SEC’s Controversial Administrative Courts Declared Constitutional

Critics say the regulator acts as “prosecutor, judge and jury.”

The Security and Exchange Commission’s controversial five-year-old practice of taking enforcement litigation to in-house judges was upheld by a federal appeals court on Tuesday, as reported by the Wall Street Journal.

The SEC administrative judges, who are not appointed by commissioners but are hired through an internal office, were found in an earlier Journal analysis to have favored the SEC 90 percent of the time, as opposed to 69 percent in general federal court.

The rules for the in-house courts “severely limit discovery and depositions,” wrote Wall Street Journal columnist Kimberly Strassel on Aug. 4. “President Obama’s SEC gets to sit as prosecutor, judge and jury—and no surprise that the agency loves this setup.” Litigants argued that the SEC’s arrangement violates the Constitution’s Appointments Clause.

But a U.S. appeals court for the District of Columbia Circuit panel overrode lower courts and denied a petition from San Diego-based financial adviser Raymond Lucia, who is contesting SEC allegations that he misled investors. The three appeals judges said the SEC judges did not need to be appointed directly by the commission because their decisions weren’t final and were subject to commission review.

“The commission’s [administrative law judges] neither have been delegated sovereign authority to act independently of the commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit,” they wrote.

An SEC spokesman told Government Executive the agency is pleased with the court decision. SEC website data show its prosecutors in federal court in 2015-2016 won 10 cases and lost none (plus two hung juries), while their score was 20-3 using the in-house courts.

The issue is being challenged in other courts.