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Superior Functions Make an “Inferior Officer,” Rules the Court: Bandimere v. SEC
Posted on Categories Court Decisions, Securities/Commodities RegulationTags , ,

By William D. Nelson

Administrative law judges working for the SEC are inferior officers for purposes of the Appointments Clause of Article II of the Constitution.

Bandimere vs. SEC, No. 15-9586 (10th Cir., 12/27/16).

A Pending Adjudication

In 2012, the SEC brought an administrative action against Mr. Bandimere, a Colorado businessman, alleging that he violated various securities laws. An SEC administrative law judge (“ALJ”) presided over a “trial-like hearing.” The ALJ’s initial decision concluded that Mr. Bandimere was liable, barred him from the securities industry, ordered him to cease and desist from violating securities laws, posed civil penalties and ordered disgorgement. The SEC reviewed the ALJ’s decision and reached a similar result in a separate opinion. During the SEC’s review, Mr. Bandimere argued that the ALJ was an “inferior officer” who had not been appointed under the Appointments Clause of Article II of the Constitution. The SEC conceded that the ALJ had not been appointed in accordance with that provision, but rejected Mr. Bandimere’s argument because, in its view, the ALJ was not an inferior officer. Mr. Bandimere timely filed a petition for review in the 10th Circuit.

The Appointments Clause

The issue before the Court is narrow: whether the ALJs working for the SEC are employees or inferior officers. The Appointments Clause states: “[The President] shall nominate, and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court and all other 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.” In Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the question was whether the Tax Court had the authority to appoint special trial judges (“STJs”) under the Appointments Clause. As a threshold matter, the Supreme Court addressed whether STJs were inferior officers or employees. Freytag held that STJs were inferior officers based on three characteristics. First, the position of the STJ was established by law. Second, the duties, salary and means of appointment of the STJ are established by statute. Third, the STJs exercise significant discretion in carrying out important non-ministerial functions.

Functions, Functions

Following the Freytag analysis, the Court concludes that SEC ALJs are inferior officers under the Appointments Clause. As the SEC acknowledged, the ALJ who presided over Mr. Bandimere’s hearing was not appointed by the President, a court of law or a department head. The characteristics articulated in Freytag were present here.  First, the office of the SEC ALJ was established by a law, the Administrative Procedures Act, and the Securities and Exchange Act authorizes the SEC to delegate “any of its functions,” with the exception of rulemaking, to ALJs.  Second, statutes set forth the SEC ALJs’ duties, salaries and means of appointment. Nor are SEC ALJs hired on a temporary or episodic basis; rather, they receive career appointments and can be removed only for good cause. Third, SEC ALJs exercise significant discretion in performing important functions commensurate with the STJs’ functions described in Freytag, including adjudicative functions.

In reaching this conclusion, the Court rejects the SEC’s argument that the ALJs are not inferior officers because they cannot render final decisions as the agency retains authority to review ALJs’ decisions de novo. Freytag did not place “exceptional stress” on the final decision-making power. To the contrary, it rebutted the government’s argument that STJs were inferior officers when they lack final decision-making power, because the argument ignored the significance of the other duties and discretion that the STJs possessed. Final decision-making power is not the essence of inferior officer status.

Because the SEC ALJ held his office unconstitutionally when he presided over Mr. Bandimere’s hearing, the Court grants his petition for review and sets aside the SEC’s opinion.

(W. Nelson: *The dissent expressed “fears of the probable consequences of today’s decision.”  Under the majority’s reading of Freytag, all federal ALJs are at risk of being declared inferior officers, potentially rendering invalid thousands of administrative actions. **In August 2016, the D.C. Circuit addressed the same issue presented in Bandimere and concluded that SEC ALJs are employees and not inferior officers. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir., 2016) (SLA 2016-33). The holding was based on the court’s conclusion that SEC ALJs cannot render final decisions.)

(SLC Ref. No. 2017-01-08)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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