The SEC’s Subdelegated Appointments Power

by Jennifer Nou — Friday, Dec. 1, 2017@Jennifer_Nou

Yesterday, the Securities and Exchange Commission (SEC) hedged its bets: it issued an order ratifying the prior appointments of its administrative law judges (ALJs). The order also called for fresh proceedings in pending actions before these newly-blessed ALJs. The SEC did all of this to “put to rest” the argument — now pursued by the Solicitor General in Lucia v. SEC — that the SEC’s method for choosing its ALJs violates the Appointments Clause. The basic issue is whether ALJs are mere employees or “inferior officers” under Article II. If the former, then smooth sailing for the SEC, which has subdelegated its authority to appoint ALJs to its Chief Administrative Law Judge and internal Office of Human Resources (more on this below). If the latter, then the constitution requires that ALJs be chosen by the President alone, a “Head[] of Department[],” or “Court[] of Law.”

Luckily for the SEC, the Supreme Court has said that the Commission is a “Head[] of Department[].” So by ratifying its ALJs, the SEC seeks to preserve the validity of still-pending administrative decisions in the event more courts hold that its ALJs are inferior officers. So confident is the SEC in its cure that it lifted the stay on administrative proceedings subject to review in the Tenth Circuit, which had held just that. The SEC thus follows the lead of the similarly risk-averse and besieged Federal Trade Commission, which already endorsed its ALJ appointments more than two years ago.

Another likely motive for the Commission’s ratification is an attempt to stave off Supreme Court review. And no wonder given that the Government is now clamoring for it. Specifically, the SEC’s gambit may wager that the appointments issue is now moot. Mootness arises when an alleged harm has been resolved by a later development; a live case or controversy no longer exists. By allowing petitioners new proceedings before Commission-appointed ALJs, the SEC may hope that petitioners have gotten just what they wanted. So Supreme Court review now seems pointless, if not jurisdictionally barred. The problem for the SEC is that the Court has been clear that agencies cannot moot claims simply by putting a Band-Aid on potentially unconstitutional behavior, especially when the agency can simply resume it later. Voluntary cessation, in other words, doesn’t result in mootness unless an agency meets the “heavy burden” of showing that it won’t repeat the allegedly illegal conduct in the future.

Unfortunately for the SEC, the Commission has made no such showing. For it has yet to renounce or rescind its subdelegation of appointment authority through whatever method* it initially used to grant that authority to its Chief Administrative Law Judge. If that internal delegation occurred through a rule codified in the Code of Federal Regulations (such as the SEC’s recent subdelegation of subpoena power to its Division of Enforcement Director), then the SEC should revoke it if it wants to cry mootness credibly. If, by contrast, the ALJ appointment power has been delegated more informally through an internal staff manual or other guidance document, then the SEC should publicly disavow it.  If the subdelegation is simply a longstanding norm or custom, then the SEC should take more convincing action to change it. Absent one of these routes — none of which is bulletproof — Lucia’s ALJ appointments issue is far from moot, but rather still alive and kicking.

* Having read a fair number of litigation documents, I have yet to come across any citation to a rule, guidance document, or other formalized means through which the SEC made this subdelegation. Rather, the SEC’s own fuzzy description (h/t Jenn Mascott) of its “internal processes” as having “shifted over time with changing laws and circumstances” seems to suggest that the Chief Administrative Law Judge’s role may be customary, but I can’t be sure. If anyone can shed further light on how this initial delegation occurred, feel free to shoot me an email, and I will update this post accordingly.

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

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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.

3 thoughts on “The SEC’s Subdelegated Appointments Power

  1. Marty Lederman

    Not sure I understand, Jennifer. The current ALJs are now appointed by the Commission. Is it your view that the Lucia case is not moot because the SEC might in the future assign new ALJs to a case involving Lucia without appointment by the Commission, via the “subdelegation”? Even after the SG has represented, *on behalf of the SEC,* that to do so would be unconstitutional? What are the odds of that?
    How is the AC issue alive, or kicking? (Or am I not understanding the point you’re making?)

    1. Jennifer Nou Post author

      No (as posted elsewhere), just the opposite: that SEC would use Commission-appointed ALJs for Lucia. But even it does, the basic idea here is that doing so does not threaten Supreme Court review, i.e., the voluntary cessation doctrine exception to mootness is relevant.

      Alternatively, if you meant to say that SEC would not assign new ALJs to Lucia *under different factual circumstances, i.e., not the facts giving rise to this enforcement action* that’s not at all clear. As you know, Commission membership changes as does the identity of the chair appointed by current or future Presidents. Any of these circumstances could lead a future Commission to honor the still-existing subdelegation — that is, allow the Chief ALJ to continue appointing the ALJ who would hear the future case involving Lucia.

  2. Eric Rasmusen

    What I wonder is how someone from the executive branch, even if approved by the Senate, can oversee what is in effect a trial and impose millions of dollars in fines when the defendant can only appeal to a real judge question of law and gross errors of fact. If the appellate court grants extreme deference to the agency as finder of fact, Americans don’t have the right to trial by an impartial judge. It’s outrageous that the Securities and Exchange COmmission can delegate its authority to an ALJ, but it’s also outrageous that Congress cut the trial judges out of the process and inserted the Commission instead.


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