul of these principles. Congress has granted to these executive agents vast legislative and judicial authority without requiring their appointment through the appointments clause. In this way, as Justice Antonin Scalia has observed, Congress "masks, under complicated and indirect measures, the encroachments which it makes on the co-ordinate departments, and thus control[s] the nominal actions (e.g., appointments) of the other branches."

Strict adherence to the appointment power, on the other hand, helps ensure that "those who wield[] it [are] accountable to political force and the will of the people." This concern is especially warranted when it comes to the modern Administrative State. As Justice Elena Kagan noted before she joined the court, because bureaucracy is the "ultimate black box of government -- the place where exercises of coercive power are most unfathomable and thus most threatening" -- "the need for transparency, as an aid to holding governmental decisionmakers to account, [] reaches its apex." Or, as Justice Samuel Alito declares simply, "Liberty requires accountability."

In short, Lucia's appeal allows the Supreme Court to vindicate important first principles of our Constitution. By resolving whether an administrative law judge is an "Officer of the United States," the court may sharpen the lines between the branches that have become blurred by the modern Administrative State's growing authority. This course would improve government accountability and better secure liberty.

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Ben Armistead

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