Having The Last Word On The Last Word: SEC Says Its ALJs Are 'Mere Employees'

In what will surely not be the last word on this continuing controversy, on September 3, 2015, a majority of the members of the Securities and Exchange Commission held that the appointment process for the Commission's administrative law judges ("ALJ") does not violate the Constitution. As we reported just last month, a federal judge in the Southern District of New York preliminarily enjoined a separate SEC administrative proceeding based in part on the judge's view that the SEC ALJ appointment process is likely unconstitutional. In light of the key role ALJs play in SEC proceedings and the number of administrative cases brought each year, the question is likely to be addressed at the appellate level and could have significant implications for the securities defense bar.

The issue came to the Commission through a securities fraud case involving former investment advisor Ray Lucia, Sr., host of the Ray Lucia financial talk radio show, and Raymond J. Lucia Companies, Inc. (the "Respondents"). The SEC accused the Respondents of misleading prospective clients about the company's "Buckets of Money" retirement wealth management strategy, An SEC ALJ mostly agreed, ordering the Respondents to cease and desist from further violations and imposing civil penalties. The Respondents raised several issues on appeal, including that the ALJ appointment process violates the Constitution.

On the constitutionality of the ALJ appointment process, the Respondents argued that under the Appointments Clause, SEC ALJs are "inferior officers" who must be appointed by either the President, the head of a department, or a court of law. Because SEC ALJs are not appointed by the President, a department head, or a court, the Respondents argued, the proceedings they conduct and any resulting orders are invalid and must be vacated.

In rejecting the Respondent's arguments, the Commission relied on the decision of the United States Court of...