Administrative Proceedings

In Jarkesy v. Securities and Exchange Commission, the Court of Appeals for the Fifth Circuit issued a remarkable opinion holding numerous aspects of the SEC’s administrative enforcement regime are unconstitutional.  The May 18, 2022 ruling stands to eliminate the SEC’s ability to adjudicate enforcement actions seeking penalties using ALJs, rather than bringing suit in federal district court.  It also could tee up further argument at the Supreme Court to resolve the scope of the SEC’s – and, perhaps, other administrative bodies’ – adjudicatory powers.

The Securities and Exchange Commission joined the raging debate about whether SEC administrative proceedings conducted by administrative law judges (“ALJs”) are unconstitutional if the ALJs have not been appointed in accordance with the Appointments Clause of the U.S. Constitution. In a 3-2 decision in In the Matter of Raymond J. Lucia Companies, Inc., the Commission ruled on September 3, 2015 that ALJs are “mere employees” of the Commission – not “inferior officers” of the United States – and are therefore not subject to the Appointments Clause’s requirements.

We blogged last week about a New York federal court’s decision in Duka v. SEC conditionally sustaining a facial challenge to an administrative enforcement proceeding conducted by Administrative Law Judges (“ALJs”) of the Securities and Exchange Commission. In that case, Judge Richard M. Berman, of the Southern District of New York, held that SEC ALJs are “inferior officers” of the United States for purposes of the U.S. Constitution’s Appointments Clause and that the ALJs at issue had not been appointed by the SEC Commissioners, in seeming violation of that constitutional provision. However, the court gave the SEC seven days to cure the defect “by having the SEC Commissioners issue an appointment or preside over the matter themselves.”

The SEC refused to take the bait. The SEC informed the court on August 10, 2015 that the Commission has already heard argument on the constitutional challenge in at least one proceeding, but has not yet issued a decision or taken any other action.