September 19, 2018

Securities Alert: SEC Vacates and Remands All Pending Administrative Enforcement Proceedings in the Wake of Lucia v. SEC

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The Securities and Exchange Commission continues to revamp its administrative enforcement procedures to steer clear of additional constitutional challenges based on the SEC’s use of administrative law judges (“ALJs”). The SEC’s latest order is in response to the Supreme Court’s decision in Lucia v. SEC, 128 S. Ct. 2044 (June 21, 2018).  In Lucia, the Supreme Court held that the SEC’s five ALJs did not have constitutional authority to decide administrative enforcement proceedings because the ALJs were acting as officers of the executive branch but had not been appointed to their positions in the manner required by the Appointments Clause of the U.S. Constitution.  The Appointments Clause requires that officers of the executive branch be appointed by the President or by an agency department head (e.g., the SEC itself); instead, the ALJ assigned to Mr. Lucia’s case had been selected by a civil-service process managed by the SEC’s staff.  As a result, Mr. Lucia – who had been fined $300,000 and banned from the securities industry for life as a result of his marketing of a retirement savings strategy called “Buckets of Money” – was entitled to a new trial by a constitutionally appointed ALJ who had not previously served on his case.

In response to Mr. Lucia’s challenge to its ALJs, in November 2017 the SEC ratified the appointment of its five existing ALJs to comply with the Appointments Clause.  And, in response to the Supreme Court’s decision in Lucia, on August 22, 2018 the SEC remanded all pending administrative proceedings so the respondents in those cases would have the opportunity for new hearings before constitutionally-appointed ALJs who did not previously participate in their cases.  The SEC also vacated any prior opinions in those cases, ordered that the newly-assigned ALJs “shall not give weight to or otherwise presume the correctness of any prior opinions, orders or rulings issued in the matter,” and re-ratified the appointment of its ALJs to comply with the Appointments Clause.  Order, Exchange Act Release No. 83907, 2018 SEC Lexis 2058 (August 22, 2018).  The SEC’s order affects more than 100 pending cases (including Mr. Lucia’s case).

Although the SEC’s most recent order gives respondents in pending administrative enforcement proceedings a fresh chance to have their cases heard by constitutionally-appointed ALJs, those respondents still face an uphill battle to victory.  As the Wall Street Journal has noted, the SEC overwhelmingly prevails in administrative proceedings that are determined by ALJs, and there has been no turnover in the ALJ ranks at the SEC since Lucia.  Therefore, although the ALJs have now been appointed in a constitutionally-correct manner, the same roster of ALJs will decide these cases on a go-forward basis.

Keesal, Young & Logan Securities Group

This information has been prepared by Keesal, Young & Logan for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between you and Keesal, Young & Logan. You should not act upon this information without seeking professional counsel.