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Justices Say SEC Judges Must Be Appointed

The U.S. Supreme Court on Thursday held that administrative law judges  at the Securities and Exchange Commission are “inferior officers” subject to the Appointments Clause of the U.S. Constitution.

(CN) - The U.S. Supreme Court on Thursday held that administrative law judges  at the Securities and Exchange Commission are “inferior officers” subject to the Appointments Clause of the U.S. Constitution.

The decision resolves a split between the D.C. Circuit and the 10th Circuit and could have broad implications for federal agencies that employ in-house judges, placing the power to appoint them in the hands of the president.

Writing for the court majority, Justice Elena Kagan sided with Raymond Lucia, a former radio show host and investment adviser who challenged the SEC after being banned by one of its administrative law judges from investment-related work and fined $300,000 for making misleading claims in his "Buckets of Money" retirement wealth strategy.

On appeal to the SEC, Lucia argued the administrative proceeding was invalid because the judge presiding over it, Administrative Law Judge Cameron Elliott, had not been constitutionally appointed. The SEC and the  D. C. Circuit rejected Lucia’s argument, holding that the agency's administrative law judges are not “Officers of the United States,” but are instead mere employees — officials with lesser responsibilities who are not subject to the Appointments


But Kagan and her colleagues in the majority disagreed, holding that under the 1991 Freytag ruling the judges should be deemed “officers.” Justices Stephen Breyer, Ruth Bader Ginsburg and Sonia Sotomayor concurred in part, and Sotomayor, joined by Ginsburg, wrote a dissent.

The officials at issue in Freytag v. Commissioner were the “special trial judges” of the United States Tax Court. Specially, the case challenged the authority of the judge who had presided over a case involving $1.5 billion in alleged tax deficiencies. On appeal it was argued the judge's decision in that case -- going against the appellants -- was invalid because he had not been constitutionally appointed.

On review the Supreme Court held the judges were subject to the Appointment Clause because they served on an ongoing, rather than "temporary or episodic basis," that they heard cases of significance, and exercised "significant discretion" in wielding their authority.

"Freytag says everything necessary to decide this case," Justice Kagan wrote. "To begin, the Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law ... Still more, the Commission’s ALJs exercise the same 'significant discretion' when carrying out the same 'important functions' as STJs do. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings — indeed, nearly all the tools of federal trial judges.

"So point for point — straight from Freytag’s list — the Commission’s ALJs have equivalent duties and powers as STJs in conducting adversarial inquiries," she continued.

Given all these reasons, the court majority held that the SEC's administrative law judges are "Officers of the United States,” subject to the Appointments Clause, and that Lucia's case was heard and decided by a judge without "the kind of appointment the Clause requires."

Kagan said Lucia is entitled to a new hearing before a properly appointed judge, and that in order to cure the constitutional error, that judge cannot be Elliot, even if he has since been properly appointed.

"Judge Elliot has already both heard Lucia’s case and issued an initial decision on the merits. He cannot be expected to consider the matter as though he had not adjudicated it before," Kagan wrote.

In her dissent, Justice Sonia Sotomayor  said she would hold the administrative law judges employed by the SEC are not "officers" because they lack final decisionmaking authority.

"The Commission can review any initial decision upon petition or on its own initiative," she wrote, and "even where the Commission does not review an ALJ’s initial decision, as in cases in which no party petitions for review and the Commission does not act sua sponte, the initial decision still only becomes final when the Commission enters a finality order.

"In other words, Commission ALJs do not exercise significant authority because they do not, and cannot, enter final, binding decisions against the Government or third parties," Sotomayor said.

The ruling is a victory to President Donald Trump, whose administration sided with Lucia last November, reversing the earlier position of the Obama administration.

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