Notice & Comment

The SEC’s Subdelegated Appointments Power

Yesterday, the Securities and Exchange Commission (SEC) hedged its bets: it issued an order ratifying the prior appointments of its administrative law judges (ALJs). The order also called for fresh proceedings in pending actions before these newly-blessed ALJs. The SEC did all of this to “put to rest” the argument — now pursued by the Solicitor General in Lucia v. SEC — that the SEC’s method for choosing its ALJs violates the Appointments Clause. The basic issue is whether ALJs are mere employees or “inferior officers” under Article II. If the former, then smooth sailing for the SEC, which has subdelegated its authority to appoint ALJs to its Chief Administrative Law Judge and internal Office of Human Resources (more on this below). If the latter, then the constitution requires that ALJs be chosen by the President alone, a “Head[] of Department[],” or “Court[] of Law.”

Luckily for the SEC, the Supreme Court has said that the Commission is a “Head[] of Department[].” So by ratifying its ALJs, the SEC seeks to preserve the validity of still-pending administrative decisions in the event more courts hold that its ALJs are inferior officers. So confident is the SEC in its cure that it lifted the stay on administrative proceedings subject to review in the Tenth Circuit, which had held just that. The SEC thus follows the lead of the similarly risk-averse and besieged Federal Trade Commission, which already endorsed its ALJ appointments more than two years ago.

Another likely motive for the Commission’s ratification is an attempt to stave off Supreme Court review. And no wonder given that the Government is now clamoring for it. Specifically, the SEC’s gambit may wager that the appointments issue is now moot. Mootness arises when an alleged harm has been resolved by a later development; a live case or controversy no longer exists. By allowing petitioners new proceedings before Commission-appointed ALJs, the SEC may hope that petitioners have gotten just what they wanted. So Supreme Court review now seems pointless, if not jurisdictionally barred. The problem for the SEC is that the Court has been clear that agencies cannot moot claims simply by putting a Band-Aid on potentially unconstitutional behavior, especially when the agency can simply resume it later. Voluntary cessation, in other words, doesn’t result in mootness unless an agency meets the “heavy burden” of showing that it won’t repeat the allegedly illegal conduct in the future.

Unfortunately for the SEC, the Commission has made no such showing. For it has yet to renounce or rescind its subdelegation of appointment authority through whatever method* it initially used to grant that authority to its Chief Administrative Law Judge. If that internal delegation occurred through a rule codified in the Code of Federal Regulations (such as the SEC’s recent subdelegation of subpoena power to its Division of Enforcement Director), then the SEC should revoke it if it wants to cry mootness credibly. If, by contrast, the ALJ appointment power has been delegated more informally through an internal staff manual or other guidance document, then the SEC should publicly disavow it.  If the subdelegation is simply a longstanding norm or custom, then the SEC should take more convincing action to change it. Absent one of these routes — none of which is bulletproof — Lucia’s ALJ appointments issue is far from moot, but rather still alive and kicking.

* Having read a fair number of litigation documents, I have yet to come across any citation to a rule, guidance document, or other formalized means through which the SEC made this subdelegation. Rather, the SEC’s own fuzzy description (h/t Jenn Mascott) of its “internal processes” as having “shifted over time with changing laws and circumstances” seems to suggest that the Chief Administrative Law Judge’s role may be customary, but I can’t be sure. If anyone can shed further light on how this initial delegation occurred, feel free to shoot me an email, and I will update this post accordingly.

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