Constitutional Law

SEC uses an unconstitutional method to hire in-house judges, federal appeals court rules

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A federal appeals court created a circuit split last week when it ruled the five administrative law judges hired by the Securities and Exchange Commission are appointed in violation of the Constitution.

The Denver-based 10th U.S. Circuit Court of Appeals said the in-house judges are “inferior officers” that are required under the appointments clause to be appointed by the president, a court of law or a department head. The New York Law Journal (sub. req.), Reuters, the New York Times DealBook blog and the Wall Street Journal (sub. req.) have stories.

A dissenter, Judge Monroe McKay, said the majority’s reading of the appointments clause would put all federal administrative law judges at risk of being declared inferior officers. “Despite the majority’s protestations,” he wrote, “its holding is quite sweeping, and I worry that it has effectively rendered invalid thousands of administrative actions.”

The SEC hires its administrative judges through a process in which the U.S. Office of Personnel Management screens applicants and proposes three finalists, one of whom is selected by someone at the SEC, according to the majority opinion (PDF) by Judge Scott Matheson.

The “diffuse process does not lend itself to the accountability that the appointments clause was written to secure. In other words, it is unclear where the appointment buck stops,” the 10th Circuit said.

McKay argued, however, that SEC commissioners are not bound by decisions of administrative judges. That means blame for unpopular decisions “will fall squarely on the commissioners and, in turn, the president who appointed them,” he wrote.

The SEC has a higher success rate with cases heard by its in-house judges, and it is sending more cases to those judges under authority gained by the 2010 Dodd-Frank Act, according to the Wall Street Journal.

Washington, D.C., lawyer Stephen Crimmins told the Wall Street Journal that the SEC could remedy concerns about the appointments clause by formally appointing the in-house judges through a commission order. Crimmins is a former top enforcement official at the SEC who is currently a partner with Murphy & McGonigle.

DealBook, however, says such a move could be viewed as an acknowledgement by the SEC that its judges are improperly appointed. Defendants still subject to orders by the administrative judges could then challenge their validity.

The case is Bandimere v. U.S. Securities and Exchange Commission.

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