As we discussed in a recent client alert, the U.S. Court of Appeals for the Tenth Circuit held on December 27, 2016, in Bandimere v. SEC, that the Securities and Exchange Commission’s use of administrative law judges (“ALJs”) to adjudicate enforcement actions is unconstitutional. The decision has created a circuit split that breathes new life into an independent constitutional ground on which the D.C. Circuit or the U.S. Supreme Court could decide PHH Corp., et al. v. Consumer Financial Protection Bureau without reaching the controversial issues of the bureau’s structure and CFPB Director Richard Cordray’s status.
In Bandimere, the Tenth Circuit invalidated Securities and Exchange Commission (“SEC”) sanctions on the ground that the ALJ who presided over the relevant proceedings was hired in violation of the U.S. Constitution’s Appointments Clause. SEC ALJs are formally hired by the Office of Personnel Management, with the hiring decision made by the SEC’s Chief ALJ. However, the Tenth Circuit ruled that SEC ALJs are “inferior officers” under the Appointments Clause and therefore must be appointed by the President, the courts, or the “head of [the] department.” The decision comes only months after a directly conflicting decision by a D.C. Circuit panel in Raymond J. Lucia Companies, Inc. v. SEC on August 9, 2016, in which the court held that the ALJs are not inferior officers because they formally lack the power to issue a final decision.
The D.C. Circuit’s PHH decision (which we analyzed previously) concerned a CFPB administrative enforcement action. The court held, among other things, that the bureau’s structure as an independent agency with a single director violates the separation of powers set forth in the U.S. Constitution. As a result, the court severed the for-cause removal provision of the Dodd-Frank Act, allowing the President to remove the director at will, and as a result, effectively supervise and direct the director.
However, as Senior Circuit Judge Raymond Randolph noted in his concurrence in PHH, the disputed CFPB enforcement action initially went before an SEC ALJ assigned to the case pursuant to an agreement between the two agencies. According to Judge Randolph, this SEC ALJ was an improperly appointed inferior officer, which “in itself rendered the proceedings against petitioners unconstitutional.”
The Bandimere decision has created a circuit split on the status of SEC ALJs and thereby raises the possibility of a decision based on Judge Randolph’s argument. If the D.C. Circuit grants a rehearing en banc in PHH, or if the U.S. Supreme Court ultimately grants certiorari in either case, these courts could decide to reconcile the split by overruling the D.C. Circuit panel’s decision in Lucia. In doing so, the D.C. Circuit or the Supreme Court would render the CFPB enforcement action at issue in PHH unconstitutional without reaching the issue of the bureau’s structure or Director Cordray’s status. Such a decision, however, would not address the criticism that the PHH decision violated the canon of constitutional avoidance by addressing a constitutional issue in lieu of deciding the case against the CFPB solely on the merits of the underlying dispute over the Real Estate Settlement Procedures Act.