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SEC Argues That Favorable Ruling for Respondent in the Eleventh Circuit Would Conflict With 7th and D.C. Circuit Precedent

By Jeffrey T. Petersen, Esq.  of Shustak Reynolds & Partners, P.C. posted on Friday, October 16, 2015.

James J. Reynolds

James J. Reynolds



Respondents challenging the constitutionality of SEC administrative proceedings imposing civil penalties on unregulated individuals have had a measure of success so far in the Northern District of Georgia. One such respondent, Gray Financial Group, Inc., was able to obtain a preliminary injunction prohibiting the administrative proceeding from going forward.

The SEC appealed that decision, and in its reply brief filed earlier this week, argued that enjoining the proceeding was erroneous on two grounds, one procedural and one substantive. First, the SEC contended that the federal courts do not have jurisdiction to hear a constitutional challenge to the SEC administrative proceedings at this time, citing the recent 7th Circuit opinion in Bebo and the D.C. Circuit opinion in Jarkesy, which itself relied on Bebo. In those opinions, the appellate courts held that the statutory review scheme providing for an administrative proceeding with subsequent appellate court review was sufficient to deem that a respondent had to follow that statutory procedure rather than proceeding immediately to a federal court challenge.

On the substantive ground, the SEC contended that the Northern District of Georgia court erred in holding that the ALJ’s were “inferior officers” rather than employees. The distinction matters in this context because if ALJ’s are inferior officers, they are not constitutionally accountable to the president because they can only be dismissed by the Commissioners, and are unconstitutionally appointed because they are named through a bureaucratic process. The SEC pointed to recent determinations by all five of its Commissioners that ALJ’s are employees rather than inferior officers, and relied on prior D.C. Circuit precedent it contends is directly applicable.

With a request for rehearing en banc pending in the 7th Circuit in Bebo, a forthcoming ruling in the Eleventh Circuit in Gray Financial and another related case where the district court has held in respondents’ favor, similar appellate proceedings in the 2nd Circuit, and substantive and procedural changes to the SEC’s administrative proceedings recently proposed by the SEC itself, the next few months will have quite an impact in shaping this hotly-contested area of law.

Jeffrey Petersen, Shustak & Partners, P.C. Shustak & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500.



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