A panel of the D.C. Circuit recently relied on Lucia and Cochran to enjoin a FINRA regulatory enforcement action pending appeal of an Appointments Clause challenge.
In securities-regulatory enforcement, the Securities Exchange Commission (“SEC”) and its delegates long have had a trinity-like advantage over those it seeks to punish: It is prosecutor, judge, and jury, with home-field advantage. Enabling the Commission, Congress empowered it to prosecute violations of the securities laws and the regulations promulgated under them. The SEC can choose to proceed in federal courts or in its own in-house administrative hearing forum. In those administrative hearings, SEC prosecutors argue before SEC-employed hearing officers. And if a Respondent appeals, it must be to their boss, the Commission itself. Only thereafter, often many years later, can a Respondent have access to a Court.
The SEC’s citadel[1] has stood for a very long time – since the creation of the Commission. In recent years, though, it has been – and remains – under assault. I cataloged efforts to chip away at SEC administrative proceedings from 2011-2017 in this article for Law360.
In a 2018 watershed ruling, Lucia v. SEC, 138 S. Ct. 2044 (2018), the Supreme Court held that SEC ALJs are constitutional officers who must be appointed by the head of the agency (and subject to accountability), not a civil-service board. See also Free Enterprise Fund .v Public Company Accounting Oversight Board, 561 U.S. 477 (2010). The SEC vacated some administrative proceedings and reconstituted in ALJ corps. My post is here.
From the start, the SEC argued that Respondents could not challenge the administrative forum until it “exhausted” the process and finally could appeal from the Commission – itself an exhausting odyssey. But in Axon Enterprise, Inc. v. FTC; SEC v. Cochran, 143 S. Ct. 890 (2023), the Supreme Court finally held that a federal court can hear pre-decision constitutional challenges to the structure of agency enforcement actions.
Last year, the Fifth Circuit held the SEC’s administrative forum itself unconstitutional. This summer, the Supreme Court agreed to review three questions about SEC ALJs:
- Do they violate the 7th Amendment’s right to a jury trial of actions then known as common-law, rather than “public rights”?
- Do they violate the non-delegation doctrine by enabling statutes giving the SEC discretion to choose to bring enforcement actions in its administrative courts or Article III courts?
- Do the two levels of “for cause” removal protection for SEC ALJs violate Article II by protecting them from Presidential removal?
Jarkesy v. SEC, 34 F. 4th 466 (5th Cir. 2022), cert. granted, No. 22-859 (2023). I covered it here.
Most recently, those arguments have been applied to the SEC’s step-child, the non-governmental private self-regulatory organization for brokers, the Financial Institution Regulatory Authority (“FINRA”). In Alpine Securities Corp., Scottsdale Capital Advisors Corp. v. FINRA, No. 23-5129 (D.C. Cir. July 5, 2023)(per curiam), the Court (2-1) enjoined FINRA from continuing an expedited enforcement proceeding against Alpine pending its appeal, “without [FINRA] first sentencing it to the corporate death penalty.” FINRA’s expedited enforcement action alleged Alpine had violated a previous cease-and-desist order. Alpine filed suit in the D.C. District Court collaterally attacking FINRA’s administrative enforcement regime as violating the Appointments Clause. In a concurring statement, Circuit Judge Walker noted that “FINRA’s hearing officers are near carbon copies of those ALJs.” And because FINRA is a non-governmental self-regulatory organization beholden, reportable, and appealable to the SEC, then because Lucia held SEC ALJs “exercised ‘significant’ executive power, then FINRA hearing officers probably do too.”
“Despite seeming to exercise the executive authority of the United States, FINRA hearing officers remain private employees. That presents two constitutional issues that will benefit from “full briefing, oral argument, and our usual extensive internal deliberations.” Merrill v. Milligan, 142 S. Ct. 879, 879 (2022) (Kavanaugh, J., concurring). First, FINRA hearing officers are not appointed by a government body pursuant to the Appointments Clause. See Lucia, 138 S. Ct. at 2051. Second, they are shielded from removal by the SEC except for cause. 15 U.S.C. § 78s(h)(4). And the Supreme Court has assumed that the President may not remove SEC Commissioners at will. Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 487 (2010). That means that there are two layers of removal protection—one for the Commissioners and one for the hearing officers. That may well infringe on the President’s “ability to execute the laws . . . by holding his subordinates accountable for their conduct.” Id. at 496.”
Concurring Statement at 6.
The Order and Statement are here.
[1] The title alludes to a pair of law review articles about the assault upon, and death of, privity in tort actions. William L. Prosser, The Assault Upon the Citadel (Strict Liability to the Consumer), 69 Yale L. J. 1099 (1960); William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 Minn. L. Rev. 791 (1966).
PartnerTom Potter is a Partner in the firm's Nashville office, and his practice focuses on securities, corporate disputes, and appellate litigation. Tom has over 35 years of experience representing business interests.
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