Welcome to Financial Advisor IQ

SEC Reverses Policy on In-House Judges

December 1, 2017

The SEC has ratified the appointment of its five administrative law judges, in a bid to address concerns raised in a Justice Department brief filed Wednesday with the U.S. Supreme Court, Reuters reports.

The commission has also directed the judges to review all their currently-open administrative cases. The move marks a reversal of policy for the SEC, newswire reports.

Lawyers for the Justice Department filed a brief Wednesday with the U.S. Supreme Court, saying the commission’s administrative law judges should be treated as officers rather than employees, according to the paper. If they are indeed officers, like other people appointed by the president, the SEC may be in violation of a separation-of-powers clause in the Constitution, the Journal writes.

The Justice Department essentially “turned its back on defending” the SEC’s in-house judge hiring process, the paper writes, citing the brief.

But the SEC’s latest move brings it in line with the Justice Department's new stance, according to Reuters. It also means current judges can stay on without concerns about the constitutionality of their positions pending judicial review, the newswire writes.

The Justice Department brief comes in relation to an appeal by financial advisor and radio personality Raymond Lucia, who accused the SEC of violating the Constitution in the way it hired the in-house judge on his case after the regulator sued him in 2012.

The U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the SEC this summer, rejecting Lucia’s claim. But the Denver-based 10th U.S. Circuit Court of Appeals had previously ruled the SEC’s hiring of judges did in fact violate the Constitution.

The Justice Department now says the Supreme Court should hear Lucia’s appeal, and that a decision in the court would clarify the position of “hundreds” of administrative law judges across other federal agencies, according to the Journal.

While the number of SEC enforcements that would be affected by the ruling is unclear, the commission had an average of 80 contested cases annually in administrative court from 2011 to 2015, Georgetown University law professor Urska Velikonja found, according to the paper.


The Justice Department’s brief means the Supreme Court is more likely to consider the appeal, although it has not yet said that it will, the paper writes.

A spokesman for the SEC declined comment to the Journal. Lucia’s lawyer, meanwhile, is very optimistic.

“We are one step closer to victory,” Mark Perry, a partner at Gibson, Dunn & Crutcher LLP who argued the case for Lucia, tells the paper.

By Alex Padalka
  • To read the Reuters article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.