On December 27, 2016, in Bandimere v. SEC, the US Court of Appeals for the Tenth Circuit held that the Securities and Exchange Commission's (SEC) use of administrative law judges (ALJ) in administrative proceedings is unconstitutional because their hiring process violates the Constitution's Appointments Clause ( (10th Cir. Dec. 27, 2016)).

In 2012, the SEC brought an administrative action against Petitioner David Bandimere for violating various securities laws. An ALJ conducted a hearing and issued an initial decision that found Mr. Bandimere liable, banned him from the securities industry, ordered him to disgorge the funds he received, and imposed civil penalties. The SEC reviewed the ALJ's initial decision and issued its own opinion affirming the result.

Mr. Bandimere appealed to the US Court of Appeals for the Tenth Circuit, arguing that the SEC's use of an ALJ to preside over his initial hearing was unconstitutional. Under the Appointments Clause of Article II of the US Constitution, the President, a court of law, or a department head must appoint all "inferior officers" who "exercis[e] significant authority pursuant to the laws of the United States" (Buckley v. Valeo, 424 U.S. 1, 126 (1976); see U.S. Const. art. II, § 2, cl. 2).

Mr. Bandimere argued that the SEC process of hiring ALJs, in which the Office of Personnel Management (OPM) reviews applicants and recommends three finalists to the SEC, which then hires one of the finalists, is an unconstitutional violation of the Constitution's Appointments Clause. The SEC conceded that its hiring process does not pass the constitutional muster but argued that the Appointments Clause does not apply because ALJs are mere employees, not inferior officers.

The divided Tenth Circuit agreed with the appellant and held that the ALJs are inferior officers subordinate to the SEC Commissioners who must be appointed under the Appointments Clause.

The court reasoned that:

Concluding that the SEC ALJs are inferior officers, the majority of the Tenth Circuit's panel ruled the ALJ who presided over Mr. Bandimere's hearing held his office unconstitutionally and set aside the SEC's decision. The dissent warned that the majority's holding may effectively render invalid thousands of SEC administrative actions and risk all federal ALJs being declared inferior officers.

The Tenth Circuit's decision in Bandimere comes at a time when the SEC has faced increasing criticism over the perceived unfairness of its administrative proceedings (see Legal Update, OIG Finds No Merit to Claims Against ALJs of Bias in SEC Proceedings). Several defendants have collaterally attacked SEC administrative proceedings arguing that the SEC's appointment of ALJs is a violation of the Constitution's Appointments Clause but the courts dismissed these actions on jurisdictional grounds. (See, for example, Tilton v. SEC, 824 F.3d 276 (2nd Cir. June 1, 2016); Hill v. SEC, 825 F.3d 1236, (11th Cir. June 17, 2016).)

The only two circuit courts that have addressed this issue on the merits reached opposite conclusions. In August 2016, in Lucia v. SEC, the US Court of Appeals for the DC Circuit held that the SEC's use of ALJs is constitutional, reasoning that the ALJs are employees, rather than inferior officers (832 F.3d 277 (D.C. Cir. August 9, 2016)). The Bandimere majority explicitly disagreed, creating a sharp circuit split and making it likely that the SEC will petition the Tenth Circuit for an en banc hearing or seek a Supreme Court review.

For more information on the SEC administrative proceedings, see Practice Note, Navigating SEC Administrative Proceedings, Navigating SEC Administrative Proceedings Flowchart, and Article, Expert Q&A on the Amendments to the SEC’s Rules of Practice for Administrative Proceedings.