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July 2018

SEC v. Lucia: The Financial Industry’s Consolation Win

The U.S. Supreme court finally deemed the Securities and Exchange Commission’s (“SEC”) administrative law judges (ALJs) “Officers of the United States.”

Administrative enforcement proceedings (“Administrative Proceeding”) with presiding ALJs are the favored adjudication method for the SEC. ALJs typically fulfill the role of judge and jury in Administrative Proceedings by administering oaths, issuing subpoenas, admitting evidence, ruling on motions, and issuing an initial decision. Those familiar with Administrative Proceedings know the SEC’s Office of Human Resources along with the U.S. Office of Personnel Management selects and hires the ALJs who serve as hearing officers over the administrative proceedings brought by the SEC.

In an Administrative Proceeding, after the ALJ issues the initial decision, the Commission has the option of reviewing the ALJ’s initial decision or the party against whom the ALJ’s decision is made can appeal to the Commission. If the Commission decides not to review, the ALJ’s initial decision is deemed to be that of the Commission. If the Commission decides to review, upon that de novo review, the Commission can make findings, conclusions, affirm, or vacate the ALJ’s decision. When the Commission issues what is deemed a “final decision,” that decision then becomes appealable to a federal court of appeals. Appeals of any final Commission order must be made within 60 days under each of the federal securities statutes.[1]

In 2015, the SEC brought over 80 percent of their cases in Administrative Proceedings.[2] The SEC’s predilection for Administrative Proceedings have led to significant criticism of the agency’s use of Administrative Proceedings and ALJs and controversy regarding the constitutionality of this practice.  Most recently, the constitutionality of the appointment process for SEC ALJs caught the eye of the U.S. Supreme Court.

In Lucia v. SEC, the SEC brought suit against Raymond Lucia and his investment adviser business which marketed the wealth-management strategy “Buckets of Money.” The SEC alleged Lucia used misleading presentation materials to deceive prospective clients. After hearing and testimony, the ALJ determined Lucia violated the Investment Advisors Act, imposed sanctions, $300,000 in civil penalties, and a lifetime ban from the investment industry. On review, the Commission remanded for additional findings of fact. After the ALJ made additional findings, he revised his initial decision and imposed the same sanctions.

Lucia appealed arguing the SEC ALJ’s are officers of the U.S. and therefore subject to the Appointments Clause, meaning they can only be appointed by the President, Courts of Law, or Heads of Departments. The SEC contended its ALJs were merely employees, falling outside of the Appointments Clause. In the Court of Appeals for the D.C. Circuit, the court sided with the SEC finding ALJs were employees rather than officers. The D.C. Circuit’s decision, however, conflicted with the Tenth Circuit’s Bandimere v. SEC.[3]  The Tenth Circuit in Bandimere, following the U.S. Supreme Court’s three-step framework in Freytag v. Commissioner of Internal Revenue,[4] found the SEC’s ALJs were “inferior officers” indicating some relationship with a superior officer situated below the President. As inferior officers, ALJs are subject to the Appointments Clause.

The U.S. Supreme Court applied the Freytag “significant authority” framework to analyze the SEC’s ALJs and drew the same conclusion as the Tenth Circuit in Bandimere. In a decision which comes as no surprise, particularly considering the SEC admitted in its certiorari brief its ALJs are inferior officers within the meaning of the Appointments Clause, the U.S. Supreme Court determined ALJs hold a continuing office established by law and exercise significant discretion. 

Ultimately, because the SEC’s ALJ heard and decided Lucia’s case without the proper appointment as required under the Appointments Clause, Lucia is entitled to a new hearing before a properly appointed official, who cannot be the previous ALJ even if he has by now the SEC had properly appointed him.

What does this mean moving forward? First, the SEC has put a hold on all ALJ cases for 30 days. The agency must now determine how it can ratify all prior ALJ appointments both efficiently and to meet the constitutional requirements.

Second, and more importantly for the industry, Lucia is a tempting opportunity to possibly challenge past civil penalties on the basis of improper appointments. Unfortunately, such arguments are unlikely to succeed unless a defendant made a timely objection which was preserved on the record and an appeal is filed within 60 days of the Commission’s final order. Moreover, a successful challenge to a past civil penalty based on Lucia would only “win”  a rehearing before a different properly appointed ALJ.  

The next few months may mean some changes for SEC cases pending in front of ALJs, but Lucia will become less significant over time at least where SEC enforcement actions are concerned. What will remain, however, is the lingering doubt regarding the independence of the SEC’s ALJs.’ Lucia’s requirement that the ALJ’s be properly appointed does not negate that the SEC will still control the appointment and place the ALJ’s on the SEC payroll. For this reason, the due process challenges to the SEC administrative forum will continue.

Several legal onlookers believe Lucia’s significance is its potential impact on other federal agencies. Although the Lucia Court’s decision is specific to the SEC’s ALJs, administrative proceedings conducted by other federal agencies might also face Appointments Clause challenges including the Merit Systems Protection Board, CFPB, FDIC, the Social Security Administration, and, importantly, in light of the high profile issue of immigration in current events, the Executive Office for Immigration Review. For the securities industry, however, Lucia is only a small win which gives a few the opportunity of rehearing unless its reasoning can be expanded into administrative hearings conducted by ALJs in state securities enforcement actions which depends on how closely the requirements of a particular state’s constitution resemble that of the United States Constitution. It its unlikely we will see a high number of cases on rehearing result in new favorable decisions.  Lucia is simply a small dent in the SEC’s armor.   


[1] See Securities Act § 9(a), 15 U.S.C. § 77i (2012); Exchange Act § 25(a)(1), 15 U.S.C. § 78(y) (2012); Investment Advisers Act § 213(a), 15 U.S.C. § 80b-13(a) (2012); Investment Company Act § 43(a), 15 U.S.C. § 80a-42 (2012).

[2] J Robert Brown Jr., Duka v. SEC and the Constitutionality of Administrative Law Judges (Part 1), The Race to the (Aug. 19, 2015),

[3] Bandimere v. SEC, 844 F.3d 1168, (10th Cir. 2016).

[4] Freytag v. Comm’r of Internal Revenue, 501 U.S. 868 (1991).


Securities Litigation

Lillian L. Alves
Tamara Seelman

Securities Litigation