An Order from the SEC on Administrative Hearings – And Questions Remain Unresolved

3 min

In the latest development regarding federal agency adjudication and administrative law judges (ALJs), the SEC issued an order, In re: Pending Administrative Proceedings, that attempts to set a path forward from the Supreme Court's decision in Lucia v. SEC earlier this summer. The Court, in that decision, found that the SEC's ALJs were "inferior officers" who were not properly appointed as required for "Officers of the United States" under the Constitution.

The underlying case, Lucia v. SEC, arose as one of several other cases brought by parties to SEC (and CFPB/BCFP) administrative enforcement actions. The Court, upon finding that the SEC's ALJs were not properly appointed, held that respondents in such case should receive "a new 'hearing before a properly appointed' official," as a remedy to the constitutional issue.

Following a stay of adjudications, the SEC's order remands pending cases back to the ALJs and reassigns the cases to ensure a different ALJ hears the remanded case (the SEC currently employs five ALJs). The order remands all proceedings and vacates all prior decisions in the cases. The order also provides litigants with some say in how the cases proceed from here – so-called alternative procedures that must be expressly agreed upon by both sides. Such alternative procedures could involve remaining with the original ALJ. For many respondents a new hearing would be a Pyrrhic victory. They are still faced with litigating in an administrative forum with fewer evidentiary and procedural rules than are available in federal court. Furthermore, relitigating a case is time-consuming, expensive, and thus unfair to respondents who would be forced to spend additional resources on legal fees.

In Harding Advisory v. SEC, the petitioners in that case are challenging the D.C. Circuit's authority under the SEC Act and the APA to remand the case for a new hearing. The SEC has requested that the case be remanded for a new hearing, citing Lucia. However, the petitioners argue that the court can only affirm, modify, or vacate the SEC's order at this point on review, and if the Commission seeks a new hearing it must do so by filing a new enforcement matter, which would then likely encounter statute of limitations issues. It remains to be seen how the D.C. Circuit will rule in Harding Advisory.

Other cases that were tried before an unconstitutionally appointed ALJ have already been remanded or had not yet reached an appeal. Respondents in those cases are facing the specter of a new hearing and may take the position that the original order instituting proceedings (OIP) was defective because it referred the matter to an unconstitutionally appointed ALJ. Because the OIP was defective, the statute of limitations as to the underlying alleged violations was not tolled and the Commission is thus barred from bringing suit.

Furthermore, in the cases that are facing a retrial, the underlying violations took place years ago, memories will surely have been lost, and it remains to be seen whether the Commission seeks, and is permitted to use, testimony from the tainted first proceeding.

Finally, even though the Commission may believe that it has now cured its appointment clause problem as to its ALJs, there remains the separation of powers issue caused by the ALJs' two layers of good-cause tenure protection. Justice Breyer, who concurred in part and dissented in part in Lucia, discussed this issue. He stated that if ALJs are inferior officers, then their removal procedures may be unconstitutional.1 Respondents facing a retrial are facing yet another trial before an unconstitutional forum.

The Supreme Court's remedy in Lucia sounds deceptively simple: Parties in administrative adjudication cannot be subject to an adverse order unless a new hearing is provided. The application of this statement, however, is more complicated.


[1] Lucia v. SEC, 138 S. Ct. 2044, 2061-62 (2018).