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Lucia v. SEC

Facts of the Case

Provided by Oyez

The Securities and Exchange Commission (“Commission”) commenced an administrative enforcement action against Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (collectively “Petitioners”) for alleged anti-fraud violations of the Investment Advisers Act arising from the way they presented their retirement wealth management strategy to prospective clients. An administrative law judge (“ALJ”) found liability and imposed sanctions including a lifetime industry bar against Petitioners. The Commission granted the parties’ petitions for review, and found that Petitioners had committed anti-fraud violations and imposed the same sanctions as the ALJ. The Commission also rejected the argument that the administrative proceedings had been unconstitutional because the ALJ who handed down the initial decision was a constitutional Officer who had not been appointed pursuant to the Appointments Clause under Article II, Section 2, Clause 2 of the Constitution. 

 

Petitioners asked the D.C. Circuit to vacate the Commission’s decision and order under review on the grounds that the ALJ who made the administrative ruling was a constitutional Officer who had not been appointed in accordance with the Appointments Clause. The appeals court rejected this argument, explaining that Commission ALJs were not constitutional Officers within the meaning of the Appointments Clause, primarily because of their lack of authority to issue final decisions on behalf of the Commission pursuant to the agency’s regulatory scheme.

Questions

  1. Are administrative law judges of the Securities and Exchange Commission Officers of the United States within the meaning of the Appointments Clause?

Conclusions

  1. In a 7-2 opinion, the Court reversed and remanded, holding that administrative law judges of the Securities and Exchange Commission are “officers of the United States” subject to the Constitution’s Appointments Clause.

    In an opinion authored by Justice Kagan, the Court began by stating that under its precedent, as established in United States v. Germaine, 99 U.S. 508 (1879), and Buckley v. Valeo, 424 U.S. 1 (1976), to be classified as an officer rather than an employee, a person needs to have a “continuing” position established by law, and must “exercis[e] significant authority pursuant to the laws of the United States.” It went on to explain that the factors in Freytag v. Commissioner, 501 U.S. 868 (1991), the case directly governing the instant matter, matched up almost exactly to the elements in Lucia’s case. 

    In Freytag, the Court ruled that U.S. Tax Court “special trial judges” (STJs) were officers because they met the elements required under Germaine and Buckley, and because they had significant discretion in addition to considerable responsibilities in presiding over administrative proceedings. These responsibilities included “tak[ing] testimony, conduct[ing] trials, rul[ing] on the admissibility of evidence, and hav[ing] the power to enforce compliance with discovery orders.” The Court reasoned that the SEC’s ALJs, like the STJs in Freytag, held a continuing office established by law, and exercised the same degree of discretion when carrying out the same functions as the STJs. But in contrast with the Tax Court STJs, whose decisions were always required to be reviewed by a regular Tax Court judge, the SEC ALJs’ decisions were not always subject to review; if the SEC decided against review then the ALJ’s decision would become final and be “deemed the action of the Commission.” As such, the SEC ALJs were officers of the United States subject to the Appointments Clause.

    In light of this conclusion, because Lucia had made a timely challenge in his case to the constitutional validity of the ALJ’s appointment, he was entitled to a new hearing before a properly appointed official.

    Justice Thomas filed a concurring opinion, in which Justice Gorsuch joined.

    Justice Breyer filed an opinion concurring in the judgment in part and dissenting in part, and was joined by Justices Ginsburg and Sotomayor as to Part III.

    Justice Sotomayor filed a dissenting opinion, in which Justice Ginsburg joined.