District Court Says Appointment of SEC Administrative Law Judge Was Likely Unconstitutional

By Courtney Gilligan Saleski, Jonathan W. Haray, and Mark A. Kasten

In Hill v. Securities Exchange Commission, the United States District Court for the Northern District of Georgia, [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], preliminarily enjoined the SEC from conducting the administrative proceeding brought against Charles Hill, Jr. (Administrative Proceeding File No. 3-16383 (Feb. 11, 2015)), finding a substantial likelihood that Hill will succeed on the merits of his claim that the SEC has violated the Appointments Clause of Article II of the US Constitution, [subscribers can access an enhanced version of this clause: lexis.com | Lexis Advance].

The district court agreed with Hill that SEC ALJs are inferior officers within the meaning of Article II and, thus, must be appointed by the President, department heads or courts of law.  The SEC ALJ in the underlying administrative proceeding was, as all SEC ALJs are, appointed 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.  As a result, the district court found that the SEC ALJ’s appointment was likely unconstitutional.    

Hill had filed an action for declaratory relief and the motion to enjoin the SEC after the SEC instituted civil administrative proceedings against him by way of an Order Instituting Cease-and-Desist Proceedings in February.  The SEC contended that the district court did not have subject matter jurisdiction over Hill’s constitutional claims because there was exclusive jurisdiction in the administrative proceeding. The court, however, determined that 28 USC § 1331, [subscribers can access an enhanced version of this statute: lexis.com | Lexis Advance], allowed for jurisdiction for Hill’s collateral constitutional claims and that the SEC statutory review scheme did not preclude pre-enforcement review of the constitutionality of the SEC proceeding.

In recent years, the SEC has increasingly instituted enforcement proceedings before its own ALJs  instead of bringing civil actions in federal court, and has enjoyed a nearly perfect success rate in its in-house forum.  While similar constitutional challenges have been brought in several other district courts throughout the country, this ruling is the first time a court has held that an SEC ALJ’s appointment likely violated the Appointments Clause. 

Companies and individuals who find themselves in the SEC’s crosshairs may be interested in exploring the possibility  of a similar constitutional challenge to such proceedings.

Find out more by contacting the authors.

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