By Jordan Gary 1
Administrative enforcement of the securities laws can offer a faster, more efficient path to justice that is presided over by officials possessing far more subject matter expertise than most Article III judges. However, by the same token, there is a dense body of both administrative and constitutional law that must be navigated in order to ensure the propriety of administrative proceedings. As agencies like the Securities and Exchange Commission (SEC) have grown in size and power, there has been increased scrutiny of those to whom the agency delegates its vast authority. 2 At the front line of most agency enforcement in the SEC and other agencies are administrative law judges (ALJs), who perform many of the same functions as an Article III judge with two chief exceptions: they are bound by different procedural and evidentiary rules (those of the agency, as opposed to the federal judiciary) and are employees of the prosecuting agency (as opposed to being part of an independent judiciary). Their decision in a given proceeding then goes to the Commission itself, which can adopt it, reject it, or hold new proceedings. The key challenge leveled against these ALJs is whether or not they are inferior officers of the United States under the Appointments Clause of the Constitution. If so, their current method of appointment is constitutionally deficient.
Compounding this already difficult legal issue is crucial threshold question: where does a respondent in an administrative proceeding go about making this argument in the first place? To many, the instinctual response is to go to a district court for injunctive relief: if the SEC proceeding is in violation of the constitution and district courts have jurisdiction over constitutional issues, 3 then the issue seems cut-and-dry. However, just as Congress can grant jurisdiction to the courts, it can take it away, and in crafting the administrative scheme of which SEC administrative law judges are a part, Congress strongly indicated a desire for initial administrative review of all issues, with eventual judicial review before a court of appeals.
This article will argue first that a party seeking to challenge the constitutionality of the SEC’s use of administrative law judges must go through the administrative process before making this constitutional argument to an Article III court. Second, the constitutional issue itself—whether SEC administrative law judges are inferior officers—should be answered in the negative.
The federal courts of the United States possess limited subject matter jurisdiction, such that “Congress decides, within constitutional bounds, whether federal courts can hear cases at all.” 4 While Congress has given district courts a wide grant of jurisdiction in the form of federal question and diversity jurisdiction, 5 there are compelling reasons to limit this jurisdiction in other areas. For example, when Congress has delegated enforcement of a statutory scheme to a particular agency, such as the SEC, courts are generally reluctant to let respondents avoid this scheme by going to a district court. 6 This policy allows the normal administrative process to run its course without unnecessary interruption. Any party still aggrieved by the final determination of the agency can, of course, get review before a circuit court as provided in the Administrative Procedure Act or, in the case of the SEC, in the Securities Exchange Act. 7
Normally, the jurisdictional determination is relatively simple: either the statutory review scheme will specifically mention the degree of district court involvement or the issue will very evidently be one that the agency was meant to determine in the first instance. 8 When neither of these are present, as in the case of a constitutional challenge to SEC administrative law judges, courts use the test established by the Supreme Court in Thunder Basin Coal Co. v. Reich. 9 This test first asks the threshold question of whether the statute establishes a “fairly discernible intent” to preclude district court review. The Court has not made this a particularly rigorous inquiry and has very recently stated that “[g]enerally, when Congress creates procedures designed to permit agency expertise to be brought to bear on particular problems, those procedures are to be exclusive.” 10 Next, the Thunder Basin test asks, “ if a finding of preclusion could foreclose all meaningful judicial review;  if the suit is wholly collateral to a statute’s review provisions; and  if the claims are outside the agency’s expertise.” 11
Not surprisingly, the “meaningful review” inquiry is typically regarded by courts as the most important factor in the test. 12 Affording a complaining party the fastest possible relief has never been a constitutional requirement, 13 and the Court has often observed that “the expense and annoyance of litigation is part of the social burden of living under government.” 14 Some meaningful review, of course, is an essential mandate of due process and one that is provided for in the Securities Exchange Act by allowing anyone aggrieved by the final decision of the Commission to obtain review before a circuit court of appeals. 15
The second prong of the Thunder Basin test asks whether the constitutional issue is “wholly collateral” to the administrative proceeding. At first, this would seem to be the case where a plaintiff is challenging the qualifications of the one presiding over the proceeding itself—i.e., the ALJ. However, the Court indicated that it had something else in mind in Elgin v. Department of Treasury, 16 when it held that the petitioner’s constitutional claims were not wholly collateral to the agency proceeding because they were “the vehicle by which [the petitioners] seek to reverse the [agency determination].” 17 According to the D.C. Circuit, claims are not wholly collateral when they are merely serving as a means “to short-circuit the administrative process through the vehicle of a district court complaint.” 18 This sets a high bar for plaintiffs seeking to circumvent the SEC administrative process. Any constitutional claim must be more than a vehicle for an administrative respondent to escape liability—it must be an end in itself. A good example of a ‘non-vehicle’ claim is Free Enterprise Fund, where the party bringing a constitutional claim against the SEC. 19 had not been accused of any wrongdoing by the agency—in other words, the plaintiffs were outside of the administrative scheme.
The Thunder Basin Court itself regarded the final factor—agency expertise—as something of an afterthought, noting that “[e]ven if” the agency did not have expertise with regard to these challenges, “petitioner’s statutory and constitutional claims here can be meaningfully addressed in the Court of Appeals.” 20 Even when scrutinizing this factor, the Court has been extremely generous in finding that agency’s expertise can be brought to bear even on constitutional challenges in which an agency lacks authority or even competence to decide the issue. For example, in Elgin, the Court found that there were “many threshold questions” to the constitutional claims that the agency could address, including determinations that may “obviate the need to address the constitutional challenge.” 21 Thus, the SEC, through its expertise in other areas, may render the plaintiff’s claim moot. This would have the salutary effect of saving the courts the time and energy of adjudicating the plaintiff’s claim in the first place. For this reason the Court has embraced mootness as “one of the principal reasons to await the termination of agency proceedings” and one that “warrants the requirement that [the respondent] pursue adjudication, not shortcut it.” 22
There are thus very few, if any, constitutional challenges to an agency that can fall into one of the Thunder Basin exceptions. It would seem that a district court would only have subject-matter jurisdiction over such a claim if (1) the statutory scheme lacks any kind of Article III review, (2) the plaintiff is not currently in an agency proceeding, or (3) the issue is so narrow that the agency cannot moot the constitutional claim on another basis.
Once in court—and as the above section indicates, it will likely be a circuit court—the plaintiff will argue that SEC administrative law judges are inferior officers of the United States. This language comes from Article II, Section 2, of the Constitution, which provides, “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.” 23 A finding that ALJs are inferior officers would be fatal, since they are selected by the Office of Personnel Management (OPM) in a process that does not directly involve the President, the Courts, or the head of a department. In this they are not alone, for “[t]he great majority of government personnel” are not categorized as inferior officers, but as “mere employees” of the Government. 24
The question of who qualifies as an inferior officer was raised far more often in the nineteenth century than it is today. Courts have historically considered and rejected a vast number of factors to take into consideration when classifying permanent employees like ALJs. Perhaps the only consideration that has remained constant and unyielding is whether the position in question “is invested by legal authority with a portion of the sovereign powers of the federal Government.” 25 This has been an enduring conceptualization of government office. As Attorney General John Griggs opined over a hundred years ago, “[t]he legal definitions of a public office have been many and various… [t]he idea seems to prevail that it is an employment to exercise some delegated part of the sovereign power.” 26 This understanding was alive and well in Buckley v. Valeo, when the Court identified “the performance of a significant governmental duty exercised pursuant to a public law,” as an essential criterion. 27 More recently, the Court observed, “[t]he exercise of significant authority pursuant to the laws of the United States marks … the line between officer and nonofficer.” 28
In the case of SEC administrative law judges, is it essential to separate the considerable sovereign power wielded by the SEC from the role of the ALJs, who have no real share of this authority. Congress has not vested ALJs with any of the powers of the Commission—the relevant statutes do not even require use of ALJs and SEC regulations do not specify that ALJs must hear any claims. 29 All decisions that ALJs do reach are “initial decisions” that are reviewed de novo by the Commission, which “may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, an initial decision by a hearing officer and may make any findings or conclusions that in its judgment are proper and on the basis of the record.” While the Commission does give ALJs “deference in the context of demeanor-based credibility determinations,” this is no different than giving credence to one who actually witnessed an event firsthand. 30 Moreover, the Commission has shown itself to be more than willing to “disregard explicit determinations of credibility.” 31
An ALJ’s determination is thus a mere input in the Commission’s ultimate determination of whether or not a respondent has violated the law. It is true that if the Commission declines a request for review or decides not to review an initial decision sua sponte, then the initial decision is deemed the action of the Commission. 32 However, all that is needed to bring a case up for review is the vote of a single commissioner. ALJ determinations also lack the power to even break a tie on the Commission: “In the event a majority of participating Commissioners do not agree to a disposition on the merits, the initial decision shall be of no effect.” 33 Without any finality or even deference, there can be no authority, much less significant authority.
In the end, the question of whether SEC administrative law judges are inferior officers has relatively low stakes. As provided in the Constitution, the President, the courts, or the head of a department can appoint inferior officers. It so happens that the SEC commissioners are the heads of a department. Accordingly, this entire issue could be resolved if Congress required that they themselves appoint ALJs. Alternatively, the D.C. Circuit could appoint ALJs, giving them a more neutral disposition, like magistrate judges that are experts in the securities laws.
The jurisdictional issue, however, has real stakes. While it is important to give everyone their day in court, the courts can easily become a means to delay justice and the effective workings of government. Courts should be hesitant to enjoin administrative proceedings when the respondent will have her opportunity to make that constitutional argument before a court of appeals. This is especially proper where the constitutional argument was transparently made to halt the proceedings. Those who are concerned with perceived delays in the administrative process should take aim at resolving that issue more directly. All that will be accomplished by expanding district courts’ subject matter jurisdiction is increasing the burden on the federal court system.
- Jordan Gary is a 3L at New York University School of Law. This Contribution is a commentary on a portion of the 2016 Problem at the Kaufman Moot Court Competition at Fordham Law School in New York, NY. The problem centered around both private enforcement and agency enforcement of a material misrepresentation made to shareholders by the CEO of a large tech company. This portion of the problem focused on the constitutionality of the SEC’s procedures under the Appointments Clause, as well as the threshold question of whether a district court could hear the matter. The views expressed in this article do not necessarily represent the views of the author on this point of law. Rather, this article is a distillation of one side of an argument assigned to the team the author represented at the competition. ↩
- As will become apparent, even the threshold question of what counts as a delegation of authority is a key point of contention. ↩
- See 28 U.S.C. § 1331 (“The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”). ↩
- Bowles v. Russell, 551 U.S. 205, 205 (2007). ↩
- Codified at 28 U.S.C. §§ 1331 and 1332, respectively. ↩
- See, e.g., Bebo v. S.E.C., 799 F.3d 765, 775 (7th Cir. 2015) (“It is only in the exceptional cases… where courts allow plaintiffs to avoid the statutory review schemes prescribed by Congress.”). ↩
- See 15 U.S.C. § 78y (“A person aggrieved by a final order of the Commission entered pursuant to this chapter may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit, by filing in such court, within sixty days after the entry of the order, a written petition requesting that the order be modified or set aside in whole or in part.”). ↩
- For example, “did respondent violate Rule 10b‑5?” would present an easy case. ↩
- 510 U.S. 200 (1994). ↩
- Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010). ↩
- Id. at 489 (quoting Thunder Basin, 510 U.S. at 207, 212). ↩
- See, e.g., Bebo, 799 F.3d at 774 (referring to meaningful judicial review as “the most critical thread in the case law” and the only controlling factor in the test). ↩
- Anyone familiar with habeas petitions knows this all too well. ↩
- F.T.C. v. Standard Oil Co. of California, 449 U.S. 232, 244 (1980). ↩
- See 15 U.S.C. § 78y. ↩
- 132 S. Ct. 2126 (2012). ↩
- Id. at 2139. ↩
- Jarkesy v. S.E.C., 803 F.3d 9, 24 (D.C. Cir. 2015). ↩
- More precisely, the plaintiffs were challenging statutory restraints on the President’s ability to dismiss members of the Public Company Accounting Oversight Board (PCAOB). ↩
- 510 U.S. at 215. ↩
- 132 S. Ct. at 2140. ↩
- Standard Oil, 449 U.S. at 244 n.11. ↩
- U.S. Const. art. II, § 2, cl. 2 ↩
- In re Timbervest, LLC, S.E.C. Release No. 4197, 2015 WL 5472520, at *23 (Sept. 17, 2015). ↩
- DOJ Office of Legal Counsel, Officers of the United States for Purposes of the Appointments Clause, 2007 OLC LEXIS 3, at *1. ↩
- Office-Comp., 22 U.S. Op. Atty. Gen. 184, 187 (1898). ↩
- 424 U.S. 1, 141 (1976). ↩
- Edmond v. United States, 520 U.S. 651, 662 (1997). ↩
- See 17 C.F.R. § 201.411. ↩
- Timbervest, 2015 WL 5472520, at *24 n.150. ↩
- Id. ↩
- See 15 U.S.C. § 78d‑1. ↩
- Id. ↩