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Securities Regulation

A Big “Uh-Oh” for the SEC’s ALJs and Administrative Courts

By Ernest Badway, Fox Rothschild LLP

Recently, the United States Supreme Court sent shock waves through the securities industry, as well as the United States Securities and Exchange Commission’s (SEC) enforcement program, when it held that SEC administrative law judges (ALJs) are “Officers of the United States” within the meaning of the Appointments Clause of the United States Constitution. Under this constitutional provision, only the President, a court, or a department head (here, the SEC) may appoint such officers. Because SEC ALJs had been appointed by members of the agency’s staff, the Court deemed the agency’s appointments process to be unconstitutional. Although the Court’s decision centered on a challenge to the authority of the SEC ALJ who presided over a particular SEC administrative enforcement proceeding involving investment adviser Raymond Lucia and his affiliated investment company, it may also have a broader impact not only on other SEC administrative proceedings but also on the use of “in-house” judges by other federal agencies.


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