The SEC’s Improper Subdelegation (Statutory, not Constitutional)

by Jennifer Nou — Wednesday, Apr. 11, 2018@Jennifer_Nou

The Securities and Exchange Commission (SEC), like any busy group of officials, can’t do everything itself. It has to delegate tasks. Not only is delegation inevitable, it is often wise. Delegating to others can promote agency expertise; it can preserve Commission resources for higher priorities. At the same time, delegation has its pathologies. It can allow agency heads to duck accountability, to shirk. Lucia, at its core, is a case about non-delegation. Not the inability of Congress to delegate legislative power to an agency, but rather the issue of whether agency heads can delegate an appointment to their subordinates — to subdelegate. This post questions whether Lucia poses a constitutional problem as it is not clear the Appointments Clause prohibits subdelegation of appointments authority for inferior officers, even if SEC ALJs were deemed so. However, the case still does present statutory concerns because SEC failed to delegate that appointments authority appropriately though a statutorily-required “published order or rule” that retains a right of review over the appointment.

Lucia is nominally a case about the Appointments Clause. That Clause requires Congress to “vest” the “appointment” of inferior officers in a “Head of Department” like the SEC. So if ALJs are inferior officers, then Congress must vest their appointment in the SEC. And that is precisely what Congress has already done: passed a statute stating that the SEC “shall” appoint its ALJs. No constitutional conundrum so far. Lucia’s complaint is that the SEC then delegated this appointment authority to its staff. But why is that a problem: Why can’t the SEC lawfully delegate this authority? After all, courts presumptively allow agency heads to subdelegate their statutory authority all the time. They even grant them Chevron deference for the authority to do so.

Perhaps the problem is that the Appointments Clause only allows Congress to “vest” the authority for appointing inferior officers in a Department Head, rendering the authority nondelegable. But there is a robust debate under other constitutional vesting clauses challenging that interpretation by analogy. Just because the Constitution allows a power to be vested in a particular actor, in other words, does not necessarily mean that that actor cannot delegate it. The text of the Appointments Clause is silent on the question. A 2015 OLC opinion expressly declines to resolve the issue, but advises formalities to be safe, all the while acknowledging that “the Constitution would permit much of the legwork of the appointment process to be delegated to a subordinate.” The Clause’s concerns with political accountability, after all, are not necessarily eviscerated because of a sub-delegation. The SEC is still on the hook for its appointments in the sense that it can always revoke a subdelegation. If it also retains the power to review each appointment, then all the more so.

Which brings me to the statutory concern. Congress has explicitly provided that the SEC has “the authority to delegate” to others within the agency “any of its functions” through a “published rule or order.” The merits brief for the judgment below cites that authority for what everyone in this case describes as the Commission’s delegation to hire ALJs to its Chief Judge and Office of Human Resources. It is important to be clear, however, exactly what that means in reality: The Commission delegated that power as a matter of practice, but not through any formal rule or order. (In a previous post, I asked anyone to send me evidence to the contrary and was not alerted to any.) Indeed, the principal briefs all cite an affidavit submitted by the SEC’s Division of Enforcement in previous litigation, which describes the practice, but acknowledges that “internal processes have shifted over time.”

One implication of this observation is that the SEC has not yet properly delegated its appointments authority as a statutory matter. Doing so requires a published rule or order as well as further regulations that specify how the SEC will timely review the appointment, if at all. In many ways, requiring the SEC to follow this statutory procedure will alleviate many of Lucia’s constitutionally-inspired concerns. A public rule or order increases the accountability of the Commission for subdelegating its appointments authority. A clear process of Commission review over that appointment further augments SEC responsibility for its ALJs. Moreover, this scheme would be more transparent and regularized by contrast to the remedy the SEC seems to contemplate: ad hoc, ornamental ratifications of hiring decisions that will likely continue to be made in reality by Commission staff (at least if past practice is any guide).

If the Supreme Court can find some way to decide this case only on narrow statutory grounds, then all the better. The ALJ was improperly hired here because the SEC failed to delegate that authority by rule or order. (Whether or not the SEC’s later ratification cured this statutory defect is an open issue.) By wading into the constitutionality of ALJs, the Court threatens to upend decades of agency practice, reopen litigation, and invite spillover effects onto agencies like the Social Security Administration where mass adjudication presents a different set of concerns. If the Court feels it necessary to rule on constitutional grounds, it should at the very least request more briefing on the question of whether the Appointments Clause prohibits the subdelegation of appointments authority for inferior officers. If the Clause does not, then what is to be gained in this case by deciding whether SEC ALJs are inferior officers?

 

This post is part of a symposium on Lucia v. SEC. All of the posts can be viewed here.

Cite As: Author Name, Title, 36 Yale J. on Reg.: Notice & Comment (date), URL.

About Jennifer Nou

Jennifer Nou is Neubauer Family Assistant Professor at the University of Chicago Law School. Her research and teaching interests are primarily in administrative law, legislation, and the separation-of-powers. Prior to joining the faculty, she was a Public Law Fellow at the Law School and also worked as a policy analyst and special assistant at the Office of Information and Regulatory Affairs. Jennifer is a graduate of Yale College and Yale Law School, and received an M. Phil in Politics from Oxford University as a Marshall Scholar. After law school, she was a law clerk to Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit and then to Justice Stephen Breyer of the U.S. Supreme Court.

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