United States: The Tenth Circuit Rules SEC Administrative Judges Are Unconstitutional, Setting Up Potential Supreme Court Review

The constitutionality of the SEC's in-house administrative proceedings is in doubt following the 10th Circuit Court of Appeals' ruling in Bandimere v. SEC.1  In Bandimere, a three-judge panel held, by a 2-1 decision, that SEC administrative law judges ("ALJs") are inferior officers under the Appointments Clause of the Constitution and that they must be appointed in accordance with that clause, rather than hired as employees.  The decision directly conflicts with the August 2016 holding of the Court of Appeals for the D.C. Circuit in Raymond J. Lucia Cos. v. SEC.2  This circuit split sets the stage for a potential Supreme Court review of the SEC's administrative proceedings.

Bandimere caps an eventful year for SEC administrative proceedings.  Following several high-profile challenges to the agency's in-house court, the SEC promulgated new rules for its ALJ hearings that expanded discovery and provided for longer timelines in complex cases, among other changes.3  Despite the new rules, many commentators remained skeptical about the fundamental fairness of SEC ALJ hearings, particularly in complex cases.4  Now, in the wake of Bandimere, the controversy around the SEC's administrative proceedings is sure to last into the new regime of Chairman-to be Jay Clayton.


Since passage of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, the SEC has been authorized to seek monetary penalties in administrative proceedings.5  This power originally was limited to entities directly regulated by the SEC, such as investment advisers and broker-dealers.  If the SEC wanted to seek monetary penalties against other parties, it was required to file a civil lawsuit in federal court.  Following the financial crisis, the Dodd-Frank Act of 2010 expanded the SEC's powers, permitting the agency to seek civil penalties from other parties (e.g., public and private companies) in its own in-house court through the use of administrative proceedings.6  Since that time, the SEC has increasingly used its administrative forum, a shift which caused one SEC official in 2014 to describe administrative proceedings as "the new normal."7  The SEC's rate of victory has been notably greater in its in-house administrative court than in federal court.8

Administrative proceedings offer the SEC several advantages over civil suits in federal court, including limited discovery obligations for the petitioner and limited discovery rights for respondents, a shortened time frame that can make preparing a defense challenging, more permissive evidence rules that may allow for admission of hearsay, and the inability of respondents to demand a jury trial.  These advantages have led many individuals facing SEC administrative suits to challenge the constitutionality of administrative proceedings, mostly without success.  In 2015 and 2016, four federal circuit courts of appeal—the Second, Seventh, Eleventh and D.C. Circuits—rejected challenges to the SEC's administrative proceedings process on jurisdictional grounds.9  Because these four courts held in favor of the SEC on jurisdictional grounds, none ruled on the constitutionality of SEC administrative proceedings.

The SEC's winning streak continued through August 2016, with the D.C. Circuit's decision in Lucia.  In that case, an SEC ALJ found that the respondents violated a rule against misleading advertising that was promulgated under the Investment Advisers Act of 1940.  The respondents appealed to the Commission, which rejected the respondents' argument that the administrative hearing was unconstitutional because the ALJ had been hired in violation of the Appointments Clause.

The Appointments Clause provides that the President:

shall nominate, and by and with the Advice and Consent of the Senate, shall appoint ... Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.10

An individual is considered an "officer" if he or she exercises "significant authority pursuant to the laws of the United States."11  Only people who are deemed to be employees or other "'lesser functionaries' need not be selected in compliance with the strict requirements of Article II."12

In considering whether SEC ALJs exercise significant authority and are therefore Officers who must be appointed, the D.C. Circuit focused on whether ALJs have the power to issue final decisions.13  The Court observed that, pursuant to the laws governing administrative proceedings, the Commission retains "a discretionary right to review the action of any" ALJ.14  Moreover, respondents may appeal ALJ decisions to the Commission, which will review the ALJ decisions de novo.  Noting that the ALJs were part of a "carefully devised scheme established after years of legislative consideration and agency interpretation," the Court held that the ALJs are not officers for purposes of the Appointments Clause.15

Bandimere v. SEC

Bandimere breaks the SEC's winning streak in cases concerning the constitutionality of administrative proceedings.  In October 2013, an ALJ decided that David Bandimere had violated several securities laws by misleading investors about two Ponzi schemes.16  On appeal, the SEC rejected Bandimere's argument that the ALJ was an inferior officer who had not been appointed under the Appointments Clause.17  Bandimere then petitioned for review by the 10th Circuit Court of Appeals.

The Court began its analysis by listing examples of positions deemed by courts as inferior officers, including Tax Court special trial judges, election supervisors, and district court clerks, and noting that the term "inferior officer" has an "unusually broad" sweep.18  It then turned to the case of Freytag v. Commissioner of Internal Revenue,19 which it found controlling.  In Freytag, the Supreme Court unanimously held that tax court special trial judges were inferior officers.  Three main characteristics led the Supreme Court to hold that the special trial judges were inferior officers:  (1) the position was "established by law"; (2) "the duties, salary, and means of appointment . . . are specified by statute"; and (3) the special trial judges "exercise significant discretion" in "carrying out . . . important functions."20  The Supreme Court in Freytag rejected the government's argument that the special trial judges were not inferior officers because they did not issue final decisions, countering that such an argument "ignore[d] the significance of the duties and discretion that special trial judges possess."21

The Tenth Circuit analyzed the duties of SEC ALJs in light of Freytag.  The Court found that SEC ALJs clearly met the first two characteristics of the special trial judges in Freytag because the ALJ position is established by the Administrative Procedures Act, and ALJs' duties, salaries, and means of appointment are also provided by statute.  The Court went on to analyze the significance of the SEC ALJs' duties.  It pointed out that, under SEC regulations, SEC ALJs are "responsible for the fair and orderly conduct of [SEC administrative] proceedings" and "have the authority to do all things necessary and appropriate to discharge [their] duties."22  These duties include, among other things, administering oaths, examining witnesses, entering default judgments, ordering depositions and document productions, ruling on the admissibility of evidence, punishing contemptuous conduct, and issuing initial decisions that declare respondents liable and impose sanctions.  Because the ALJs "closely resemble" the special trial judges from Freytag and perform important functions, the Court ruled that they are "inferior officers who must be appointed in conformity with the Appointments Clause."23

The Tenth Circuit took issue with the D.C. Circuit's decision in Lucia, arguing that the D.C. Circuit placed "undue weight on final decision-making authority" when declaring that SEC ALJs are not inferior officers.24 The Tenth Circuit read Freytag as rebutting the argument that final decision-making authority is a necessary condition for declaring a position an inferior officer.  The Court stated, "[f]inal decision-making power is relevant in determining whether a public servant exercises significant authority.  But that does not mean every inferior officer must possess final decision-making power."25

Circuit Judge Monroe McKay's dissent explains his disagreement with the majority's reading of Freytag and, perhaps more notably, highlights the massive consequences that could follow if the Supreme Court were to adopt the Tenth Circuit's holding that SEC ALJs are inferior officers.  Judge McKay argues that "[u]nder the majority's reading of Freytag, all federal ALJs are at risk of being declared inferior officers."  As an example, Judge McKay pointed out that the 1,537 Social Security Administration ALJs could be deemed inferior officers because their duties closely resemble those of SEC ALJs.

Impact of Bandimere

Bandimere is a significant victory for opponents of SEC administrative proceedings.  Undoubtedly, many respondents in such proceedings, as well as those who have been adjudged liable by ALJs, will attempt to capitalize on the ruling.  The SEC, therefore, has significant motivation to petition the Supreme Court for certiorari, rather than let the ruling stand.  The matter appears ripe for review by the Supreme Court in light of the split between the D.C. and Tenth Circuits, and the potentially broad ramifications of Bandimere.  If the Supreme Court adopts the Tenth Circuit's holding, do not expect SEC administrative proceedings to wither away.  Rather, the SEC (and possibly other agencies) would need to change the process by which it appoints ALJs or, alternatively, reduce the powers of ALJs so that they are not inferior officers.

Nonetheless, Bandimere represents a threat to the "new normal," in which the SEC favors bringing cases in its administrative forum.  Until the issue presented in Bandimere and Lucia is clarified by the Supreme Court, the murky constitutional status of SEC ALJ hearings could cause the SEC to bring more of its enforcement actions—particularly high profile cases—in federal court.

President-elect Trump's nominee for Chairman of the SEC, Jay Clayton, has not yet publically expressed his views about the SEC's reliance on administrative proceedings or the constitutionality of those proceedings.  However, in light of the Bandimere decision and public interest in the topic, Mr. Clayton will likely need to consider the role and powers of the SEC's in-house court soon after taking office.


1 Bandimere v. U.S. Sec. Exch. Comm'n, No. 15-9586 (10th Cir. Dec. 27, 2016).

2 832 F.3d 277 (2016).

3 See Amendments to the Commission's Rules of Practice, 17 CFR Part 201, available at https://www.sec.gov/rules/final/2016/34-78319.pdf.

4 See, e.g., Jodi Avergun, Douglas Fischer, Joseph Moreno, Emily Rockwood, and Lex Urban, The SEC Retains its House Advantage During Administrative Proceedings, Aug. 5, 2016, available at http://www.cadwalader.com/resources/clients-friends-memos/the-sec-retains-its-house-advantage-during-administrative-proceedings.

5 Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990).

6 See 15 U.S.C. § 77h-1 (2012).

7 See Jean Eaglesham, SEC Is Steering More Trials to Judges It Appoints, The Wall Street Journal, May 6, 2015, available at http://www.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590.

8 See Jean Eaglesham, SEC Wins With In-House Judges, The Wall Street Journal, May 6, 2015, available at http://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803 (observing that from October 2010 to March 2015, the SEC won 90% of contested cases in administrative proceedings, but just 69% of such cases in federal court).

9 Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016).

10 U.S. Const. Art. II, § 2, cl. 2.

11 Buckley v. Valeo, 424 U.S. 1, 126 (1976).

12 Freytag v. Comm'r, Internal Revenue, 501 U.S. 868, 880 L. Ed. 2d 764 (1991) (quoting Buckley v. Valeo, 424 U.S. at 126).

13 Lucia, 832 F.3d at 285.

14 See 15 U.S.C. § 78d-1(b).

15 Lucia, 832 F.3d at 289.

16 In the Matter of David F. Bandimere, Initial Decision Release No. 507, 2013 WL 5553898 (Oct. 8, 2013).

17 In the Matter of David F. Bandimere, SEC Release No. 9972, 2015 WL 6575665 (Oct. 29, 2015).

18 Bandimere at 10.

19 501 U.S. 868 (1991).

20 Id. at 881-82.

21 Id. at 881.

22 17 C.F.R. §§ 200.14, 200.11.

23 Bandimere at 22.

24 Id. at 24.

25 Id. at 28.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions