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District Court Deals SEC Setback in Use of Admin Courts

A real estate developer fighting an administrative proceeding by the SEC scored an early victory Monday after a federal district court ruled that the SEC’s procedure appointing administrative law judges (ALJs) may be unconstitutional. The setback comes at a time of mounting criticism regarding the SEC’s use of the in-house courts.

After the SEC initiated administrative proceedings against Charles Hill, Hill filed suit in federal district court to stop the proceeding based on several claims that the administrative court was unconstitutional. The district court was persuaded by Hill’s argument that the current process of appointing ALJs violates the Appointments Clause of the Constitution. ALJs are “hired by the SEC’s Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions, and the Office of Personnel Management.” However, the court rejected the SEC’s argument that the ALJs are employees, finding instead that their significant authority makes it likely that they are instead “inferior officers.” The Appointments Clause of the Constitution requires that “inferior officers” “must be appointed by the President, department heads, or courts of law.”

Based on this finding, the court issued an order halting the administrative proceeding while Hill’s suit continues in federal court.  The court noted that its conclusion could seem “unduly technical” as the SEC could easily cure the issue by “having the SEC Commissioners issue an appointment or preside over the matter themselves.” Nonetheless, the court found that “[t]he Appointments Clause is contained in the text of the Constitution and is an important part of the Constitution’s separation of powers framework” and “cannot be waived.”