SEC Opts For Intercircuit Nonacquiescence

January 9, 2017

Leave it to the SEC and the federal courts to turn this into a winter of discontent. As the frigid temperatures of 2017 fall upon us, Wall Street's legal community is trying to figure out whether the federal securities regulator is acting in a constitutional or unconstitutional manner. While we're pondering that prospect, we must further wonder whether the SEC's enforcement docket will be upended if cases adjudicated by the organization's administrative law judges must be overturned for constitutional infirmities. All of which adds up to one hell of a mess except for industry lawyers who may soon be enjoying one hell of a lovely payday!

Free Enterprise Fund and PCAOB

Way back in 2010, the United States Supreme Court issued Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. (Opinion, Supreme Court; No. 08-861 / June 28, 2010), in which Petitioners had argued that the Sarbanes-Oxley Act contravened constitutional separation of powers by conferring executive power on PCAOB members without subjecting them to Presidential control. Also, Petitioners challenged PCAOB's appointment as violating the Appointments Clause of the Constitution, Art. II, §2, cl. 2.

In its majority opinion, the Supreme Court rendered a fairly awkward Opinion that was affirmed in part, reversed in part, and remanded pursuant to Roberts, C.J. joined by Scalia, Kennedy, Thomas, and Alito, JJ.; with dissent by Breyer, J, joined by Stevens, Ginsburg, and Sotomayor JJ. In Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. (Opinion, Supreme Court; No. 08-861 / June 28, 2010), the Court stated:

We are asked, however, to consider a new situation not yet encountered by the Court. The question is whether these separate layers of protection may be combined. May the President be restricted in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States?

We hold that such multilevel protection from removal is contrary to Article II's vesting of the executive power in the President. The President cannot "take Care that the Laws be faithfully executed" if he cannot oversee the faithfulness of the officers who execute them. Here the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President's determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President's "constitutional obligation to ensure the faithful execution of the laws." Id., at 693.

Page 2 of the Opinion

Free Enterprise Fund amounted to little more than a flubbed punt, exacerbated by the one-vote majority of the Opinion. Ultimately, the Supreme Court cobbled together a hodge-podge solution, which permitted PCAOB to function but its members would be subject to removal at will by the Securities and Exchange Commission ("SEC"). The Court's rationale suggests that the justices agreed to disagree but ultimately sought to provide some constitutional cover by which PCAOB would survive. As with most "Yes . . . but" judicial opinions, Free Enterprise Fund virtually guaranteed that the residual uncertainty left in the Opinion's wake would bubble up yet again. 

SIDE BAR: For a detailed analysis of Free Enterprise Fund: Supreme Court Rules PCAOB Construct Partially Unconstitutional -- Terminable At Will Is New Standard (BrokeAndBroker.com Blog, June 28, 2010).

Bandimere

Seven years after the Supreme Court decided Free Enterprise Fund, the federal courts again dealt with the SEC's compliance with the Appointments Clause. This time, the challenge involves the SEC's appointments of its Administrative Law Judges ("ALJs"). As noted in "In Face Of Split Circuits, SEC ALJ Rules Because We Say So" (BrokeAndBroker.com Blog, January 6, 2017):
In David F. Bandimere, Petitioner, v. United States Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the Tenth Circuit, 15-9586 / December 27, 2016), upon considering Petitioner Bandimere's appeal, the Court of Appeals for the Tenth Circuit ("10Cir") preliminarily explained that:

When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ("ALJs") presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made up of more than 4 million people, most of them employees. Some of them are "Officers of the United States," including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2. In this case we consider whether the five ALJs working for the Securities and Exchange Commission ("SEC") are employees or inferior officers.

Based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause Exercising jurisdiction under 15 U.S.C. §§ 77i(a) and 78y(a)(1), we grant Mr. Bandimere's petition for review.
Kon and Lucia

The United States Court of Appeals for the Tenth Circuit's ("10Cir's") Bandimere Opinion, deemed the SEC's ALJ system to be unconstitutional because of its violation of the Appointments Clause. As such, Bandimere has thrown the SEC's enforcement agenda into chaos by splitting the federal appellate circuits on the issue of the constitutionality of the ALJs' service. As an SEC ALJ recently noted In the Matter of Alexander Kon (Order Regarding Respondent's Motion for Judgment on the Pleadings and Motion for Withdrawal; Admin. Proc. Rul. Rel. No. 4501; Admin. Proc. File No. 3-17674 / January 5, 2017):

[T]he two United States Circuit Courts of Appeal that would likely have jurisdiction over any petition for review from a final Commission action arising from this proceeding are currently split on the applicability of the Appointments Clause to Commission ALJs. Compare Bandimere v. SEC, __ F.3d __, No. 15-9586, 2016 WL 7439007, at *15 (10th Cir. Dec. 27, 2016), with Raymond J. Lucia Cos. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016). The Commission, however, has held that its ALJs are not subject to the Appointments Clause. See Raymond J. Lucia Cos., Exchange Act Release No. 75837, 2015 WL 5172953, at *21-23 (Sept. 3, 2015).

Entering into 2017, the SEC ALJ handling Kon announced that he  followed the SEC's historic position of accepting the line of federal cases that had favorably interpreted the constitutionality of his service. To be clear, there is nothing wrong -- in principle or theory -- for any ALJ to espouse the company line. The problem create by this pick-and-choose approach is that at least one federal appellate court has ruled that the SEC's ALJs are serving in an unconstitutional manner; and that means that when a respondent in an SEC proceeding reiterates the holding of Bandimere, the SEC is confronted not with a mere respondent's argument but, to the contrary, a federal circuit court's finding. 

Here We Go Again

For many, the ALJ/Appointments Clause issue may seem exceedingly esoteric and the stuff of academic musing. In reality, this legal dilemma will likely become inextricably enmeshed within the SEC's enforcement fabric until such time as the Supreme Court resolves the split among the federal circuits. At times the appearance of this issue may seem peripheral to very real and serious regulatory issue. In truth, what is on the periphery is something fighting to get into the very core of the case. For example, In the Matter of Harding Advisory LLC and Wing F. Chau, Respondents (Order Instituting Administrative and Cease-And-Desist Proceedings; '33 Release No. 9467; Invest. Adv. Act Rel. No. 3696; Invest. Co.Act Rel. No. 30746; Admin. Proc. File No. 3-15574 / October 18, 2013), the SEC instituted administrative and cease-and-desist proceedings ("OIP"). As set forth in the OIP's "Summary":

1. This matter involves violations of the federal securities laws by Harding and its principal Wing F. Chau in their role as investment managers for certain collateralized debt obligation transactions ("CDOs"). As the Collateral Manager of these CDOs, Harding was responsible for the selection, acquisition, and monitoring of portfolios of assets - the collateral - backing tranches of securities issued to investors by special-purpose vehicles (the "Issuers"), including one named Octans I CDO Ltd. ("Octans I").
2. Unbeknownst to investors and in conflict with the marketing materials and offering circular for Octans I, a third party named Magnetar Capital LLC (together with affiliates, "Magnetar") - a hedge fund firm whose interests were not aligned with those of the debt investors in Octans I - had undisclosed rights over the selection of collateral for Octans I. Magnetar's influence led Harding to select assets for Octans I that Harding's own personnel disfavored.
3. The Octans I transaction was a $1.5 billion CDO that closed on September 26, 2006. The collateral for the transaction consisted mostly of credit default swaps ("CDS") referencing subprime residential mortgage-backed securities ("RMBS"), 1 as well as securities of other CDOs backed by RMBS. Octans I was structured and marketed by subsidiaries of Merrill Lynch & Co., Inc. (collectively "Merrill"), which also lent their balance sheet to store, or "warehouse," collateral acquired for Octans I in the months leading up to the closing of the transaction. By April 3, 2008, Octans I had failed, costing the transaction's outside investors approximately $1.1 billion. Harding received approximately $4.5 million in fees for its role in the transaction.
4. The warehouse agreement governing the process of accumulating collateral prior to the closing of the Octans I transaction was actually a three-way agreement among Harding, Merrill, and Magnetar. The agreement gave Magnetar important rights, chief of which was the right to veto Harding's selection of collateral for the Octans I portfolio. Consistent with the agreement, Magnetar exercised significant control over the composition of the portfolio, but this right, among the others granted to Magnetar, was not disclosed to the debt investors in Octans I.
5. The so-called "pitchbook" and offering circular used to market Octans I, the relevant portions of which were drafted or reviewed by Harding, described Harding's creditselection processes and represented that the collateral would be selected by Harding and housed at Merrill in accordance with a warehouse agreement between Merrill and Harding. These representations were materially misleading because they did not disclose Magnetar's rights in and influence over the collateral selection process.
6. The offering circular and a Collateral Management Agreement with the Octans I Issuer executed by Chau also represented that Harding, in selecting collateral for the CDO, would perform its obligations as collateral manager:
with reasonable care (i) using a degree of skill and attention no less than that which [Harding] would exercise with respect to comparable assets that it manages for itself and (ii) without limiting the foregoing, in a manner consistent with the customary standards, policies and procedures followed by institutional managers of national standing relating to assets of the nature and character of the [Octans I collateral].
This was a material misrepresentation in that Harding and Chau, as they knew or at least recklessly disregarded, compromised their standards to accommodate trades requested by Magnetar.
7. Harding and Chau also later breached their obligations by purchasing, for inclusion in several other CDOs managed by Harding, tens of millions of dollars' worth of notes from a troubled Magnetar-related CDO underwritten by Merrill known as Norma. Harding and Chau bought the Norma securities despite their basically unfavorable view of them, adding lower-rated notes to their prior Norma commitment only after receiving pressure from Merrill and a direct request from Magnetar. Chau was apparently trying to return a favor and show that he was a "team player" who "never forget[s] my true friends." For each of the CDOs into which Harding placed the Norma notes, the collateral management agreement contained standard of care representations similar to that in the collateral management agreement for Octans I.
8. Harding and Chau committed the breaches described in this Order because they wanted fees that could be earned only if Magnetar agreed to close the Octans I transaction, and because they were seeking to please Merrill and Magnetar. Merrill had arranged the Octans I transaction at the impetus and behest of Magnetar, which, together with Merrill, had selected Harding as the collateral manager. Merrill and Magnetar had sent, and were in a position to continue sending, significant CDO business to Harding. As such, Harding's interests were in keeping Merrill and Magnetar happy, and Harding put those interests ahead of its obligations to the Issuers and their investors.

Footnotes:

1 RMBS are bonds backed by pools of residential mortgage loans, in this case subprime loans. CDS are explained below.

SEC ALJ Initial Decision

In the Matter of Harding Advisory LLC and Wing F. Chau, Respondents (Initial Decision; Initial Dec. Rel. No. 734; Admin. Proc. File No. 3-15574 / January 12, 2015), SEC ALJ Cameron Elliot issued a 98-page Initial Decision.

SIDE BAR: I rank ALJ Elliot's Harding Advisory Initial Decision among the most comprehensive and thoughtful documents of its type. After some 35 years on Wall Street, I am compelled to characterize ALJ Elliot's effort as "towering" and would commend it to any serious industry participant. Whether you concur or disagree in whole or part with Elliot's findings and decisions, there should be no doubt as to the considerable effort and dedication that was behind this document. 

As noted in the Initial Decision's "Summary":

This Initial Decision (ID) finds that Respondents Harding Advisory LLC (Harding) and Wing F. Chau (Chau) violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 206 of the Investment Advisers Act of 1940 (Advisers Act). The ID: orders Harding and Chau to cease and desist from violations of Section 17(a) of the Securities Act and Section 206 of the Advisers Act, and to jointly and severally pay $1,003,216 in disgorgement and prejudgment interest; revokes Harding's investment adviser registration and orders it to pay a civil penalty of $1.7 million; and bars Chau from association with the securities industry and orders him to pay a civil penalty of $340,000.

Without question, the regulatory issues presented in Harding Advisory are serious. The proposed financial sanctions exceed $3 million and the ALJ proposes to bar Chau. As summarized in the Initial Decision, ALJ Elliot found that

[H]arding committed the following violations:
a. negligently misrepresenting to Octans I investors, in the pitch book, Harding's investment analysis process, in violation of Section 17(a)(2);
b. negligently misrepresenting to the Octans I issuer, in the CMA, the standard of care Harding followed in selecting collateral, in violation of Section 206(2) and Section 17(a)(2);
c. negligently failing to follow the correct standard of care, with respect to the Octans I issuer, in violation of Section 206(2) and Section 17(a)(3);
d. negligently misrepresenting to Octans I investors, in the offering circular, the standard of care Harding followed in selecting collateral, in violation of Section 17(a)(2);
e. failing to follow the correct standard of care, with respect to two advisory clients which received Norma mezzanine bonds, in violation of Section 206(1) and Section 17(a)(1); and
f. misrepresenting to two advisory clients, in each client's CMA, the standard of care Harding followed in selecting Norma mezzanine bonds for each client's portfolio, in violation of Section 206(1) and Section 17(a)(1).

Additionally, Chau is primarily liable for, and aided and abetted and caused, Harding's Norma-related violations.

Pages 90 - 91 of the SEC Initial Decision

SEC Opinion

And what is to become of ALJ Elliot's considerable work and the equally significant investment of time and energy by the Respondents? In accordance with the SEC administrative process, the full Commission reviewed the proposed Initial Decision. In light of Bandimere, What are we to make of the SEC's Chair and the two sitting Commissioners basing their decision upon a hearing conducted by an ALJ, who may be acting and may have been appointed in violation of the Constitution? 

In the Matter of Harding Advisory LLC and Wing F. Chau, Respondents (Opinion; '33 Release No. 10277; Invest. Adv. Act Rel. No. 4600; Invest. Co. Act Rel. No. 32415; Admin. Proc. File No. 3-15574 / January 6, 2017), SEC Chair White and Commissioner Stein and Commissioner Piwowar dismissed the Octans charges but found that Respondents had violated Section 206(1) and (2) of the Advisers Act and Section 17(a) of the Securities Act in purchasing and allocating BBB-rated Norma bonds to two Harding-managed CDOs. As noted in the preliminary summary of the SEC Opinion:

A registered investment adviser and its principal violated Section 17(a) of the Securities Act of 1933 and Sections 206(1) and (2) of the Investment Advisers Act of 1940 in selecting assets for certain collateralized debt obligations ("CDOs") that it managed. Held, it is in the public interest to bar principal with a right to reapply after five years for permission to associate, revoke the investment adviser's registration, order disgorgement of $5,775,635.61, plus prejudgment interest, jointly and severally, and order the investment adviser to pay two civil penalties of $425,000 each, or $850,000 total, and the principal to pay two civil penalties of $85,000 each, or $170,000 total.

In setting forth their rationale for dismissing the Octans charges, the Chair and both Commissioners explain:

We dismiss all charges related to Octans. We agree with the ALJ, based on our independent de novo review, that the record does not support the Division's theory that Harding knowingly or recklessly compromised its independent judgment to select undesirable assets that favored Magnetar's short position. The record indicates that, despite modest short positions, Magnetar was net long in Octans and that its financial interests were generally aligned with other debt investors in the CDO. We also find that the omission of Magnetar's involvement in the warehouse agreement from the offering documents was not fraudulent. We find further that the Division failed to establish that Harding negligently misrepresented the standard of care it would follow in selecting assets for Octans. To the extent that the Division's expert witness articulated a standard of care, the record demonstrates that Harding satisfied that standard.

Pages 6 -7 of the SEC Opinion

In sustaining the Norma-related charges, the SEC Opinion initially explains that [Ed: Footnotes Omitted]:

The record establishes that Respondents agreed to purchase the BBB-rated Norma tranche as a favor to Merrill and Magnetar and allocated those bonds to Lexington and Neo without regard for the creditworthiness of the assets. Accordingly, we find that Respondents abdicated their duty to pick only the assets they believed were best for their clients-the issuers of Lexington and Neo-in violation of Sections 206(1) and 206(2) of the Advisers Act. We also find that Respondents misrepresented the standard of care Harding would follow in selecting assets for Lexington and Neo in violation of Section 17(a)(2) of the Securities Act.

Pages 14 - 15 of the SEC Opinion

Recap

So . . . where are we? Harding Advisory is essentially adjudicating an SEC enforcement action that cites misconduct from 2006, which was before the onset of the Great Recession and, from the vantage point of 2017, over a decade old. The OIP was filed some four years ago in 2013. The ALJ conducted hearings in 2015 and issued his Initial Decision in 2015.
I merely note the dates so that it is clear that a future decision by the Supreme Court about the constitutionality of the SEC's ALJ system will have far-reaching repercussions. If the ALJ system is struck down or a widening split in the circuit emerges, consider the trail of matters that will come under scrutiny. Are my concerns overly esoteric? Is this Appointments Clause issue the stuff of flights of legal fantasy? Take note that the Appointments Clause reared its ugly and nettlesome head in SEC Harding Advisory Opinion:

C. Respondents' challenges to appointment of Commission ALJs are unpersuasive
Respondents argue that the ALJ who presided over this matter was not appointed in a manner consistent with the Appointments Clause of Article II of the Constitution or applicable statutory provisions.81 We have rejected similar claims before and again do so here.82
Recently, the D.C. Circuit confirmed in Raymond J. Lucia Companies v. SEC that our ALJs are employees, not constitutional Officers, and thus their manner of appointment is not subject to the requirements of the Appointments Clause. The D.C. Circuit, relying on Landry v. FDIC, 83 rejected squarely the contention that the Commission's ALJs are "constitutional Officer[s] who must be appointed pursuant to the Appointments Clause."84 Lucia held that the "FDIC regime considered in Landry" does not differ in any material way from the regulatory regime governing our ALJs.85
As Lucia explained, "nothing in the securities laws . . . suggests Congress intended that Commission ALJs be appointed as if [constitutional] Officers."86 That the federal securities laws specify that only the Commission and "officers of the Commission designated by it" may exercise certain functions, such as issuing subpoenas and holding hearings, 87 is irrelevant. There is "no indication Congress intended these officers to be synonymous with 'Officers of the United States' under the Appointments Clause." 88 Identical reasoning disposes of Respondents' contention that we failed to adhere to our organic statutes or the Administrative Procedure Act, by authorizing ALJs, who are mere employees, to preside over our administrative proceedings.89 The legislative history that Respondents cite does not undermine the analysis of the D.C. Circuit. We accordingly reject Respondents' challenges to the manner of appointment of our ALJs.90
Footnotes:
81 Respondents filed a Motion to Submit Supplemental Briefing regarding their Appointments Clause claims. The motion does not contain the required certificate of compliance and exceeds the length limitation specified in Rule of Practice 154(c). 17 C.F.R. § 201.154(c). The Motion is stricken pursuant to Rule of Practice 180(b). Id. § 201.180(b). Nevertheless, and in the alternative, we have considered and rejected the arguments contained therein.
82 See, e.g., Timbervest, 2015 WL 5472520, at *23-25; Lucia, 2015 WL 5172953, at *21- 23. In a footnote, Respondents also assert that the manner of removing ALJs is unconstitutional in light of the Supreme Court's decision in Free Enterprise Fund v. PCAOB. We have also rejected this argument. See, e.g., Timbervest, 2015 WL 5472520, at *26-28.
83 204 F.3d 1125 (D.C. Cir. 2000) (holding that, for purposes of the Appointments Clause, ALJs at the Federal Deposit Insurance Corporation ("FDIC"), who oversee the FDIC's contested administrative proceedings, are employees rather than inferior officers).
84 832 F.3d 277, 280 (D.C. Cir. 2016).
85 Id. at 288.
86 Id. at 289.
87 See, e.g., 15 U.S.C. §§ 77s(c), 77u.
88 Lucia, 832 F.3d at 289.
89 We have also noted "that the Administrative Procedure Act "consistently uses the term 'officer' or the term 'officer, employee, or agent' to 'refer to [agency] staff members.'" Timbervest, 2015 WL 5472520, at *26 n.165 (quoting Kenneth Culp Davis, Separation of Functions in Administrative Agencies, 61 HARV. L. REV. 612, 615 & n.11 (1948)); cf. 5 U.S.C. §§ 556-57 (referring to official who presides over hearing as the "presiding employee"). Moreover, the Dictionary Act provides an interpretive presumption that the term "'officer' includes any person authorized by law to perform the duties of the office." 1 U.S.C. § 1.
90 On December 27, 2016, the Tenth Circuit held that "SEC ALJs are inferior officers under the Appointments Clause." SEC v. Bandimere, __ F.3d __, 2016 WL 7439007, at *7 (10th Cir. Dec. 27, 2016). The government is considering options for further review. In this case, the record indicates that Respondents may appeal to the D.C. Circuit but not to the Tenth Circuit. See 15 U.S.C. 78y(a). Accordingly, we adhere to the D.C. Circuit's decision in Lucia. See Indep. Petroleum Ass'n v. Babbitt, 92 F.3d 1248, 1261 (D.C. Cir. 1996) (acknowledging the permissibility of "intercircuit nonacquiescence . . . , especially when the law is unsettled"); Samuel Estreicher and Richard Revesz, Nonacquiescence by Federal Administrative Agencies, 98 YALE L.J. 679, 687, 735 (1989) (stating that an agency engages in "intercircuit nonacquiescence" by declining to follow "the case law of a court of appeals other than the one that will review the agency's decision" and that "an agency's ability to engage in intercircuit nonacquiescence should not be constrained").
Pages 26 -27 of the SEC Opinion

Bill Singer's Comment

I fully anticipated that Chair White (appointed by President Obama) and Commissioner Stein (appointed to one of the two so-called two "Democrat" SEC Commissioner seats) would support the DCCir's position as set forth in Lucia and would reject Respondents' challenge to the constitutionality of the SEC's ALJ system. Given the purported Republican, conservative bona fides of Commissioner Piwowar, however, I did not expect his support for the somewhat absurdly named doctrine of "intercircuit nonacquiescence."

The SEC mission is to enforce a national scheme of securities regulation, one that is interstate in nature. The doctrine of "intercircuit nonacquiescence" wrongly encourages a federal regulator (as well as respondents) to forum shop. It is understandable that the SEC would opt to give added weight to its home DCCir Court of Appeals. Lost in the SEC's jockeying, however, is that the legal issue raised in the Appointments Clause is not about a mere interpretation or application of some subsection of a multi-page '33, '34, or '40 Act rule or regulation. To the contrary, what is at stake is a section of the United States Constitution. Accordingly, we should not mistakenly frame this debate as one resolved by determining Congressional-intent of a statute.

In reality, there is no congressional intent involved when dissecting the Appointments Clause because the same document that drafted the Appointments Clause created Congress. The issue, as such, is not congressional intent but the Framers' intent. As the lone Republican SEC appointee, I expected Commissioner Piwowar to be a more forceful voice in preserving the Framers' intent as enunciated in Bandimere. At a minimum, I would have expected Commissioner Piwowar to dissent as to the ALJ issue based upon the intercircuit split and to decline to express his support for what appears to be a constitutionally suspect practice. In "Commissioner Piwowar Challenges SEC To Be Fair And Effective" (BrokeAndBroker.com Blog, October 17, 2014), I wrote:
On October 14, 2014, Commissioner Piwowar addressed the Securities Enforcement Forum. Commissioner Piwowar has a Ph.D in Finance, which provides him with a different perspective than most of his predecessors and colleagues. Towards the beginning of his speech, he tackles the issue of due process and, thereafter, points a finger at the SEC's enforcement protocol:

For me, due process starts with fundamental notions of fairness.  Persons should be on notice as to what acts, or failures to act, constitute violations of the law and our regulations. Persons should also be on notice as to the potential sanctions and liabilities that may be imposed as a result of those violations.

. . .

Additionally, I oppose the use by the Commission of enforcement measures as an alternative to rulemaking under the Administrative Procedure Act.The Administrative Procedure Act, with its requirements for the government to engage in notice and comment rulemaking, implements key due process protections.  I understand the frustrations of the rulemaking process.  It takes a significant amount of time, effort, and bandwidth for the Commission to propose and adopt rules under the Administrative Procedure Act. Nevertheless, I have significant concerns when Commission orders - especially in settled administrative actions - create new interpretations of the laws or regulations or impose new regulatory requirements. When Commission actions create such results, we fail in our duty to uphold due process.

Bill Singer's Comment: Bravo! Commissioner Piwowar perfectly enunciates the need for fair notice about what conduct may constitute a violation and the consequences of such misconduct. For too long, Wall Street's regulators have codified regulations through prosecution and enforcement, which tended to come off a make-it-up-as-you-go-along undertaking. Notwithstanding the explosion of laws, rules, and regulations, the "interpretation" and the even-handed application of those proscriptions don't also seem a priority. The result is a lot of wasted regulation because many apparent successful prosecutions and enforcement actions are ultimately over-turned on appeal.
"Commissioner Piwowar Challenges SEC To Be Fair And Effective" (BrokeAndBroker.com Blog, October 17, 2014).

Sadly, in 2017, Commissioner Piwowar, who once championed fundamental notions of fairplay and scrupulous attention to reasonable notice, now backtracks on those constitutional protections. Commissioner Piwowar turns a blind eye to a federal Court of Appeals' interpretation of the SEC's ALJ system as unconstitutional and, in what comes off as more than a bit of a cynical about-face, he espouses intercircuit nonacquiescence. If the SEC repudiation of Bandimere does not fully rise to the level of imposing a "new regulatory requirement" via an enforcement case,  then, at the very least, it rises to the level of encouraging unsavory forum shopping, fostering a distinctly non-federal complexion to what should be a uniform system of federal securities regulation, and burdening respondents with defense and appellate costs that may subsequently prove unjustified if the Supreme Court deems the SEC ALJs as appointed in violated of constitutional proscriptions. I would respectfully ask Commissioner Piwowar to re-read Footnote 90 of the SEC Opinion that, in part, asserts:

On December 27, 2016, the Tenth Circuit held that "SEC ALJs are inferior officers under the Appointments Clause." SEC v. Bandimere, __ F.3d __, 2016 WL 7439007, at *7 (10th Cir. Dec. 27, 2016). The government is considering options for further review . . ."

Clearly, it is NOT simply Respondents Harding Advisory and Chau who are arguing that the ALJ system is unconstitutional; to the contrary, that position is a holding of one of the nation's federal circuit courts of appeals, as noted in the above footnote. If anything, the SEC is placing itself in the position of arguing against 10Cir's ruling and favoring the contrary ruling of DCCir. The SEC Opinion (and all future ones during the pendency of the Appointments Clause challenges) should make the distinction that the issue is not solely one raised by a respondent but, in fact, a finding of a Circuit Court of Appeals.  

Further, Footnote 90 to the SEC Opinion asserts that "The government is considering options for further review." Really? Who exactly is considering that option? Are we talking about the lame-duck Obama Administration? Is the SEC in contact with the Trump Administration and informing the public that the incoming administration will appeal Bandimere? If the new administration pointedly declines to appeal Bandimere, will the SEC clarify that the organization is not supported by the next administration in its interpretation of the constitutionality of its ALJs?

Without question, Bandimere has upended the SEC and that may result in less robust enforcement until the highest court in the land weighs in. Despite that horrific inconvenience, there is nothing preventing the SEC from filing its cases in the federal courts and mothballing its ALJ administrative hearing facilities -- or, the Chair and Commissioners could conduct plenary hearings during the pendency of appeals, or, finally, the SEC could appoint its ALJs in conformity with Bandimere.