The SEC’s Inferiority Complex, by Kent Barnett

by Guest Blogger — Thursday, June 11, 2015

CJW Note: In both academic and practitioner adlaw circles, there’s been chatter for a while about the constitutionality of the SEC using administrative law judges (ALJs) in its enforcement actions. On Monday a federal judge found such practice to likely be unconstitutional. One of my coauthors, Kent Barnett (UGa Law), has written extensively on ALJs (he’s quoted in the WSJ article linked above), so I thought I’d share his preliminary thoughts on the case here (which have also been cross-posted over at The Conglomerate). Here is Kent’s take:

In, what is to my knowledge, an unprecedented decision this week, a federal district court in Atlanta preliminarily enjoined the SEC from proceeding with an enforcement action before an Administrative Law Judge (ALJ) because the ALJ’s appointment violated the U.S. Constitution.

The court held (as I have argued elsewhere) that ALJs are not mere employees, but instead “inferior officers of the United States,” whose appointments are subject to the Appointments Clause. That clause requires that inferior officers be appointed in one of four ways: through presidential appointment and senatorial confirmation or through appointment “by the President alone, in the Courts of Law, or in the Heads of Departments.” Here, the relevant appointment mechanism is the last one—appointment by the head of a department. According to the court’s opinion, the ALJ was not appointed by the SEC Commissioners (the head of the department), but instead by a Chief ALJ.

Is this sky going to fall for the SEC if ALJs were not appointed properly? Not based on my initial take. From what I can tell, there is an easy fix: the SEC merely needs to have the Commissioners reappoint current ALJs and approve future ALJs that the Chief ALJ selects. (But I hope that those with more knowledge about the SEC can correct me if I’m wrong.)

Congress does not need to take any legislative action; the SEC already has authority under Section 4(b) of the ’34 Act to appoint “officers . . . and other employees.” The problem here is that, despite the SEC’s broad legislative authority to delegate functions under Section 4A(a), the delegation of appointment power is unconstitutional. That does not mean, of course, that the SEC must interview and review the CVs of ALJ candidates going forward. Instead, for future ALJs, the SEC can simply preclude the Chief ALJ’s selection from becoming effective without the Commissioners’ approval. Indeed, retaining final say on appointments is not only constitutionally required but also expressly permitted by Section 4A(b), which says that the SEC retains discretion to review delegated actions. For current ALJs, the SEC can simply reappoint them. Agencies have done so successfully in the face of past Appointments Clause violations. See Edmond v. United States.

So, in light of the easy fix, is this decision much ado about nothing? No.

First, this is the only decision of which I’m aware that (correctly, I think) holds that ALJs are inferior officers. Most ALJs are likely appointed by heads of departments, and thus their appointments are valid regardless of their status. But other ALJs may be appointed by agencies that are not departments, such as the CFPB or FERC (as I’ve argued elsewhere). If so, their appointments would violate the Appointments Clause.

Second, the decision shows how little attention agencies may be giving to appointments internally, even if statutory authority otherwise permits a constitutional appointment. The SEC’s experience suggests that the heads of departments should, as a matter of default agency design, be required to sign off on all hiring for federal officials who may be deemed inferior officers. For agencies that list of officials may be relatively lengthy, considering that courts have held that the following were inferior officers: district-court clerks, clerks within certain executive departments, assistant surgeons, cadet-engineers, election monitors, federal marshals, military judges, and general counsel for the Department of Transportation. Approving hiring decisions may be more onerous than agencies would like, but the Appointments Clause requires that minimal involvement by the head of the department.

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