SEC's In-House Forum Is Constitutional, D.C. Cir. Says

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Rob Tricchinelli

Aug. 9 — The Securities and Exchange Commission's in-house courts pass constitutional muster, the D.C. Circuit held Aug. 9 in the leading case challenging whether the agency's administrative law judges are improperly hired Raymond J. Lucia Cos., Inc. v. SEC, 2016 BL 256510, D.C. Cir., No. 15-1345, opinion 8/9/16 .

ALJs don't issue “final” decisions on behalf of the agency, meaning they can't be considered officers subject to Appointments Clause restrictions on their employment, Judge Judith W. Rogers wrote for the U.S. Court of Appeals for the District of Columbia Circuit.

The challenge was brought by Raymond J. Lucia, an investment adviser who appealed an ALJ's 2013 decision barring him from the industry (133 SLD, 7/11/13).

The D.C. Circuit is the first federal appeals court to address the merits of whether the SEC's ALJs are hired constitutionally. The decision is a major win for the SEC as it will stunt, if not wipe out, dozens of related challenges winding their way through the agency's in-house tribunal and other federal courts.

‘We're Pleased.'

“We’re pleased with the court’s decision,” an SEC representative told Bloomberg BNA in an e-mail.

Lucia's attorney, Mark A. Perry of Gibson, Dunn & Crutcher LLP in Washington, didn't respond to a request for comment.

Fairness?

Lucia was one of several SEC respondents to fire back at the agency. Like others, he contended the ALJs were hired improperly because the president or the full commission didn't make the appointment.

In order for the Appointments Clause standard to be triggered, the ALJs would have to be considered “officers” of the U.S., Lucia said, an argument that the D.C. Circuit rejected because ALJ decisions aren't final.

Federal law gives the commission the right to review any ALJ decision, which makes the commission the final arbiter, the court said, even though many ALJ initial decisions do become final.

“The Commission has retained full decision-making powers, and the mere passage of time is not enough to establish finality,” Brown wrote. “And even when there is not full review by the Commission, it is the act of issuing the finality order that makes the initial decision the action of the Commission.” Judges Cornelia T.L. Pillard and Robert L. Wilkins were also on the panel.

‘Buckets of Money.'

In July 2013, ALJ Cameron Elliot revoked Lucia's adviser status, barred him from the industry and hit him with a six-figure fine for misrepresenting the results of his “Buckets of Money” investment strategy.

That action prompted Lucia to bring the constitutional challenge.

Other respondents have sued the SEC in federal court before their administrative case concluded, but several courts have held such lawsuits to be premature and tossed the respondents back to the agency (118 SLD, 6/20/16).

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.