If you are a broker-dealer, registered investment advisor or an individual associated with an entity regulated by the Securities and Exchange Commission (“S.E.C.”), the deck may be stacked against you. The Dodd-Frank Act provided the S.E.C. with expanded authority to utilize administrative proceedings presided over by administrative law judges selected by the S.E.C. to police the activities of entities and individuals regulated by the S.E.C.
In fiscal year 2015, administrative law judges issued 207 initial decisions and ordered civil penalties totaling $20,823,750 and disgorgement totaling $12,065,036 against industry individuals and entities. The administrative law judges are hired through the S.E.C.’s Office of Administrative Law Judges. They issue decisions, which then get memorialized or altered by the Commission. The S.E.C. sets the rules of procedure, the rules of discovery, and the scope of the proceedings in these administrative hearings. And, of course, the S.E.C. picked the judges.
A number of individuals and companies in recent years have attempted to challenge the S.E.C.’s use of administrative law judges on a variety of grounds. Although due process and equal protection arguments generally have not been successful, there was some hope that relief from these administrative proceedings might be achieved through the argument that the S.E.C.’s appointment of its administrative law judges violates the Appointments Clause of Article II of the Constitution. The Appointments Clause requires that the President has the ultimate authority to hire or fire government officials with executive authority. Because the President neither appoints nor is able to directly fire these administrative judges, aggrieved parties have been arguing that the administrative law judges are executing unlawful executive powers. The hope of undercutting these proceedings significantly dimmed with the recent decision by the U.S. Court of Appeals for the District of Columbia in Raymond James Lucia Cos. v. S.E.C. (No. 15-1345).
In Lucia, an appellate court, for the first time, considered the merits of the arguments regarding the constitutionality of the S.E.C.’s appointment of administrative law judges. In one of these proceedings, a former investment advisor, Mr. Raymond Lucia, was barred for life from working in the securities industry and received an adverse judgment of $300,000 in monetary penalties and disgorgement. Mr. Lucia followed the rules and exhausted his appellate options within the Commission before filing his case at the circuit court level. The D.C. Circuit affirmed the Commission’s decision upholding the administrative law judge’s findings against Mr. Lucia, holding that because the S.E.C.’s administrative law judges do not have the power to issue final decisions, they fall below the threshold of authority required to be considered an officer for purposes of the Appointments Clause of the Constitution. In short, the S.E.C. can legally appoint the judges.
When pursuing legal action against regulated individuals and/or entities, the S.E.C. has the choice to file civil charges for violations of the securities laws in either federal court or pursuant to its administrative proceedings. Regulated individuals and entities should be forewarned of the high likelihood that any such claims will end up in front of an administrative law judge hand-picked by the S.E.C.
Given that the odds of successfully challenging the constitutionality of these S.E.C. administrative courts has decreased drastically, it becomes even more important to have skilled counsel familiar with the process representing you if the S.E.C. knocks on your door.