Use of administrative law judges in SEC hearings
⚖️ Use of Administrative Law Judges (ALJs) in SEC Hearings – Detailed Overview
📘 What Are ALJs?
Administrative Law Judges are independent adjudicators who preside over administrative hearings conducted by U.S. federal agencies, including the SEC.
In the SEC Context:
ALJs conduct quasi-judicial proceedings on alleged violations of federal securities laws.
Their powers include:
Administering oaths
Examining witnesses
Ruling on motions
Issuing initial decisions (which may be appealed to the full Commission)
Legal Foundation:
Governed by the Administrative Procedure Act (APA) (1946)
Appointments and removal of ALJs are constrained by:
Appointments Clause (U.S. Const., Art. II, § 2)
Removal protections under 5 U.S.C. § 7521
⚖️ Key Issues Involving SEC ALJs:
Appointments Clause challenges
Due process concerns
Impartiality and structural independence
Scope of ALJ authority
Appeal rights within the SEC and judiciary
📚 Key Cases: ALJs in SEC Hearings
Here are six significant cases that shaped the law regarding ALJs at the SEC.
1. Lucia v. SEC (2018)
U.S. Supreme Court
🔍 Facts:
Raymond Lucia was sanctioned by an SEC ALJ for misleading investment presentations.
He challenged the validity of the ALJ’s appointment under the Appointments Clause.
⚖️ Holding:
The Court held that SEC ALJs are "Officers of the United States", not mere employees.
Therefore, they must be appointed by the President, courts of law, or department heads.
The ALJ who presided over Lucia’s case was not properly appointed, so the decision was invalid.
🔑 Legal Principle:
SEC ALJs must be constitutionally appointed.
Appointments Clause applies to ALJs with significant authority.
2. Bandimere v. SEC (2016)
10th Circuit Court of Appeals
🔍 Facts:
David Bandimere, a financial adviser, was found to have violated securities laws by an improperly appointed ALJ.
⚖️ Holding:
The 10th Circuit ruled that the SEC's ALJs were unconstitutionally appointed under the Appointments Clause.
Echoed Lucia, though it predated the Supreme Court ruling.
🔑 Legal Principle:
Circuit courts began dividing over the constitutionality of ALJ appointments—this circuit split led to Lucia being accepted by the Supreme Court.
3. Hill v. SEC (2015)
Northern District of Georgia
🔍 Facts:
Charles Hill challenged the SEC’s use of ALJs to try his insider trading case, arguing the ALJ was unconstitutionally appointed.
⚖️ Holding:
The district court granted an injunction, agreeing the ALJ was likely unconstitutionally appointed.
But later appellate courts disagreed on jurisdiction.
🔑 Legal Principle:
Raised the issue of whether federal courts can enjoin SEC proceedings midstream.
Sparked broader challenges to the SEC’s in-house adjudication system.
4. Jarkesy v. SEC (2022)
5th Circuit Court of Appeals
🔍 Facts:
George Jarkesy challenged the SEC's administrative proceeding on multiple grounds:
Violation of right to jury trial
Improper delegation of legislative power
Removal protections of ALJs violated Article II
⚖️ Holding:
The Fifth Circuit ruled in favor of Jarkesy, holding that:
SEC’s in-house adjudication of fraud cases violated the Seventh Amendment
ALJs' removal protections were unconstitutional
Congress had improperly delegated power without an “intelligible principle”
🔑 Legal Principle:
Cast serious doubt on the constitutionality of SEC administrative enforcement.
The case is on appeal and may be taken up by the Supreme Court again.
5. Cochran v. SEC (2023)
U.S. Supreme Court
🔍 Facts:
Michelle Cochran, an accountant, was sanctioned by an ALJ.
She challenged the constitutionality of the ALJ’s removal protections before the SEC process was complete.
⚖️ Holding:
Supreme Court held that federal district courts have jurisdiction to hear constitutional challenges to SEC proceedings before final agency action.
🔑 Legal Principle:
Opened the door to pre-enforcement constitutional challenges to ALJs.
Strengthened judicial oversight of administrative adjudication.
6. Tilton v. SEC (2016)
2nd Circuit Court of Appeals
🔍 Facts:
The Tilton sisters (private equity executives) challenged SEC ALJs on Appointments Clause grounds.
⚖️ Holding:
The Second Circuit ruled that challengers must wait until the SEC process concludes before seeking judicial review.
🔑 Legal Principle:
At the time, courts took a "no-intervention" approach, which was later overturned in Cochran (2023).
🧩 Summary Table
| Case | Court | Issue | Outcome | Key Takeaway |
|---|---|---|---|---|
| Lucia v. SEC (2018) | Supreme Court | Improper appointment of ALJ | ALJ decision vacated | SEC ALJs must be properly appointed |
| Bandimere v. SEC (2016) | 10th Circuit | Appointments Clause | ALJ appointment unconstitutional | Helped create circuit split |
| Hill v. SEC (2015) | District Court | ALJ challenge mid-proceeding | Injunction granted | Triggered national challenges |
| Jarkesy v. SEC (2022) | 5th Circuit | Jury trial, delegation, removal | SEC process unconstitutional | Massive challenge to SEC’s structure |
| Cochran v. SEC (2023) | Supreme Court | Access to courts pre-finality | Jurisdiction granted | Early-stage constitutional claims allowed |
| Tilton v. SEC (2016) | 2nd Circuit | Timing of challenge | Must wait for agency process | Later overruled by Cochran |
🔍 Broader Implications of These Cases
✅ 1. Appointments Clause Enforcement
SEC must ensure ALJs are appointed by constitutionally authorized officers.
Reinforces separation of powers and limits on agency independence.
✅ 2. Challenge Timing
Cochran shifted the landscape by letting parties sue before SEC finalizes decisions, increasing court oversight.
✅ 3. Seventh Amendment & Jury Trials
Jarkesy raises the question whether civil penalties require jury trials in Article III courts, not ALJs.
✅ 4. Removal Protections
Courts may strike down “double for-cause” protection, arguing it infringes on executive control.
✅ 5. SEC's Structural Vulnerability
These cases create potential for significant constitutional limits on agency adjudication powers across all regulatory agencies—not just the SEC.
📌 Conclusion
The use of ALJs in SEC enforcement proceedings has undergone intense constitutional scrutiny in recent years, culminating in a redefinition of how administrative law works in the U.S.
The legal trajectory shows:
Growing judicial resistance to insulated agency tribunals.
Stronger insistence on constitutional accountability for executive branch actors.
A shift toward reasserting Article III and Seventh Amendment rights in financial regulatory contexts.
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