Legal Seminar, Denver, CO

Supreme Court: SEC ALJs Unconstitutional

• In Lucia v. SEC , the Supreme Court held that SEC ALJs are “Officers” of the United States and their appointment by SEC staff violated the Appointments Clause of the US Constitution. • Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a "Department." • The Court looked to its decision in Freytag v. Commissioner , which concluded that US Tax Court special trial judges qualified as officers not employees. • The Supreme Court found the SEC ALJs to be "near-carbon copies" of the special trial judges examined in Freytag . In applying the Freytag test, the Court found that, like special trial judges, the SEC ALJs: • Occupy a continuing position established by law because SEC ALJs receive a career appointment. • Exercise significant authority and discretion • Issue decisions containing factual findings, legal conclusions, and remedies. • Because the ALJ in this case was not constitutionally appointed, but instead hired by agency staff, the Court reversed and remanded the case for a new hearing before a properly appointed official.

Public Company Accounting Oversight Board (PCAOB) • On June 28, 2010, the Supreme Court held in Free Enterprise Fund v. Public Company Accounting Oversight Board , that Sarbanes-Oxley's limitations on the SEC's authority to remove members of the PCAOB violate Article II of the Constitution. • The Court declined to issue an injunction preventing the PCAOB from continuing its operations (or to declare the entire statute unconstitutional), holding that the violation is remedied by the SEC receiving authority to remove members of the PCAOB at will.