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SEC ADMINISTRATIVE JUDGES- ARE THEY CONSTITUTIONAL?

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, March 6, 2017.

Erwin Shustak, Esq.
619.696.9500 ex. 109
[email protected] 

A recent decision by a federal appellate court has cast doubt on whether decisions by SEC administrative judges are constitutional and enforceable. There is no split amongst the federal appeals court sitting in Washington, and the 10th Circuit Court of Appeals, based in Denver, which is certain to invite ultimate review, and clarification, by the U.S. Supreme Court.

At issue is whether the SEC administrative judges are mere employees of a federal agency - the Securities and Exchange Commission - or whether the extent of their power makes them “inferior officers” of the federal government. If they are considered “inferior officers,” they must be appointed by the President or the head of the SEC under the Appointments clause of the U.S. Constitution. At the present time, SEC administrative judges are not appointed according to the Appointments clause of the Constitution.

In August, 2016, an SEC administrative law judge upheld a lifetime ban against San Diego-based Raymond J. Lucia, the author and creator of his “Buckets of Money” theory of investing. Lucia appealed the SEC judge’s decision arguing that the manner in which the SEC administrative judges are selected was unconstitutional. On appeal, the U.S. Circuit Court for the D.C. Circuit, concluded the SEC administrative judges are employees, who do not need to be appointed by the President or the head of the SEC.

In December, however, in a case involving David Bandimere, the 10th Circuit Court of Appeals addressed the same question and reach an opposite conclusion. That court ruled the SEC administrative judges act as inferior officers, based on the extent and nature of their authority. As such, the court reasoned, they require Presidential, court, or agency appointment to execute their authority. The 10th Circuit’s decision directly contravenes the D.C. Circuit’s decision in Lucia.

While there is a split in the circuits, registered persons considering appealing their FINRA and SEC fines and sanctions should seriously consider a further appeal to the SEC for hearing by an administrative judge for two reasons. First, there is the possibility of either challenging the authority of the SEC administrative judge either before the hearing or after the hearing. A successful challenge, as in the Banidmere case, effectively tossed the fines and sanctions. In addition, an appeal to an SEC administrative judge will buy time for the affected registered person since any fines or sanctions do not take effect until the SEC appeal is concluded.

 Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.

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