The Volokh Conspiracy

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Are the SEC's administrative law judges unconstitutional?


The U.S. Court of Appeals for the 10th Circuit has bestowed a holiday gift on all of us administrative law nerds (especially for those who should be grading exams). Today, in Bandimere v. SEC, a divided panel held that the Securities and Exchange Commission's administrative law judges (ALJs) are unconstitutional. Judge Matheson wrote for the court, joined by Judge Briscoe (who also wrote a concurring opinion). Senior judge McKay dissented. This decision is potentially quite significant and creates a circuit split on the underlying Appointments Clause question.

Here's Judge Matheson's summary of the opinion:

When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ("ALJs") presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made up of more than 4 million people, most of them employees. Some of them are "Officers of the United States," including principal and inferior
officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2. In this case we consider whether the five ALJs working for the Securities and Exchange Commission ("SEC") are employees or inferior officers.

Based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause.

For those who forget, the Appointments Clause, in Article II, section 2 of the Constitution, provides, in relevant part:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

At issue in Bandimere is whether the SEC's ALJs are "officers" for the purposes of this clause, and in particular "inferior" officers who may be appointed by heads of departments, such as the chair of the SEC. This matters because SEC ALJs are not so appointed. Rather, they are selected through an internal administrative process.

The panel majority concluded that the ALJs are constitutional officers because, among other things, they exercise significant discretion in carrying out "important functions" delegated by statute, including the imposition of liability and sanctions on those found to have violated relevant SEC rules. These functions, Judge Matheson explains for the majority, are more than "ministerial tasks," making the ALJs officers. As his opinion concludes:

SEC ALJs "are more than mere aids" to the agency. . . . They "perform more than ministerial tasks." The governing
statutes and regulations give them duties comparable to the [Special Trial Judges]' duties described in Freytag. SEC ALJs carry out "important functions," and "exercis[e] significant authority pursuant to the laws of the United States." The SEC's power to review its ALJs does not transform them into lesser functionaries. Rather, it shows the ALJs are inferior officers subordinate to the SEC commissioners.

Judge McKay rejected this analysis and warned of the potential ramifications of the court's decision. His dissent begins:

Notwithstanding the majority's protestations otherwise, today's opinion carries repercussions that will throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause. While the Supreme Court perhaps opened the door to such an approach in Freytag v. Commissioner, I would not throw it open any further, but in my view that is exactly what the majority has done. I do not believe Freytag mandates the result proposed here, and the probable consequences are too troublesome to risk without a clear mandate from the Supreme Court. I respectfully dissent.

Judge Briscoe authored a separate concurring opinion responding to some of the dissent's arguments. Specifically, Briscoe sought to address "(I) the dissent's predictions about speculative 'repercussions' of the opinion, by which it reaches what appear to be several erroneous conclusions; and (II) its application of a truncated legal framework to a misstated version of the facts of record."

Bandimere is but one of several cases to raise Appointments Clause objections to SEC enforcement actions. In August, the U.S. Court of Appeals for the D.C. Circuit reached the opposite conclusion in Raymond J. Lucia Cos. v. SEC, accepting the SEC's argument that ALJs are mere "employees," and not officers at all. As a consequence, unless the SEC adjusts the manner in which it appoints ALJs—such as by providing for their ultimate appointment by the SEC chair—this case is likely on its way to the Supreme Court.

Also, for those who care about such things, the author of today's opinion (Judge Matheson) was appointed by President Obama, and concurring Judge Briscoe was appointed by Bill Clinton. Senior judge McKay was a Jimmy Carter appointee. The panel lineup goes to show that strict application of the Appointments Clause is not just for conservatives or Republican appointees. On the other hand, the panel in Raymond J. Lucia Cos. consisted of one Clinton and two Obama appointees.