The higher you go, the harder you fall. This simple, yet powerful, adage could not be more apt regarding the recent rise and fall in power of the United States Securities and Exchange Commission (SEC). The rise began in 2010 when Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), giving the SEC new power over its administrative proceedings. Using this new power, the SEC brought more insider-trading and highly contested cases before specially hired administrative law judges (ALJs), who conduct these administrative proceedings. This "home-court" advantage corresponded with the SEC's enforcement division enjoying an 86%, success rate in administrative proceedings over the past five years, compared to only a 70% success rate in federal courts.
With this increased success, the SEC has faced strong opposition from various investment advisory groups. Specifically, these groups have raised multiple district court challenges to the SEC's hearing process, including one particularly innovative challenge in Timbervest v. SEC. In this 2015 case, the plaintiffs alleged, among other things, that the SEC's appointment process for its ALJs is unconstitutional. Judge May of the United States District Court for the Northern District of Georgia agreed and found that the SEC's appointment of ALJs likely violates Article II of the United States Constitution, because ALJs are inferior officers, not mere employees. As inferior officers, ALJs must be appointed by the President, the courts of law, or the heads of departments. The SEC ALJs are not appointed by any of these parties. Therefore, as one of the first cases with which a federal district court judge has agreed regarding constitutional challenges to the SEC ALJ appointment, Timbervest creates significant ramifications for the SEC and, potentially, all other federal agencies that use ALJs.
Tincher, Moses M.
"Timber! The SEC Falls Hard as the Georgia District Court in Timbervest Finds the Appointment of the SEC ALJs "Likely Unconstitutional","
Mercer Law Review: Vol. 67:
2, Article 8.
Available at: https://digitalcommons.law.mercer.edu/jour_mlr/vol67/iss2/8