On June 21, 2018, the Supreme Court of the United States held in Lucia v. SEC that the SEC’s administrative law judges are “Officers of the United States” who must be constitutionally appointed. The decision is likely to have a ripple effect on cases currently pending in the SEC’s administrative forum, as the Court also found that persons subjected to a hearing before an unappointed judge who challenged the validity of the ALJ’s appointment are entitled to a new hearing before a new ALJ.

Since the passage of the Dodd-Frank Act in 2010, the SEC has been increasingly filing enforcement actions in its own administrative forum rather than in federal court. This has led to a series of challenges to the SEC’s in-house forum, which many view as biased and unfair. Administrative proceedings are tried by SEC attorneys before an ALJ hired by the SEC, whose decision is then appealed to the SEC’s Commissioners. Only at the conclusion of that process can a respondent be heard in federal court, but the Commission’s opinion is afforded great deference and can be overturned only in limited circumstances.

At issue in Lucia was the question of whether the SEC’s ALJs who preside over its administrative proceedings are “Officers of the United States” (in which case constitutional appointment is required), or “mere employees” of the agency (in which case they can simply be hired by SEC staff). Finding that the SEC’s in-house judges have “nearly all the tools of federal trial judges,” the Court concluded that they were “Officers of the United States” who must be constitutionally appointed. “To cure the constitutional error,” the Court further held that Lucia was entitled to a new hearing before a new ALJ – one who is appointed pursuant to the Constitution – or the Commission itself.

The Court’s latter holding is significant, as there are numerous cases pending in the SEC’s administrative forum that will be impacted by the Court’s ruling. Shortly after Lucia was issued, the Commission entered an order staying all pending administrative proceedings. In addition, the SEC has yet to formally appoint any ALJs, opting instead to issue an order “ratifying the agency’s prior appointment” of its ALJs. The Court in Lucia, however, stopped short of addressing whether the ratification order was valid. Should the SEC continue to prosecute its pending (or new) cases before its “ratified,” rather than appointed, ALJs, it runs the risk that those cases could be overturned on appeal.

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management or Litigation Groups.