This is an update of "SEC ALJ Says Bandimere Notwithstanding. And So It Goes. And So It Goes" (BrokeAndBroker.com Blog, January 16, 2017).
[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
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.
On January 3, 2017, Respondent submitted a motion for a ruling on the pleadings (motion to dismiss), pursuant to 17 C.F.R. § 201.250(a). On January 4, 2017, Respondent submitted a motion for withdrawal, in which he argues that I am disqualified from presiding over this proceeding.Respondent argues in his motion to dismiss that Commission administrative law judges are appointed in violation of the Appointments Clause of Article II of the Constitution, and that this proceeding must therefore be dismissed. See Motion to Dismiss at 2-3. On the same basis, Respondent argues in his motion for withdrawal that I must disqualify myself from this proceeding. See Motion for Withdrawal. The 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).Respondent's motion to dismiss is therefore DENIED IN PART as to his Appointments Clause argument. In responding to the motion to dismiss, the Division of Enforcement need only address the remaining arguments. Respondent's motion for withdrawal is DENIED. This Order does not resolve Respondent's pending motion to amend his answer, to which the Division should file a response.SO ORDERED._______________________________Cameron ElliotAdministrative Law Judge
SIDE BAR: Raymond J. Lucia Companies, Inc. and Raymond J. Lucia, Petitioners, v. Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the District of Columbia Circuit, August 9, 2016):Finally, petitioners point to nothing in the securities laws that suggests Congress intended that Commission ALJs be appointed as if Officers. They do point to the reference to "officers of the Commission" in 15 U.S.C. § 77u, but there is no indication Congress intended these officers to be synonymous with "Officers of the United States" under the Appointments Clause. Of course, petitioners contend that Congress was constitutionally required to make the Commission ALJs inferior Officers based on the duties they perform. But having failed to demonstrate that Commission ALJs perform such duties as would invoke that requirement, this court could not cast aside a carefully devised scheme established after years of legislative consideration and agency implementation. See 5 U.S.C. §§ 3105, 3313; see also Civil Service Reform Act of 1978, Pub. L. 95-454, 92 Stat. 1111Page 18 of the DCCir Opinion
On January 11, 2017, Respondent moved for interlocutory review of my order denying his motion seeking my withdrawal and denying in part his motion for judgment on the pleadings, both of which were based on the Appointments Clause of Article II of the Constitution. Alexander Kon, Admin. Proc. Rulings Release No. 4501, 2017 SEC LEXIS 27 (ALJ Jan. 5, 2017).The motion appears to be directed to the Commission, which may grant a party's petition for interlocutory review or order review on its own motion at any time, although "petitions for interlocutory review are ‘disfavored' and will be granted only in ‘extraordinary circumstances.'" Gary L. McDuff, Exchange Act Release No. 78066, 2016 SEC LEXIS 2121, at *19 (June 14, 2016); 17 C.F.R. § 201.400(a).It is unclear what relief, if any, Respondent requests from me. To the extent Respondent requests that I certify my ruling for interlocutory review under Rule of Practice 400(c), 17 C.F.R. § 201.400(c), I DENY the motion. Under Rule 400(c), I "shall not certify a ruling [for interlocutory review] unless . . . the ruling involves a controlling question of law as to which there is substantial ground for difference of opinion [,] and an immediate review of the order may materially advance the completion of the proceeding." 17 C.F.R. § 400(c)(2)(i), (ii). That standard is not met here. The Commission has made clear that it finds no merit to the contention that its administrative law judges should have been appointed in a manner consistent with the Appointments Clause. Harding Advisory LLC, Securities Act Release No. 10277, 2017 SEC LEXIS 86, at *67-69 & n.82 (Jan. 6, 2017). Respondent has provided no reason why the Commission might rule otherwise in this proceeding, the Tenth Circuit Court of Appeals' decision in Bandimere v. SEC, No. 15-9586, --- F.3d ---, 2016 WL 7439007 (10th Cir. Dec. 27, 2016), notwithstanding.Cameron ElliotAdministrative Law Judge
In light of the U.S. Court of Appeals for the Tenth Circuit's recent decision denying rehearing en banc in Bandimere v. SEC, 1 we find it prudent to stay all administrative proceedings assigned to an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission under Section 9(a) of the Securities Act, Section 25(a) of the Securities Exchange Act, Section 43(a) of the Investment Company Act, or Section 213(a) of the Investment Advisers Act. The stay is effective immediately and shall remain in effect pending the expiration of time in which the government may file a petition for a writ of certiorari in Bandimere, the resolution of any such petition and any decision issued by the Supreme Court in that case, or further order of the Commission. The administrative law judges, in any applicable case, are directed to issue a notice indicating that the proceeding has been stayed. This order does not preclude the Commission from assigning any proceeding pending before an administrative law judge to itself or to any member of the Commission at any time.We also elect to stay all administrative proceedings pending before the Commission onreview from an initial decision by an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission under the aforementioned provisions of the federal securities laws.By the Commission.Brent J. FieldsSecretary1 844 F.3d 1168 (10th Cir. 2016), rehearing denied, 2017 WL 1717498 (May 3, 2017)(Case No. 15-9586).
Belatedly but nonetheless correctly, the SEC concedes that an ALJ's constitutional disqualification is no longer a mere argument raised by a Respondent. To the contrary, that position is a holding of at least one federal circuit court. By staying appeals subject to the 10Cir's review, the SEC has intelligently conserved its resources and avoided imposing unfair appellate costs upon respondents. Clearly, this is a circuit split in need of Supreme Court action.It's a bit troublesome for ALJ Elliot to acknowledge the split in the federal appeals courts but to reject the 10Cir ruling by simply concluding that we here, at the SEC, have held that our ALJs are not subject to the Appointments Clause. As of December 28, 2016, the law of the land in Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah was as the 10Cir says: SEC ALJs serve in violation of the Constitution. I do not downplay the significance of the Lucia DCCir Opinion and I acknowledge that the law of the land in the District of Columbia differs from that of its 10Cir sister states. I do question the propriety of a mere SEC ALJ, however, picking sides when the issue is of such fundamental, constitutional import.In phrasing his decision, ALJ Elliot states the proposition before him as "Respondent submitted a motion for withdrawal, in which he argues that I am disqualified from presiding over this proceeding." In fairness to Respondent Kon, he is not merely arguing that ALJ Elliot is disqualified. Respondent Kon is presenting proof to ALJ Elliot that the 10Cir in Bandimere has concluded that ALJ Elliot is disqualified. That the DCCir and ALJ Elliot and the SEC may all disagree with Bandimere is not a sufficient basis upon which to reduce Kon's submission as little more than a respondent's argument. We're sort of beyond that characterization.
This proceeding was stayed on April 21, 2017, based on the parties' agreement in principle to a settlement on all major terms. Alexander Kon, Admin. Proc. Rulings Release No. 4795, 2017 SEC LEXIS 1400, at *1 (ALJ May 11, 2017). On May 19, 2017, the Division of Enforcement submitted a status update representing that the requirements of 17 C.F.R. § 201.161(c)(2) were no longer satisfied. The stay therefore lapsed on May 22, 2017. Alexander Kon, 2017 SEC LEXIS 1400, at *1; see 17 C.F.R. § 201.161(c)(2)(ii).However, in light of the U.S. Court of Appeals for the Tenth Circuit's recent decision denying rehearing en banc in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), reh'g and reh'g en banc denied, No. 15-9586, 2017 WL 1717498 (10th Cir. May 3, 2017), the Securities and Exchange Commission has stayed all administrative proceedings assigned to an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission. Pending Admin. Proc., Securities Act of 1933 Release No. 10365, 2017 WL 2224348 (May 22, 2017).Respondent is a resident of Kansas and therefore would, under Section 9(a) of the Securities Act and Section 25(a) of the Securities Exchange Act of 1934, have the option to seek review in the Tenth Circuit of a final order of the Commission in this matter. 15 U.S.C. §§ 77i(a); 78y(a)(1); Order Instituting Proceedings at 1. Accordingly, this proceeding is stayed indefinitely.Cameron ElliotAdministrative Law Judge