The Shadow of Free Enterprise: The Unconstitutionality of the Securities & Exchange Commission’s Administrative Law Judges

Abstract

Six years ago, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), for the first time giving the Securities and Exchange Commission (SEC) the power to seek monetary penalties through its in-house adjudication. The SEC already had the power to seek such penalties in federal court. With the Dodd-Frank Act, the SEC’s enforcement division could now choose between an adjudication before an SEC Administrative Law Judge (ALJ) or a civil action before an Article III judge. With this new choice, the SEC realized a significant home-court advantage. For example, in 2014, the SEC’s enforcement division prevailed in 100% of its administrative proceedings, while it prevailed in only 61% of the cases it brought in federal court. With these statistics, it is no surprise that potential respondents to SEC enforcement actions soon challenged the constitutionality of the SEC’s new choice.

In this Article, we explain why the SEC ALJs’ appointment and removal processes violate the United States Constitution. The SEC ALJs are inferior officers of the United States. As such, they must be appointed by the President, a court of law, or the head of a department. Instead, they are appointed by the head SEC ALJ. Additionally, in Free Enterprise Fund v. Public Company Accounting Oversight Board, the Supreme Court held that dual for-cause removal provisions violate separation of powers because such clauses prevent the President from faithfully executing the law. The SEC ALJs are subject to multiple for-cause removal protections. Possibly, the Supreme Court will refuse to extend its holding in Free Enterprise — that multiple levels of tenure protection violate separation of powers — to ALJs. However, if the Court meant what it said and if the case is to have any relevance beyond the agency involved in that case, then the multiple for-cause removal provisions affecting the SEC ALJs specifically, and all ALJs generally, will need to be reconsidered.

Keywords: separation of powers, appointment, removal, Free Enterprise, ALJ, Constitution

JEL Classification: K3