ARE ALJS CONSTITUTIONALLY- APPOINTED, OR ARE THEY MERE EMPLOYEES? The Rock and the Hard Place Posed by the Bandimere and Lucia Decisions

Transcription

1 ARE ALJS CONSTITUTIONALLY- APPOINTED, OR ARE THEY MERE EMPLOYEES? The Rock and the Hard Place Posed by the Bandimere and Lucia Decisions

2 Co-Sponsored by the ABA Section of Administrative Law and Regulatory Practice, and the ABA Judicial Division s National Conference of the Administrative Law Judiciary Panelists: Prof. Kent Barnett, Judge Judith Boggs (moderator), Chief ALJ Walter Brudzinski, Prof. Linda Jellum, Prof. Jennifer Mascott, Mark Perry, Esq., and Prof. Richard Pierce Organizers: Judge Alex Manuel, Judge Brudzinski, and Anne Kiefer.

3 DISCLAIMER The views expressed in this presentation are those of the panelists alone. Their opinions do not represent the views of the American Bar Association or any other professional entity or association.

4 SEPARATION OF POWERS The executive Power shall be vested in a President of the United States of America. Art. II, Sec. 1, cl The Appointments Clause prevents congressional encroachment upon the Executive and Judicial Branches.

5 Art. II, Sec. 2, cl. 2 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. [Excepting Clause]

6 BANDIMERE AND LUCIA Bandimere holds that SEC ALJs are inferior officers because they exercise significant authority pursuant to the laws of the U.S. Lucia states that SEC ALJs are not inferior officers because they do not issue final decisions of the agency.

7 POWER TO REMOVE ALJS --Buckley v. Valeo, 424 U.S. 1 (1976) found (FEC) Commissioners not appointed in accordance with the Appointments Clause are insulated unlawfully from oversight by the President who, is vested with the executive power, to hold executive officers accountable by removing them from office.

8 GOOD CAUSE PROTECTION Butz v. Economou, 438 U.S. 478, (1978). Removing good cause protection upon ALJ removal undermines adjudicatory role and ability to exercise independent judgment, free from pressures by the parties or other officials within the agency. But, can t have any restriction on ALJ removal that would infringe on President s authority.

9 RESTRICTION IMPERMISSIBLE Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd.,561 U.S. 477 (2010) found reasonable restrictions on the removal of inferior officers OK because they don t unduly infringe upon the President s exercise of the Executive power (severed for cause removal from Board) and has hinted as such in which excluded ALJs from the reach of its holding, page 507 footnote 10.

10 RESTRICTION PERMISSIBLE Wiener v. U.S., 357 U.S. 349, 353 (1958) upheld restrictions on removal of war claims commission members distinguishing between those officials whose functions are purely executive and those whose work is quasijudicial.

11 Query Are Congressional restrictions upon the President s ability to remove quasi-judicial agency adjudicators likely to interfere with the President s ability to perform his executive duties. See Morrison v. Olson, 487 U.S. 654, (1988). (For cause on removal of Independent Counsel by Attorney General upheld).

12 WHY IS THE APPOINTMENTS CLAUSE IMPORTANT? Designed to preserve political accountability relative to important Government assignments. Edmond v. United States, 520 U.S. 651, 663 (1997).

13 CURRENT STATUS OF ALJs Employees, not inferior officers. See 5 C.F.R DOJ s position in the pending litigation.

14 WHAT HAS SCOTUS SAID? Ramspeck v. Fed. Trial Examiners Conference, 345 U.S. 128 (1953). Special class of semi-independent subordinate hearing officers and classified as Civil Service employees. Not a constitutionally protected position. Neither the 10 th Circuit nor the D.C. Circuit discussed Ramspeck at length.

15 DEFINITION OF EMPLOYEE Lesser functionaries subordinate to the officers of the United States, and do not need to be appointed in accordance with the Clause. Buckley v. Valeo, 424 U.S. 1, 126 n.162 (1976).

16 CURRENT LAW OF ALJ APPOINTMENTS Under 5 U.S.C. 3105, [e]ach agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title....

17 CURRENT LAW OF ALJ APPOINTMENTS, CONT. Under 5 C.F.R , [a]n agency may appoint an individual to an administrative law judge position only with prior approval of OPM, except when it makes its selection from the list of eligibles provided by OPM. If found to be inferior officers may the principal appointing official be constrained by OPM s requirements?

18 Admin Conf. of the US (ACUS) 57 Fed. Reg ,60 (12/29/92) [APA] contemplated impartial factfinders, with substantive experience in the adjudications over which they preside, who would be insulated from the investigative and prosecutorial efforts of employing agencies through protections [in] hiring, salary, and tenure, as well as separation-of-functions requirements.

19 ACUS, Cont. The decisions of such impartial factfinders were made subject to broad review by agency heads to ensure that the accountable appointee at the top of each agency has control over the policymaking for which the agency has responsibility. See 5 U.S.C. 557 (b).

20 INFERIOR OFFICERS Inferior officers are officers that exercise significant authority and are directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate. Edmond v. United States, 520 U.S. 651, (1997).

21 EXAMPLES OF INFERIOR OFFICERS (1) those charged with the administration and enforcement of the public law, Buckley v. Valeo, 424 U.S. at 139; (2) those granted significant authority, Buckley at 126; (3) those with responsibility for conducting civil litigation in the courts of the US, id.; (4) those who hold an office, US v. Germaine, 99 US 508, 510 (1879), created by regs or statute. US v. Mouat, 124 US 303, 307(1888).

22 INFERIOR OFFICER DEFINITION IN BANDIMERE (1) whether the position was established by law; (5 U.S.C. 556, 557) (2) whether the duties, salary, and means of appointment are specified by statute; 5 (U.S.C. 5372), and, (3) whether the position exercises significant authority in carrying out important functions. (See 5 U.S.C. 556 (c)(1-11)).

23 LANDRY Applied the three factors listed above to FDIC ALJs but found they are employees because of a fourth factor: FDIC ALJs do not have the ability to render a final decision, only recommend. FDIC Board of Directors issues all final decisions.

24 LUCIA Consistent with Landry, the DC Circuit found SEC ALJs are not inferior officers because their initial decisions become final only when the Commission issues a finality order.

25 ALJs and the Appointments Clause Supreme Court Review?

26 THREE RELEVANT CIRCUIT COURT CASES STATUS/UPDATE (1) Lucia v. SEC Lucia has filed a cert petition for Supreme Court review of the D.C. Circuit s holding that the ALJs are not officers. The government has requested a second extension of time to file its response, with a current deadline of October 25. (2) SEC v. Bandimere The Tenth Circuit decided not to grant en banc review of the court s officer holding. The Govt filed a cert petition for review on September 29. The petition was unusual, asking the Court to grant review in Lucia rather than in Bandimere if it grants review at all. (3) Burgess v. FDIC On 9/7/2017, the Fifth Circuit issued a stay of an FDIC order based on the likelihood that the FDIC s ALJs are officers.

27 Will the Supreme Court take the case? (1) Circuit Split: direct conflict between the 10th and D.C. Circuits [and now, through its stay, the 5th Circuit has weighed in on the side of the 10th] (2) Important Issue: Federal appeals courts have found aspects of a important government position to be unconstitutional. Arguably, the Court should want to address this. (3) Timing? Would the Court let the issue percolate until the Fifth Circuit takes final action? (4) Vehicle? Consolidated case?

28 How might the Supreme Court rule? --Perhaps on the narrowest grounds? --Leave in place the significant authority standard of Buckley. --Address whether final decision-making authority is a required factor for officer status under the general Buckley standard as further interpreted in Freytag. --The Question Presented raised by the Lucia petition is direct, giving the Court several options for how to answer the constitutional question (Are SEC ALJs officers of the United States?).

29 How Might the Supreme Court Rule (slide 2) Alternative approaches to defining officer beyond Freytag/Buckley, referenced in various briefs: (1) Statutory Argument by Amicus in Lucia (2) The Dept. of Justice Office of Legal Counsel s 2007 Memo (3) Founding Era History

30 How might the Supreme Court rule (slide 3) Will the removal concerns raised in Free Enterprise Fund influence the Court s consideration of ALJ appointments issues if the Supreme Court grants cert? If the Court ever were to conclude that ALJs are officers, who should appoint ALJs? The SEC already has the potential statutory authority to appoint its ALJs. 15 U.S.C. 78d(b)(1).

31 RECENT CASES The D.C. Cir. in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) and Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016) [ALJ as employee]. The 10 th Cir. in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) [ALJ as inferior officer] The 5 th Cir. in Burgess v. FDIC, No (Sept. 7, 2017) The Fed. Cir. In Helman v. DVA, No (May 9, 2017)

32 ACTIVITY IN OTHER CIRCUITS Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Bennett v. SEC, 844 F.3d 174 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016). Dismissed for failure to exhaust.

33 ABA PANEL OCTOBER 20, 2017 Presentation by: MARK A. PERRY Partner, Gibson, Dunn & Crutcher Lead Counsel, Lucia v. SEC, No (U.S. 2017)

34 Who are officers? Buckley (U.S. 1976): An Officer is any official who exercis[es] significant authority pursuant to federal law Freytag (U.S. 1991): Tax Court judges who take testimony, conduct trials, rule on evidence, enforce discovery orders Edmond (U.S. 1997): military appellate judges whose decisions are subject to discretionary review

35 Who are Employees? Buckley (U.S. 1976): Employees are lesser functionaries subordinate to officers of the United States Bufford (U.S. 1890): merchant appraiser with no general functions, nor any employment which has any duration as to time and who acts only occasionally and temporarily Germaine (U.S. 1879): civil surgeons with only occasional and intermittent duties who take[] no oath and are not paid through regular appropriation

36

37

38 Freytag v. CIR, 501 U.S. 868 (1991) Special Trial Judge appointed by Chief Judge is inferior officer. Appointment must conform to Appointments Clause. Courts of Law not limited to Art. III courts. Special Trial Judge exercises independent authority of Court. Has contempt powers to enforce compliance.

39 POWERS OF U.S. ALJs AS PER 5 U.S.C. 556 (c) 1. Administer oaths and affirmations; 2. Issue subpoenas authorized by law; 3. Rule on offers of proof and receive relevant evidence; 4. Take depositions or have depositions taken when the ends of justice would be served; 5. Regulate the course of the hearing.

40 POWERS OF U.S. ALJs, Cont. 6. Hold conferences for the settlement or simplification of the issues by consent of the parties or by the use of alternative means of dispute resolution as provided in subchapter IV of this chapter; 7., et al. - Inform the parties as to the availability of one or more alternative means of dispute resolution, and encourage use of such methods;

41 EMPLOYEE OR INFERIOR OFFICER? Does the APA give the ALJ authority to bind the agency? See 5 U.S.C. 557(b). If the ALJ has no independent authority to bind the agency, is the ALJ an inferior officer?

42 Remedies if ALJs are Found to be Inferior Officers By Chief ALJ Walter Brudzinski And Prof. Kent Barnett

43 FUTURE CONSIDERATIONS If are found to be inferior officers, what happens to cases previously decided?

44 Ryder v. U.S. 515 U.S. 177 (1995) Edmond v. U.S. 520 U.S. 651 (1997)

45 MILITARY JUSTICE Court Martial Judges (Military) Intermediate Courts of Criminal Appeals (Military and Civilian) Court of Appeals for the Armed Forces (Civilian)

46 DE FACTO OFFICER DOCTRINE Confers validity upon acts performed by a person acting under color of official title even though it is later discovered that legality of that person s appointment or election to office is deficient. Ryder, 515 U.S. at 180. Doctrine protects public by ensuring orderly government despite technical defects in title to office. Id. Cert. granted.

47 RYDER One who makes a timely challenge to the constitutionality of the appointment of an officer who adjudicates his case is entitled to a decision on the merits and appropriate relief. Id. at 183. Petitioner is entitled to a hearing before a properly appointed panel... [t]he judgment is reversed, and the case is remanded for proceedings consistent with this opinion.

48 POST-RYDER The Secretary of Transportation issued a memo adopting the DOT General Counsel s earlier assignment of judges to the CG Court of Criminal Appeals (formerly the CG Court of Military Review addressed in Ryder) as judicial appointments of my own.

49 Edmond v. U.S. 520 U.S. 651 (1997) Secretary of Transportation's appointment of the judges was proper.

50 IF ALJS ARE INFERIOR OFFICERS... Going forward: Agency fix sufficient? (5 U.S.C. 3105) Congressional fix necessary? For final cases: Res judiciata? For pending cases: Waiver? Harmless error? De Facto Officer and De Facto Validity Doctrines? Stays? Retroactive appointments?

51

52 No. IN THE Supreme Court of the United States RAYMOND J. LUCIA AND RAYMOND J. LUCIA COMPANIES, INC., v. SECURITIES AND EXCHANGE COMMISSION, Petitioners, Respondent. On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The District Of Columbia Circuit PETITION FOR A WRIT OF CERTIORARI MARK A. PERRY Counsel of Record JASON NEAL KELLAM M. CONOVER SHANNON U. HAN RYAN N. WATZEL GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C (202) mperry@gibsondunn.com Counsel for Petitioners

53 QUESTION PRESENTED Whether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause.

54 ii PARTIES TO THE PROCEEDING AND RULE 29.6 STATEMENT All parties to the proceeding are named in the caption. Pursuant to this Court s Rule 29.6, undersigned counsel state that petitioner Raymond J. Lucia Companies, Inc. has no parent corporation, and no publicly held company holds 10 percent or more of its stock.

55 iii TABLE OF CONTENTS Page OPINIONS BELOW... 1 JURISDICTION... 1 CONSTITUTIONAL, STATUTORY, AND REGULATORY PROVISIONS INVOLVED... 1 STATEMENT... 2 REASONS FOR GRANTING THE PETITION... 9 I. SEC ALJS ARE OFFICERS OF THE UNITED STATES II. THERE IS A DIRECT AND ACKNOWLEDGED CIRCUIT SPLIT ON THE QUESTION PRESENTED A. The D.C. Circuit Wrongly Concluded That SEC ALJs Are Mere Employees B. The Tenth Circuit Correctly Held That SEC ALJs Are Officers III. THIS CASE IS THE IDEAL VEHICLE TO RESOLVE THE QUESTION PRESENTED CONCLUSION... 36

56 iv TABLE OF APPENDICES Page APPENDIX A: Order and Judgment of the En Banc United States Court of Appeals for the District of Columbia Circuit (June 26, 2017)... 1a APPENDIX B: Panel Opinion of the United States Court of Appeals for the District of Columbia Circuit (Aug. 9, 2016)... 3a APPENDIX C: Opinion and Order of the Securities and Exchange Commission (Sept. 3, 2015)... 37a APPENDIX D: Dissenting Opinion of Commissioners Gallagher and Piwowar of the Securities and Exchange Commission (Oct. 2, 2015) a APPENDIX E: Initial Decision on Remand of the Administrative Law Judge (Dec. 6, 2013) a APPENDIX F: Order of the Securities and Exchange Commission Remanding the Case for Issuance of an Initial Decision (Aug. 8, 2013) a APPENDIX G: Order of the United States Court of Appeals for the District of Columbia Circuit Granting Rehearing En Banc (Feb. 16, 2017) a

57 v TABLE OF APPENDICES (continued) Page APPENDIX H: Constitutional, Statutory, and Regulatory Provisions Involved a U.S. Const. art. II, sec a 5 U.S.C a 5 U.S.C a 5 U.S.C a 5 U.S.C a 10 U.S.C a 15 U.S.C. 77u a 15 U.S.C. 78d a 15 U.S.C. 78v a 15 U.S.C. 80a a 15 U.S.C. 80b a 26 U.S.C. 7443A a Administrative Procedure Act, Pub. L. No , 60 Stat. 237 (1946) a 17 C.F.R a 17 C.F.R a

58 vi TABLE OF APPENDICES (continued) Page APPENDIX H (continued): 17 C.F.R a 17 C.F.R a 17 C.F.R a 17 C.F.R a 17 C.F.R a 17 C.F.R a 17 C.F.R a APPENDIX I: Notice of Filing on the Selection of SEC ALJs, In re Timbervest, LLC (June 4, 2015) a APPENDIX J: Related Cases Statement from En Banc Brief for Petitioners (Apr. 24, 2017) (excerpt) a APPENDIX K: Related Cases Statement from En Banc Brief for Respondent (Apr. 24, 2017) (excerpt) a

59 vii CASES TABLE OF AUTHORITIES Page(s) Alice Corp. Pty., Ltd. v. CLS Bank Int l, 134 S. Ct (2014)... 9 Auffmordt v. Hedden, 137 U.S. 310 (1890) Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016)... 2, 4, 8, 10, 16, 19, 20, 27, 28, 29, 30, 31, 32, 34 Bandimere v. SEC, 855 F.3d 1128 (10th Cir. 2017)... 8, 34 Buckley v. Valeo, 424 U.S. 1 (1976)... 2, 10, 12, 14, 27 Butz v. Economou, 438 U.S. 478 (1978) Cw. of Pennsylvania v. U.S. Dep t of HHS, 80 F.3d 796 (3d Cir. 1996) Dep t of Transp. v. Ass n of Am. R.Rs., 135 S. Ct (2015) Edmond v. United States, 520 U.S. 651 (1997)... 2, 10, 13, 23, 24, 25, 32, 33 Free Enter. Fund v. PCAOB, 561 U.S. 477 (2010)... 14, 18, 24, 27

60 viii TABLE OF AUTHORITIES (continued) CASES (continued) Page(s) Freytag v. Comm r, 501 U.S. 868 (1991)... 2, 7, 11, 13, 14, 18, 21, 27, 28, 30, 33, 34 Glidden Co. v. Zdanok, 370 U.S. 530 (1962) Go-Bart Importing Co. v. United States, 282 U.S. 344 (1931)... 12, 22, 24 Ex parte Hennen, 38 U.S. (13 Pet.) 230 (1839) ICC v. Brimson, 154 U.S. 447 (1894) Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)... 6, 20, 21, 22 Myers v. United States, 272 U.S. 52 (1926) NLRB v. SW Gen., Inc., 137 S. Ct. 929 (2017) Ramspeck v. Fed. Trial Exam rs Conference, 345 U.S. 128 (1953)... 25, 26 Rice v. Ames, 180 U.S. 371 (1901)... 12

61 ix TABLE OF AUTHORITIES (continued) CASES (continued) Page(s) Ryder v. United States, 515 U.S. 177 (1995)... 13, 24 Saad v. SEC, 718 F.3d 904 (D.C. Cir. 2013) SEC v. Chenery Corp., 318 U.S. 80 (1943) Ex parte Siebold, 100 U.S. 371 (1880) United States v. Allred, 155 U.S. 591 (1895)... 12, 22, 24 United States v. Germaine, 99 U.S. 508 (1879)... 11, 26 United States v. Hartwell, 73 U.S. (6 Wall.) 385 (1868) United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33 (1952) United States v. Moore, 95 U.S. 760 (1878) United States v. Perkins, 116 U.S. 483 (1886) Weiss v. United States, 510 U.S. 163 (1994)... 13, 22, 24

62 x TABLE OF AUTHORITIES (continued) CONSTITUTIONAL PROVISIONS Page(s) U.S. Const., art. II, 2, cl , 10, 25 STATUTES 5 U.S.C , 14, 28 5 U.S.C , 14, 17, 28 5 U.S.C U.S.C , 14, 28 5 U.S.C , 14, U.S.C U.S.C U.S.C. 77u... 3, 14, U.S.C. 78d U.S.C. 78d , 4, U.S.C. 78u U.S.C. 78u U.S.C. 78v... 3, 14, U.S.C. 78y U.S.C. 80a , 14, 26

63 xi TABLE OF AUTHORITIES (continued) STATUTES (continued) Page(s) 15 U.S.C. 80b U.S.C. 80b , 14, U.S.C. 7443A U.S.C U.S.C U.S.C Administrative Procedure Act, Pub. L. No , 60 Stat. 237 (1946) REGULATIONS 17 C.F.R , 15, 16, C.F.R C.F.R , 15, C.F.R C.F.R , C.F.R C.F.R , 15, C.F.R C.F.R

64 xii TABLE OF AUTHORITIES (continued) REGULATIONS (continued) Page(s) 17 C.F.R C.F.R C.F.R , C.F.R , C.F.R , C.F.R , C.F.R , C.F.R C.F.R C.F.R , C.F.R C.F.R C.F.R C.F.R , C.F.R , 16, 17, C.F.R , C.F.R , 17

65 xiii TABLE OF AUTHORITIES (continued) RULES Page(s) D.C. Cir. R. 35(d)... 9 OTHER AUTHORITIES Administrative Procedure Act, Promotion of Hearing Examiners, 41 Op. Att y Gen. 74 (1951) In re Alchemy Ventures, Inc., Exchange Act Release No. 70,708, 2013 WL (Oct. 17, 2013) In re Bandimere, Securities Act Release No. 9,972, 2015 WL (Oct. 29, 2015)... 27, 29 Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797 (2013) In re Bellows, Exchange Act Release No. 40, WL (Sept. 8, 1998) Br. in Opp., Landry v. FDIC, No (U.S. Aug. 28, 2000), 2000 WL , 23 In re Bridge, Securities Act Release No. 9,068, 2009 WL (Sept. 29, 2009)... 17

66 xiv TABLE OF AUTHORITIES (continued) OTHER AUTHORITIES (continued) Page(s) In re Clawson, Exchange Act Release No. 48,143, 2003 WL (July 9, 2003) DOJ, Office of Legal Counsel, 19 Jean Eaglesham, SEC Wins With In-House Judges, Wall. St. J. (May 6, 2015) Samuel Johnson, A Dictionary of the English Language (6th ed. 1785) Sarah N. Lynch, SEC Judge Who Took on the Big Four Known for Bold Moves, Reuters (Feb. 3, 2014) Jennifer L. Mascott, Who Are Officers of the United States?, 70 Stan. L. Rev. (forthcoming 2017) Officers of the U.S. Within the Meaning of the Appointments Clause, 31 Op. O.L.C. 73 (2007) Oral Argument, Raymond J. Lucia Cos., Inc. v. SEC, 2017 WL (D.C. Cir. June 26, 2017) (en banc) (No ), 9

67 xv TABLE OF AUTHORITIES (continued) OTHER AUTHORITIES (continued) Page(s) Order, In re Pending Administrative Proceedings, Securities Act Release No. 10,365 (May 22, 2017) SEC, ALJ Initial Decisions, 16 SEC, Office of Administrative Law Judges, 18 SEC, SEC Announces Arrival of New Administrative Law Judge Cameron Elliot, / htm (Apr. 25, 2011) U.S. Br., Free Enter. Fund v. PCAOB, No (U.S. Oct. 13, 2009), 2009 WL Noah Webster, An American Dictionary of the English Language (1828)... 10

68 PETITION FOR A WRIT OF CERTIORARI Petitioners Raymond J. Lucia and Raymond J. Lucia Companies, Inc. respectfully petition for a writ of certiorari to review the judgment of the United States Court of Appeals for the District of Columbia Circuit. OPINIONS BELOW The per curiam order of the en banc court of appeals, denying the petition for review by an equally divided court (Pet. App. 1a-2a), is available at 2017 WL The panel s opinion (Pet. App. 3a- 36a) is reported at 832 F.3d 277. The opinion and order of the Commission (Pet. App. 37a-109a) are available at Exchange Act Release No. 73,857, 2015 WL ; an interim remand order (Pet. App. 238a- 243a) is unreported. The relevant initial decision of the administrative law judge (Pet. App. 115a-237a) is available at Initial Decision Release No. 495, 2013 WL JURISDICTION The judgment of the court of appeals was entered on June 26, Pet. App. 1a. This Court has jurisdiction under 28 U.S.C. 1254(1). CONSTITUTIONAL, STATUTORY, AND REGULATORY PROVISIONS INVOLVED The Appointments Clause as well as pertinent statutory and regulatory provisions are reproduced in the Appendix at 247a-294a.

69 2 STATEMENT Administrative law judges of the Securities and Exchange Commission preside over trial-like adversarial hearings, during which they take testimony, rule on the admissibility of evidence, and enforce compliance with their orders. This Court has ruled that non-article III adjudicators who exercise such discretionary powers are Officers of the United States who must be appointed pursuant to the Appointments Clause. Freytag v. Comm r, 501 U.S. 868, (1991). In this case, however, a three-judge panel of the D.C. Circuit ruled that SEC ALJs are mere employees who are not subject to the Appointments Clause. Pet. App. 21a. The Tenth Circuit expressly disagreed with that decision, ruling that SEC ALJs are Officers of the United States within the meaning of the Appointments Clause. Bandimere v. SEC, 844 F.3d 1168, 1170 (10th Cir. 2016). The D.C. Circuit subsequently granted en banc rehearing, but reached a 5-5 deadlock leaving the panel decision intact and the circuit split intractable. 1. Long before the advent of the modern administrative state, the Framers understood that curbing abuses of executive power requires carefully cabining the prerogative to appoint those who wield it. Edmond v. United States, 520 U.S. 651, (1997). In prescribing the exclusive means of appointing any Office[r] of the United States, U.S. Const., art. II, 2, cl. 2, the Appointments Clause preserves the Constitution s structural integrity by ensuring that officials invested with significant federal authority remain accountable to political force and the will of the people. Freytag, 501 U.S. at 878, 884; see also Buckley v. Valeo, 424 U.S. 1, 126 (1976) (per curiam).

70 3 Congress has charged the SEC with executing and enforcing the federal securities laws, 15 U.S.C. 78d(a), including the Investment Advisers Act of 1940, id. 80b-9. Congress authorized the Commission to delegate any of its functions except rulemaking to administrative law judge[s]. Id. 78d- 1(a). When the Commission initiates an enforcement action, it can either sue in federal court or commence an administrative proceeding. See id. 78u, 78u-2, 78v. Where the Commission elects to commence an administrative proceeding, an ALJ with delegated authority normally presides over the hearing. See 17 C.F.R In establishing this statutory scheme, Congress repeatedly referred to SEC ALJs as officers of the Commission, 15 U.S.C. 77u, 78v, 80a-40, 80b-12; set forth their duties and salary by law, see 5 U.S.C (duties), 5372(b) (salary); and prescribed that the agency shall appoint [its] administrative law judges, 5 U.S.C (emphasis added) a manner of appointment that, if followed, would comport with the Appointments Clause. The Commission, in turn, has deemed its ALJs hearing officer[s] and delegated to those officer[s] the authority to do all things necessary and appropriate to discharge their duties. 17 C.F.R That authority is extensive and includes the powers to oversee hearings and discovery, rule on motions (including summary disposition), enter default judgments, and impose or modify sanctions. See generally ibid. (non-exhaustive list of ALJs powers); see also id (default),.180 (sanctions),.230 (document production), (subpoenas and depositions),.250 (summary disposition), (evidence). SEC ALJs also rule on the admissibility of evidence,

71 4 take testimony, and make credibility findings, to which the Commission defers absent overwhelming evidence to the contrary. Pet. App. 19a. The Commission acknowledged in this case that ALJ fact-finding plays a vital role in the agency s decision-making process. Id. 241a. At the conclusion of an administrative hearing, SEC ALJs enter an initial decision, 17 C.F.R (a)(1), that can and almost always does become final, id (d)(2). Although the Commission retain[s] a discretionary right to review any action by an ALJ, whether sua sponte or upon a petition for review, 15 U.S.C. 78d-1(b), [i]f the right to exercise such review is declined or not timely sought, the ALJ s action is deemed the action of the Commission, id. 78d-1(c). About 90 percent of ALJ decisions are not reviewed by the Commission, see Bandimere, 844 F.3d at 1180 n.25; in such cases, the Commission will issue an order that the decision has become final, 17 C.F.R (d)(2). It is undisputed that, if SEC ALJs are constitutional Officers, then the current procedure for their selection does not comply with the Appointments Clause. Pet. App. 9a-10a. SEC ALJs are not appointed by the Commission as a whole, but rather selected by SEC staff from a pool of candidates identified by the Office of Personnel Management. Id. 295a- 297a (providing details of how SEC ALJs are selected). 2. Petitioner Raymond J. Lucia, formerly the sole owner of petitioner Raymond J. Lucia Companies, Inc., is an investment professional who until this proceeding had an unblemished record spanning nearly forty years. See Pet. App. 34a; 119a-120a; 233a. In free seminars for potential clients (at which

72 5 no securities were offered or sold), he promoted a retirement strategy colorfully named Buckets of Money, which advocated a diversified portfolio from which, in retirement, investors would liquidate lowerrisk investments first to give riskier investments time to grow. Id. 23a; 127a-129a. Mr. Lucia used a slideshow that compared fictional investors following his strategy with investors following other strategies in hypothetical scenarios. Pet. App. 23a; 130a-132a. Two examples, which the slides described as backtests, were based partly on historical data, such as stock returns, and partly on assumptions for other variables, such as inflation and real-estate rates of return. Both Mr. Lucia (orally) and the slides (in writing) repeatedly disclosed this use of assumptions, and the slides included dozens of disclaimers that the examples were hypothetical. Id. 24a-29a; 43a n.10; 45a n.14; 76a-77a. Before Mr. Lucia publicly distributed the slideshow, supervising broker-dealers repeatedly approved the slides, and Commission staff had reviewed a similar version and none had raised any concern that the slides were misleading. See id. 84a. 3. In 2012, the Commission charged petitioners with violating the anti-fraud provisions of the Investment Advisers Act of 1940 and SEC rules. Pet. App. 7a-8a. After the Commission elected to proceed administratively rather than in federal court, ALJ Cameron Elliot presided over a trial-like hearing at which witnesses testified and were cross-examined, documents were introduced into evidence, and objections were made and ruled upon. After Judge Elliot issued an initial decision, the Commission remanded for further factual findings, id. 239a, because they

73 6 were a matter of considerable importance to the Commission, id. 241a. On remand, Judge Elliot found that Mr. Lucia s presentations were misleading because they used the word backtest a term with no statutory or regulatory definition to describe hypotheticals that were not based solely on historical data, but included certain disclosed assumptions. Pet. App. 115a-116a; 196a-197a. Despite finding that the SEC had not proved any investor losses, Judge Elliot barred Mr. Lucia from working as an investment advisor for the rest of his life, revoked his company s registration, and assessed civil penalties. Id. 225a-233a. Because of these sanctions, Mr. Lucia is unemployable in his lifelong profession and on the verge of bankruptcy. 4. Petitioners timely sought Commission review, challenging the initial decision on the merits and arguing that Judge Elliot held office in violation of the Appointments Clause. Pet. App. 38a-40a. The Commission granted discretionary review and by a 3-2 vote affirmed in relevant part. Ibid.; id. 110a. On the merits, the Commission majority sustained Judge Elliot s finding that the presentations were misleading because a backtest must use historical data whereas petitioners hypotheticals relied in part on assumptions. Pet. App. 66a-69a. Relying on Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), the Commission majority further concluded that SEC ALJs are not subject to the requirements of the Appointments Clause, Pet. App. 86a, because it is the Commission s issuance of a finality order that makes [an ALJ s] decision effective and final, id. 90a. In the SEC s only written dissent of 2015, Commissioners Gallagher and Piwowar sharply disagreed

74 7 on the merits. See Pet. App. 110a-114a. The dissenters explained that the majority had create[d] from whole cloth specific requirements for advertisements that include the word backtest, and then applied to petitioners a new rule deeming it misleading if a backtest fails to use actual historical rates even if the slideshow presentation specifically discloses the use of assumed rates for certain components. Id. 111a. The dissenters also noted that Article III courts should decide the Appointments Clause issue. Id. 113a. 5. A three-judge panel of the D.C. Circuit denied a timely petition for review. Pet. App. 4a. In addition to sustaining the Commission s decision on the merits, id. 21a-36a, the panel rejected petitioners Appointments Clause challenge. The panel stated that, under the D.C. Circuit s 2-1 decision in Landry, the constitutional analysis begins, and ends, with whether Commission ALJs issue final decisions of the Commission. Pet. App. 13a. Petitioners argued both that Landry s approach was inconsistent with Freytag, which rejected the argument that adjudicators may be deemed employees because they lack authority to enter a final decision, 501 U.S. at 881, and that applying Landry here would be inconsistent with Edmond s holding that certain military appellate judges were Officers even though their decisions were subject to discretionary review. See Pet. App. 13a. But the panel summarily responded that this court has rejected that argument, and Landry is the law of the circuit. Ibid. Relying solely on Landry, the panel held that SEC ALJs are not Officers because their decisions are subject to discretionary Commission review and, therefore, are not independently final. Pet. App. 13a-18a.

75 8 The panel concluded that the Commission has retained full decision-making powers in every case because an ALJ s initial decision becomes final when, and only when, the Commission issues [a] finality order. Id. 15a. Petitioners timely filed a petition for rehearing en banc, arguing that the panel decision could not be reconciled with this Court s Appointments Clause jurisprudence. Petitioners also pointed out that, in opposing certiorari in Landry, the government had defended Landry as limited to one particular agency, see Br. in Opp. 7, Landry v. FDIC, No (U.S. Aug. 28, 2000), 2000 WL ( Landry BIO ), but reneged on that promise in this case by arguing that Landry resolved the Appointments Clause question for all ALJs. While that petition was pending, the Tenth Circuit ruled that SEC ALJs are Officers of the United States who must be appointed pursuant to the Appointments Clause. Bandimere, 844 F.3d at 1179, The Tenth Circuit majority expressly disagreed with the D.C. Circuit s reasoning: Landry place[s] undue weight on final decision-making authority. Id. at As Judge Briscoe explained, [t]he critical difference between the [Bandimere] majority and Landry and Lucia is that the majority recognizes that Freytag does not make final decision-making authority the sine qua non of inferior Officer status. Id. at 1189 (concurring opinion). The government filed a petition for rehearing that was transmitted to all the judges of the court who are in regular active service and then, after Justice Gorsuch s confirmation, denied by a 9-2 vote. Bandimere v. SEC, 855 F.3d 1128 (10th Cir. 2017).

76 9 In light of these conflicting decisions, the D.C. Circuit granted rehearing en banc to resolve two questions: (1) Is [Judge Elliot] an inferior officer rather than an employee for the purposes of the Appointments Clause of Article II of the Constitution? ; and (2) Should the court overrule [Landry]? Pet. App. 245a. Under the D.C. Circuit s rules, a grant of en banc rehearing vacates the panel s judgment but ordinarily not its opinion. D.C. Cir. R. 35(d). The ten judges comprising the en banc court heard argument on May 24, Hear Oral Argument, Raymond J. Lucia Cos., Inc. v. SEC, 2017 WL (D.C. Cir. June 26, 2017) (en banc) (No ), (all Internet sites last visited July 17, 2017). A month later, the court issued a brief per curiam order and judgment stating that the petition for review was denied by an equally divided court. Pet. App. 1a-2a (citing D.C. Cir. R. 35(d)). REASONS FOR GRANTING THE PETITION The D.C. Circuit which hears more petitions for review of SEC action than any other court of appeals granted en banc rehearing to decide whether SEC ALJs are constitutional Officers, and then deadlocked 5-5 on that question, confirming that this Court s review is required. Cf. Alice Corp. Pty., Ltd. v. CLS Bank Int l, 134 S. Ct. 2347, (2014) (granting review after en banc court of appeals failed to produce majority opinion resolving recurring issue). Moreover, the en banc court s inability to resolve the Appointments Clause issue leaves in place a square and acknowledged conflict between the panel decision in this case, which held that SEC ALJs are mere employees, and the Tenth Circuit s contrary holding that SEC ALJs are Officers of the United States. Compare

77 10 Pet. App. 21a with Bandimere v. SEC, 844 F.3d 1168, 1188 (10th Cir. 2016). Only this Court can resolve this conflict. This case cleanly presents the important and recurring question whether SEC ALJs are Officers who must be appointed pursuant to the Appointments Clause. I. SEC ALJS ARE OFFICERS OF THE UNITED STATES This Court s precedents make clear that the Appointments Clause s purposefully broad category of Officers includes SEC ALJs because they exercise significant discretion in conducting trials, making evidentiary and other rulings that shape the administrative record, and issuing initial decisions that become final in 90 percent of cases. A.1. This Court has consistently applied a simple, expansive definition of Officer : Every official whose position is established by Law and who exercises significant authority pursuant to the laws of the United States is an Officer of the United States. Buckley v. Valeo, 424 U.S. 1, 126, 132 (1976) (per curiam) (quoting U.S. Const. art. II, 2, cl. 2). Unless their selection is elsewhere provided for in the Constitution as with the President all officers of the United States who meet these criteria are to be appointed in accordance with the Clause. Id. at 132. Buckley s broad definition of Officer makes perfect sense of the Clause s text. See, e.g., 2 Samuel Johnson, A Dictionary of the English Language, s.v. officer (6th ed. 1785) ( A man employed by the publick ); 2 Noah Webster, An American Dictionary of the English Language, s.v. officer (1828) (similar). And it is pivotal to the structural safeguar[d] the text provides. Edmond v. United States, 520 U.S. 651, 659

78 11 (1997). The Framers viewed the power of appointment to offices as the most insidious and powerful weapon of eighteenth century despotism. Freytag v. Comm r, 501 U.S. 868, 883 (1991) (citation omitted). They understood that by limiting the appointment power to those who were readily identifiable, they could ensure that those who wielded it were accountable to political force and the will of the people. Id. at 884. The Clause s restrictions thus preserv[e] the Constitution s structural integrity by preventing the diffusion of the appointment power. Id. at 878. The Court s modern definition of Officer reflects two centuries of decisions holding a wide range of officials to be subject to the Clause including: district-court clerks, Ex parte Hennen, 38 U.S. (13 Pet.) 230, 258 (1839); a clerk to an assistant treasurer in Boston, United States v. Hartwell, 73 U.S. (6 Wall.) 385, (1868); engineers and assistant surgeons, United States v. Perkins, 116 U.S. 483, 484 (1886); United States v. Moore, 95 U.S. 760, 762 (1878); thousands of clerks in the Departments of the Treasury, Interior and the othe[r] departments, United States v. Germaine, 99 U.S. 508, 511 (1879), responsible for the records, books, and papers appertaining to the office, Hennen, 38 U.S. (13 Pet.) at 259; judges of election and federal marshals, Ex parte Siebold, 100 U.S. 371, (1880); commissioners of the circuit courts who t[ook] bail for the appearance of persons

79 12 charged with crime, United States v. Allred, 155 U.S. 591, 594 (1895); extradition commissioners, Rice v. Ames, 180 U.S. 371, 378 (1901); district-court commissioners, Go-Bart Importing Co. v. United States, 282 U.S. 344, (1931); and U.S. attorneys, Myers v. United States, 272 U.S. 52, 159 (1926). Only individuals with no general functions, nor any employment which has any duration as to time, whose posts lack tenure, duration, continuing emolument, or continuous duties, and who ac[t] only occasionally and temporarily have been held by this Court to fall outside the Clause. Auffmordt v. Hedden, 137 U.S. 310, 327 (1890); see also Buckley, 424 U.S. at 126 n.162 (employees are lesser functionaries subordinate to Officers). 2. This Court has never held that a federal adjudicator is a mere employee, while holding that many quasi-judicial officials including clerks, commissioners, and non-article III judges are Officers. See generally Jennifer L. Mascott, Who Are Officers of the United States?, 70 Stan. L. Rev. (forthcoming 2017) (draft at Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797, , (2013). For example, court commissioners (the predecessors of today s magistrate judges) are constitutional Officers. Go-Bart, 282 U.S. at ; Allred, 155 U.S. at 594. There is no difference of constitutional magnitude between magistrate judges and administrative law judges. The critical decision is Freytag, in which this Court held that special trial judges of the U.S. Tax

80 13 Court are Officers. 501 U.S. at Although STJs could make final decisions in some cases, in other cases (including Freytag itself) they lacked final decision-making power and could issue only proposed opinions, which the Tax Court was free to accept or reject. Ibid. Freytag unanimously held that, even in such cases, STJs acted as Officers because they exercised significant discretion in performing important functions specifically, tak[ing] testimony, conduct[ing] trials, rul[ing] on the admissibility of evidence, and enforc[ing] compliance with discovery orders. Id. at ; accord id. at 901 (Scalia, J., concurring in part and concurring in the judgment). This Court has held that military judges, too, are Officers based on their significant adjudicatory duties. In Weiss v. United States, 510 U.S. 163 (1994), the Court explained that military judges are Officers because of the authority and responsibilities [they] possess, which include ruling on procedural and legal issues and adjudicating offenses under the Uniform Code of Military Justice. Id. at ; see also Ryder v. United States, 515 U.S. 177, (1995). This Court s decision in Edmond likewise recognized that intermediate appellate military judges are Officers, in part because they independently weigh the evidence, judge the credibility of witnesses, and determine controverted questions of fact. 520 U.S. at 662 (quoting 10 U.S.C. 866(c)). That the judges ha[d] no power to render a final decision on their own was relevant only to whether they were inferior officers or principal officers. Id. at B. Under these principles and precedents, SEC ALJs are Officers subject to the Appointments Clause. It is not disputed that SEC ALJs hold offices established by law, or that they exercise authority

81 14 including ruling on the admissibility of evidence, taking testimony, and conducting trials previously deemed sufficiently significant to confer Officer status. Freytag, 501 U.S. at This Court need go no further to conclude that SEC ALJs are Officers. Like the special trial judges in Freytag, SEC ALJs duties, salary, and means of appointment all are specified by statute, 501 U.S. at 881; see 5 U.S.C , 3105, Congress in fact referred to SEC ALJs as officers in the securities laws. 15 U.S.C. 77u ( [a]ll hearings may be held before the Commission or an officer or officers of the Commission designated by it (emphases added)); see id. 78v, 80a-40, 80b-12 (same). Federal law accordingly provides that the agency here, the Commission shall appoint administrative law judges. 5 U.S.C (emphasis added); see Free Enter. Fund v. PCAOB, 561 U.S. 477, (2010) (SEC Commissioners acting as a body constitute a Head of Department under the Clause). The SEC has never explained why the Commission itself does not or could not appoint its ALJs. SEC ALJs also exercis[e] significant authority pursuant to the laws of the United States, Freytag, 501 U.S. at 881 (quoting Buckley, 424 U.S. at 126), entrusted to them by the federal securities laws and the Commission. That authority includes the power to conduc[t] hearings in proceedings instituted by the Commission, and to do all things necessary and appropriate to discharge that function. 17 C.F.R Specific duties include: amending charging documents, id (d)(2); entering orders of default, id ;

82 15 consolidating proceedings, id (a); [a]dminister[ing] oaths and affirmations, id (a)(1), (a); [i]ssu[ing] subpoenas, id (a)(2), (b); ordering depositions and acting as the deposition officer, id ; ordering production of evidence and regulating document production, id (b),.230,.232; issuing protective orders, id ; [r]ul[ing] upon motions, including for summary disposition, id (a)(7), (h),.250; rejecting filings for procedural noncompliance, id (b); granting extensions of time and stays, id ; [h]old[ing] pre-hearing conferences and requir[ing] attendance at such conferences, id (a)(6), (e),.221(b); ordering prehearing submissions, id (a); [r]egulat[ing] the course of [the] hearing, id (a)(5), (d); receiving relevant evidence and ruling upon admissibility, id (c); [r]ul[ing] on offers of proof, id (a)(3), (c); [e]xamin[ing] witnesses, id (a)(4);

83 16 regulating the scope of cross-examination, id ; regulating the conduct of the parties and their counsel, id (d); and imposing sanctions for contemptuous conduct, id (a). These are adjudicatory functions that, under Freytag, reflect Officer status. Bandimere, 844 F.3d at 1187 ( STJs and ALJs closely resemble one another where it counts ). To be sure, ALJs cannot impose fines or imprisonment for contempt (although they can impose other sanctions against contumacious litigants or attorneys), but that is true of most administrative agency officials. See ICC v. Brimson, 154 U.S. 447, (1894). Indeed, the statute that grants the Tax Court contempt power, 26 U.S.C. 7456(c), does not grant STJs the same power. And this Court has never hinted that contempt power is even relevant to Officer status. In addition to performing the same functions found significant in Freytag (and then some), the SEC ALJ, following a hearing, prepare[s] an initial decision containing the conclusions as to the factual and legal issues presented. 17 C.F.R (a)(8), (i),.141(b),.360(a). Although parties may petition for review of the ALJ s initial decision by the Commission, or the Commission may review the decision sua sponte, see id (a), review of an ALJ decision is the exception: In approximately 90 percent of cases, no such further review is conducted. See Bandimere, 844 F.3d at 1180 n.25; SEC, ALJ Initial Decisions, Review often is not sought, and even when requested it is not always granted. See 17 C.F.R (b)(2)

84 17 (the Commission can decline to review any [ALJ] decision, except in limited circumstances not pertinent here); see also, e.g., In re Bellows, Exchange Act Release No. 40,411, 1998 WL (Sept. 8, 1998) (declining such review). SEC ALJs also have power to issue default orders that are immediately judicially enforceable without any SEC review. In re Alchemy Ventures, Inc., Exchange Act Release No. 70,708, 2013 WL , at *4 (Oct. 17, 2013). If no timely petition for review is filed or if the Commission declines review, the ALJ s initial decision by statute shall, for all purposes, including appeal or review thereof, be deemed the action of the Commission. 15 U.S.C. 78d-1(c); accord 5 U.S.C. 557(b) (ALJs initial decisions automatically become final without further proceedings absent further review). In such cases, the Commission s regulations provide that it will issue an order that the [ALJ s] decision has become final. 17 C.F.R (a)(1),.360(d)(2). The finality order is non-discretionary and issues as a matter of course after 42 days when no petition for review has been filed. See id (d)(2),.410(b),.411(c). On the relatively rare occasions the Commission does review an ALJ s initial decision, the Commission does not review the decision anew, but defers to the ALJ s credibility determinations and factual findings. See In re Clawson, Exchange Act Release No. 48,143, 2003 WL , at *2 (July 9, 2003) ( We accept [an SEC ALJ s] credibility finding, absent overwhelming evidence to the contrary (emphasis added)); In re Bridge, Securities Act Release No. 9,068, 2009 WL , at *18 n.75 (Sept. 29, 2009) (similar). As the Commission emphasized in this case, SEC ALJs play a vital role in the adjudicative process, as they are

85 18 in the best position to make findings of fact and resolve any conflicts in the evidence. Pet. App. 241a (citation omitted). Judge Elliot is the only adjudicator in this case who saw and heard the witnesses testify, who reviewed all the evidence, and who shaped the record through evidentiary and other rulings. See, e.g., id. 193a (finding an Enforcement Division witness credible after noting that evidence concerning a false claim brought by that witness had previously been excluded). The authority of SEC ALJs mirrors that of the STJs in Freytag (as well as the military judges in Weiss and Edmond). Indeed, the SEC itself represents to the public that its ALJs perform comparable functions to federal district judges. SEC, Office of Administrative Law Judges, (last modified Jan. 26, 2017) (ALJs conduct public hearings in a manner similar to non-jury trials in the federal district courts ); see also SEC, SEC Announces Arrival of New Administrative Law Judge Cameron Elliot, (Apr. 25, 2011). This Court has similarly observed that the role of the modern administrative law judge is functionally comparable to that of a judge. Butz v. Economou, 438 U.S. 478, 513 (1978). A number of Justices, in fact, have previously indicated that ALJs in general are Officers. See Free Enter. Fund, 561 U.S. at 542 (Breyer, J., joined by Stevens, Ginsburg, and Sotomayor, JJ., dissenting); Freytag, 501 U.S. at 910 (Scalia, J., joined by O Connor, Kennedy, and Souter, JJ., concurring in part and concurring in the judgment). Until recently, the Executive Branch agreed that officials with the authority of ALJs are Officers. The Office of Legal Counsel responsible for providing

86 19 authoritative legal advice for the Executive Branch (DOJ, Office of Legal Counsel, opined that an Office[r] of the United States is one who possesses delegated sovereign authority to act in the first instance, whether or not that act may be subject to direction or review by superior officers. Officers of the U.S. Within the Meaning of the Appointments Clause, 31 Op. O.L.C. 73, 95 (2007) (emphasis added). That opinion has never been withdrawn or disavowed by the President or the Attorney General, and it is flatly contrary to the D.C. Circuit s finality requirement and the SEC s litigating position in this case. It makes clear that [n]either Buckley nor early authority supports [a] restriction of Officer status to exclude those who act only at the direction of other Officers. Id. at 93 (citation omitted). Under this Court s established (and unbroken) line of Appointments Clause jurisprudence, SEC ALJs are Officers of the United States within the meaning of the Clause. II. THERE IS A DIRECT AND ACKNOWLEDGED CIRCUIT SPLIT ON THE QUESTION PRESENTED Two courts of appeals have now applied this body of precedent to reach conflicting decisions on whether SEC ALJs are Officers of the United States who must be appointed pursuant to the Appointments Clause. The D.C. Circuit panel answered that question in the negative, while the Tenth Circuit answered it in the affirmative. The question presented is binary; one of these two decisions must be wrong. Indeed, at each step in the analysis the Tenth Circuit squarely disagree[d] with the panel decision left in place by the en banc court s order. Bandimere, 844 F.3d at Moreover, the judgment in this case denying the peti-

87 20 tion for review is irreconcilable with the Tenth Circuit s judgment granting a petition for review based on the identical constitutional challenge. Compare Pet. App. 2a with Bandimere, 844 F.3d at Certiorari is necessary to resolve this dispute between the circuits on an important and recurring constitutional issue. A. The D.C. Circuit Wrongly Concluded That SEC ALJs Are Mere Employees The panel decision never addressed the many important, and discretionary, duties exercised by SEC ALJs discussed above. Instead, it held that under Landry its analysis begins, and ends, with whether SEC ALJs can issue unreviewable final decisions of the Commission, and concluded that they cannot. Pet. App. 13a; see also Bandimere, 844 F.3d at 1182 ( The D.C. Circuit followed Landry and considered dispositive SEC ALJs supposed inability to render final decisions ). Confining the Appointments Clause s reach to those who have the power of final decision, however, contravenes this Court s teaching in Freytag. At minimum, confining the Clause s reach to those who can issue unreviewable final decisions cannot be reconciled with this Court s teaching in Edmond. 1. The panel decision uncritically adopted its finality requirement from the D.C. Circuit s divided decision in Landry, Pet. App. 13a, which held that inferior Officers must have the power of final decision, 204 F.3d at This Court s precedents make clear, though, that authority to issue final decisions is a criterion that distinguishes inferior Officers from principal Officers, not a sine qua non for the Clause to apply at all.

88 21 Freytag expressly rejected the argument that inability to make final decisions takes officials outside the Appointments Clause. 501 U.S. at In many cases, including Freytag itself, STJs lack[ed] authority to enter a final decision, and merely assist[ed] other officials in taking the evidence and preparing the proposed findings and opinion. Ibid. That did not matter, Freytag held, and deeming those judges mere employees on that basis would ignor[e] the significance of the duties and discretion that [the] judges possess namely, the fact that they perform[ed] more than ministerial tasks, including tak[ing] testimony, conduct[ing] trials, and rul[ing] on the admissibility of evidence. Ibid. To be sure, the Freytag Court went on to hold in the alternative that [e]ven if the duties of special trial judges were not as significant as we have found them to be, our conclusion would be unchanged because STJs could issue final decisions in other cases. 501 U.S. at 882 (emphasis added). But as Judge Randolph cogently explained, that conclusion was [t]he conclusion the Court had reached in the preceding paragraphs namely, that although special trial judges may not render final decisions, they are nevertheless inferior officers of the United States. Landry, 204 F.3d at 1142 (concurring opinion); see Freytag, 501 U.S. at 881. The power of final decision in Freytag is thus clearly designated as an alternative holding. Landry, 204 F.3d at 1142 (Randolph, J., concurring). While authority to make final decisions may be sufficient to trigger the Appointments Clause, the Appointments Clause hardly makes such authority necessary and under this Court s precedent it is not. The panel in this case summarily rejected petitioners argument that Landry s contrary reasoning

89 22 was inconsistent with Freytag, stating that Landry is the law of the circuit. Pet. App. 13a. But Landry was wrongly decided, as Judge Randolph pointed out at the time. See 204 F.3d at (concurring opinion). Time and again, this Court has held that adjudicators who lacked final decision-making authority nevertheless were constitutional Officers. See, e.g., Go-Bart, 282 U.S. at 352, 354 ( All the [Officer s] acts were preparatory and preliminary to a consideration of the charge by a grand jury and the final disposition of the case in the district court ); Allred, 155 U.S. at 595 (commissioners are subject to the orders and directions of the court appointing them ); accord Weiss, 510 U.S. at 168 ( No sentence imposed [by the Officer] becomes final until it is approved by the officer who convened the court-martial ). Since these officials all are Officers notwithstanding their lack of final decision-making authority, such authority cannot be the lynchpin of Officer status as the court below made it. 2. The panel decision not only erroneously confined the Appointments Clause to officials with final decision-making authority, but also implausibly extended that requirement to exempt officials who can and do issue final decisions, so long as those decisions are subject to discretionary review. Pet. App. 14a-18a. That holding cannot be reconciled with this Court s decision in Edmond. Edmond held that judges on the Coast Guard Court of Criminal Appeals were inferior Officers because their decisions were always subject to further review by principal Officers namely, the Court of Appeals for the Armed Forces whether by sua sponte order of the Judge Advocate General or where the CAAF exercised its discretion to grant review.

90 U.S. at ; see 10 U.S.C. 867(a). The lack of power to render a final decision unless permitted to do so by other Executive officers, Edmond held, is the defining feature of inferior officers, distinguishing them from the principal officer[s] that supervise them. 520 U.S. at 663, 665; see also Dep t of Transp. v. Ass n of Am. R.Rs., 135 S. Ct. 1225, 1239 (2015) (Alito, J., concurring) ( Inferior officers can do many things, but nothing final should appear in the Federal Register unless a Presidential appointee has at least signed off on it ). As the United States has represented to this Court on at least two occasions, Edmond makes clear [that] inability to render a final decision is indicative of inferior officer status. U.S. Br. 32 n.10, Free Enter. Fund v. PCAOB, No (U.S. Oct. 13, 2009), 2009 WL (emphasis omitted); see also Landry BIO 12 n.4 ( In concluding that judges on the Coast Guard Court of Criminal Appeals are inferior rather than principal officers, the Court in Edmond observed that those judges have no power to render a final decision on behalf of the United States unless permitted to do so by other Executive officers ). The panel nevertheless held that SEC ALJs are employees, not Officers, precisely because their decisions are subject to discretionary review. That holding cannot be squared with Edmond or, indeed, any other decision where this Court held that an official who cannot render an unreviewable final decision of the Executive Branch is nevertheless an Officer:

91 24 Case Adjudicator Officer? Unreviewable Final Decisions? Go-Bart, 282 U.S. 344 U.S. Commissioners Yes. 282 U.S. at 352. No. 282 U.S. at 354. Allred, 155 U.S. 591 U.S. Circuit Commissioners Yes. 155 U.S. at No. 155 U.S. at 595. Weiss, 510 U.S. 163 Military judges Yes. 510 U.S. at 169. No. 510 U.S. at 168. Ryder, 515 U.S. 177 Judges of the Coast Guard Court of Military Review Yes. 515 U.S. at No. Edmond, 520 U.S. at 653, 665. Edmond, 520 U.S. 651 Judges of the Coast Guard Court of Criminal Appeals Yes. 520 U.S. at No. 520 U.S. at 665. Free Enter. Fund, 561 U.S. 477 Public Company Accounting Oversight Board Yes. 561 U.S. at 486. No. 537 F.3d at 673. Even federal magistrates who wield wide authority and plainly are Officers under Buckley would not be Officers under the D.C. Circuit s test because they cannot (absent consent) render final decisions on the merits. See 28 U.S.C. 636(b)(1)(A).

92 25 In short, the D.C. Circuit s finality rule conflates a prerequisite for principal-officer status with a gateway requirement for the Appointments Clause to apply at all. As Edmond explained, the very term inferior officer connotes a relationship with some higher ranking officer ; their work is directed and supervised by such principal officer[s]. 520 U.S. at ; see also NLRB v. SW Gen., Inc., 137 S. Ct. 929, 947 (2017) (Thomas, J., concurring) ( a principal officer is one who has no superior other than the President ). The Appointments Clause by its terms covers both types of Officers, simply allowing (at Congress s option) a different appointment method for the latter. U.S. Const. art. II, 2, cl. 2. The D.C. Circuit s finality rule, however, effectively confines the Clause to only principal Officers, i.e., those with power to make unreviewable final decisions. If the decision below were allowed to stand, it would erase the category of inferior Officers from the text of our Constitution. 3. The panel decision noted that Congress provid[ed] Civil Service protections to ALJs in response to concerns their actions were influenced by a desire to curry favor with agency heads. Pet. App. 21a (citing Ramspeck v. Fed. Trial Exam rs Conference, 345 U.S. 128, 132 & n.3, 142 (1953)). The effectiveness of this structure might be questioned given that in roughly 50 decisions before this one, Judge Elliot had not once ruled against the Commission. See Sarah N. Lynch, SEC Judge Who Took on the Big Four Known for Bold Moves, Reuters (Feb. 3, 2014), To be sure, the Commission exercised its power of discretionary review and (by a 3-2 margin) affirmed his decision; but that establishes only that Judge Elliot is an inferior rather than a principal Officer. See Edmond, 520 U.S. at 665.

93 26 In any event, individuals with civil service protections may be Officers. See, e.g., Cw. of Pennsylvania v. U.S. Dep t of HHS, 80 F.3d 796, , 806 (3d Cir. 1996). Indeed, contemporaneously with Ramspeck the Attorney General opined that hearing examiners the predecessors to ALJs were inferior officers even though their pay, promotion, and termination were controlled by the Civil Service Commission. Administrative Procedure Act, Promotion of Hearing Examiners, 41 Op. Att y Gen. 74, (1951). As Ramspeck explained, Congress intended to make hearing examiners a special class of semi-independent subordinate hearing officers. 345 U.S. at 132 (emphasis added) (citation omitted). When Congress originally enacted the Administrative Procedure Act of 1946, it thus referred to hearing examiners as officers nine times. See Administrative Procedure Act, Pub. L. No , 60 Stat. 237 (1946). And in enacting the securities laws, Congress referred to ALJs as officers, prescribing that [a]ll hearings may be held before the Commission or an officer or officers of the Commission. 15 U.S.C. 77u (emphases added); see also id. 78v, 80a-40, 80b-12 (same). The panel here said that there is no indication Congress intended these officers to be synonymous with Officers of the United States under the Appointments Clause. Pet. App. 21a. But this Court has squarely rejected this very argument. Germaine, 99 U.S. at 510 (if Congress s use of officers had meant others than officers as defined by the Constitution, words to that effect would be used, as servant, agent, person in the service or employment of the government ). The panel s decision runs headlong into this precedent and the rest of this Court s Appointments Clause jurisprudence.

94 27 B. The Tenth Circuit Correctly Held That SEC ALJs Are Officers The Tenth Circuit has held on materially indistinguishable facts that SEC ALJs are inferior officers who must be appointed in conformity with the Appointments Clause. Bandimere, 844 F.3d at The result in Bandimere shows that there is a conflict among the circuits that requires this Court s intervention; its reasoning points up the errors made by the panel in this case. 1. Bandimere, like this case, concerned an SEC administrative action resulting in a lifetime industry bar and civil penalties. 844 F.3d at In affirming the ALJ s initial decision on discretionary review, ibid., the Commission again relied on the D.C. Circuit s decision in Landry and concluded that SEC ALJs are not Officers within the meaning of the Appointments Clause. In re Bandimere, Securities Act Release No. 9,972, 2015 WL , at *19-21 (Oct. 29, 2015). The Tenth Circuit granted the petition for review and vacated the Commission s decision, holding that SEC ALJs are inferior Officers because they carry out important functions, Bandimere, 844 F.3d at 1188 (quoting Freytag, 501 at 882), and exercis[e] significant authority pursuant to the laws of the United States, ibid. (quoting Buckley, 424 U.S. at 126). Bandimere recognized that, although this Court has not stated a specific test for inferior officer status the term s sweep is unusually broad. Id. at 1174 (quoting Free Enter. Fund, 561 U.S. at 539 (Breyer, J., dissenting)). Drawing from its review of the 150-year history of this Court s cases contain[ing] examples of inferior officers, the Tenth Circuit concluded that Freytag controls the result. Id. at The

95 28 court gleaned three characteristics of inferior Officers from Freytag: (1) their position is established by Law ; (2) their duties, salary, and means of appointment are specified by statute ; and (3) they exercise significant discretion in carrying out important functions. Id. at 1179 (alterations in original) (quoting Freytag, 501 U.S. at ). As Bandimere explained, [t]hose three characteristics exist with respect to SEC ALJs. 844 F.3d at First, both the position and the delegated powers of SEC ALJs are established by law. Ibid. (citing 5 U.S.C. 556(b)(3); 17 C.F.R ). Second, various statutes set forth the duties, salary, and means of appointment of SEC ALJs. Ibid. (citing 5 U.S.C (duties); id. 5372(b) (salary); id. 1302, 3105 (means of appointment)). Third, SEC ALJs exercise significant discretion in performing important functions commensurate with the STJs functions described in Freytag. Ibid. [B]oth perform similar adjudicative functions, the majority reasoned: They take testimony, conduct trials, rule on admissibility of evidence, and have the power to enforce compliance with discovery orders. Id. at 1181 & n.30 (quoting Freytag, 501 U.S. at ). Bandimere also spell[ed] out even more of [the] discretionary functions exercised by SEC ALJs. 844 F.3d at 1181 n.30. For example, SEC ALJs can shape the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, receiving evidence, ruling on dispositive and procedural motions, issuing subpoenas, and presiding over trial-like hearings. Id. at (footnotes omitted). SEC ALJs also make credibility findings to which the SEC affords considerable weight during agency review,

96 29 enter default judgments and otherwise steer the outcome of proceedings by holding and requiring attendance at settlement conferences, and issue initial decisions that declare respondents liable and impose sanctions. Id. at (footnotes omitted) (quoting Bandimere, 2015 WL , at *15 n.83). Because SEC ALJs closely resemble the STJs described in Freytag, the Tenth Circuit held that SEC ALJs are inferior officers who must be appointed as the Constitution commands. Id. at Judge Briscoe concurred, fully join[ing] the majority, and writing separately to explain that an Appointments Clause challenge requires a position-byposition analysis of the authority Congress by law and a particular executive agency by rule and practice has delegated to its personnel. Bandimere, 844 F.3d at 1189 (concurring opinion). [S]weeping pronouncements on the constitutional status of other ALJs, Judge Briscoe continued, would be both unnecessary and inappropriate. Ibid. This was a pointed response to Judge McKay s dissent, which consisted in large part of such sweeping pronouncements. See id. at 1194, (dissenting opinion). 2. The Tenth Circuit acknowledged that it was address[ing] the same question, yet reaching the opposite conclusion, as the panel decision in this case. Bandimere, 844 F.3d at The Tenth Circuit expressly rejected both Landry s finality requirement for Officer status and the panel s extension of that requirement in this case. a. Whereas the D.C. Circuit held that under Landry, the constitutional analysis begins, and ends, with whether SEC ALJs issue final decisions of the Commission, Pet. App. 13a, Bandimere expressly rejected the final authority argument that

97 30 the D.C. Circuit relied on in Landry and Lucia. 844 F.3d at 1186; see also id. at 1182 ( We disagree that final decision-making power is dispositive to the question at hand ). Beginning and ending the Appointments Clause analysis with an official s final decision-making authority, the Tenth Circuit explained, would ignor[e] the significance of the duties and discretion that [the official] possess[es], id. at 1175 (quoting Freytag, 501 U.S. at 881), and place undue weight on a factor that, though perhaps relevant in determining whether a public servant exercises significant authority, is not a predicate for inferior officer status, id. at (emphases added). The Tenth Circuit thus refused to repeat the D.C. Circuit s mistakes in mak[ing] final decision-making authority the sine qua non of inferior Officer status, and failing to perform a complete Appointments Clause analysis. Id. at 1189 (Briscoe, J., concurring). Bandimere squarely rejected, too, the D.C. Circuit s interpretation of Freytag s holding established in Landry and reaffirmed in this case. [P]roperly read, the Tenth Circuit concluded, Freytag did not place exceptional stress on final decision-making power. 844 F.3d at Indeed, properly read, Freytag said the opposite that STJs are inferior officers even though the ultimate decisional authority in cases under section 7443A(b)(4) rests with the Tax Court judges. Id. at 1182 (citation omitted) (discussing 26 U.S.C. 7443A(b)(4)). Bandimere explained that Freytag s discussion of STJs final decision-making authority in certain cases did not modify or supplant its holding that STJs were inferior officers based on the significance of [their] duties and discretion. Id. at 1183 (alteration in original) (quoting Freytag, 501 U.S. at 881). Rather, that discussion only reaffirm[ed] that the duties of the STJs are sufficiently

98 31 significant to make them inferior officers. Id. at Whereas the D.C. Circuit assumed that every inferior officer must possess final decision-making power under Freytag, the Tenth Circuit concluded that Freytag s holding undermines that contention. Id. at Cementing its disagreement with the decision below, Bandimere added that this Court has neither equated significant authority with final decisionmaking power in Buckley, Freytag, Edmond, or elsewhere, nor indicated that each of the officers it has deemed inferior possesses that power. 844 F.3d at In short, the Tenth Circuit resoundingly rejected the D.C. Circuit s exclusive focus on final decision-making authority as having no footing in this Court s teachings. b. Recognizing that the issue was not dispositive to [its] holding because it was not dispositive to Freytag s holding, Bandimere, 844 F.3d at 1184 n.36, the Tenth Circuit nonetheless concluded that SEC ALJs exercise significant authority in part because their initial decisions can and do become final without plenary agency review, as indeed 90 percent do, id. at 1180 n.25 (emphasis added). The court explained that the agency has no duty, based on the regulation s plain language, to review an unchallenged initial decision before entering an order stating the decision is final. Ibid. (citing 17 C.F.R (d)(2)). In fact, Bandimere noted multiple paths for an initial decision to become final without plenary agency review. Id. at 1184 n.36. In the absence of a petition for review, for example, the agency may simply enter an order stating an initial decision is final without engaging in any review. Ibid. (emphasis added) (citing 17 C.F.R (d)(2)).

99 32 The Tenth Circuit added that, at any rate, under Edmond [t]he SEC s power to review its ALJs does not transform them into lesser functionaries ; [r]ather, it shows the ALJs are inferior officers subordinate to the SEC commissioners. Bandimere, 844 F.3d at 1188 (citing Edmond, 520 U.S. at 663). Judge Briscoe thus observed that, even under the D.C. Circuit s truncated Freytag analysis, [Bandimere] correctly holds that the SEC s ALJs are inferior Officers. Id. at 1194 (concurring opinion). * * * As things stand today, SEC ALJs are Officers in the Tenth Circuit but not in the D.C. Circuit. That is an untenable state of affairs given that Congress has authorized review of SEC final decisions either in the D.C. Circuit or in the regional circuit encompassing the petitioner s residence or principal place of business. 15 U.S.C. 78y(a)(1). The SEC itself has acknowledged that the situation is unsustainable, staying all administrative proceedings that are appealable to the Tenth Circuit. Order, In re Pending Administrative Proceedings, Securities Act Release No. 10,365 (May 22, 2017). The Commission, courts, and parties to SEC proceedings all need to know sooner rather than later whether or not SEC ALJs are Officers who must be appointed pursuant to the Appointments Clause. III. THIS CASE IS THE IDEAL VEHICLE TO RESOLVE THE QUESTION PRESENTED This case cleanly presents the important and recurring question whether SEC ALJs are Officers of the United States. There are no potential vehicle problems.

100 33 The Judiciary has a strong interest in maintaining the constitutional plan of separation of powers. Freytag, 501 U.S. at 879 (quoting Glidden Co. v. Zdanok, 370 U.S. 530, 536 (1962)). That interest is especially strong in the context of the Appointments Clause, which is among the significant structural safeguards of the constitutional scheme. Edmond, 520 U.S. at 659. So important are the structural interests implicated by an Appointments Clause challenge that they can be considered on appeal whether or not they were ruled upon below. Freytag, 501 U.S. at Because these important structural interests warrant review even where such a challenge has been waived, see id. at , they manifestly warrant review here, where the issue was properly presented in and actually decided by both the agency and the reviewing court. In part because of the changes wrought by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission has dramatically increased both the number and proportion of enforcement actions brought in administrative hearings before its ALJs. In 2014, for example, [t]he SEC brought more than four out of five of its enforcement actions before its ALJs, up from less than half of them a decade earlier. Jean Eaglesham, SEC Wins With In-House Judges, Wall. St. J. (May 6, 2015). Moreover, the Commission agrees that SEC ALJs fact-finding and credibility determinations are a matter of considerable importance to the Commission s ability to undertake review. Pet. App. 241a. The constitutionality of proceedings before SEC ALJs thus is important to the functioning of the Commission s decision-making apparatus as well as to the rights of individuals and entities compelled to defend themselves in administrative hearings.

101 34 The question presented is also tightly focused. It is undisputed that the five SEC ALJs are not appointed by the President, the head of a department, or a court of law. Pet. App. 87a. It is also undisputed that the only appropriate remedy for an Appointments Clause violation here is vacatur of the challenged orders. See Freytag, 501 U.S. at 879; United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 38 (1952) (defect in the appointment of Officer is an irregularity which would invalidate a resulting order ). The Commission has not argued that the Appointments Clause violation could be excused under a harmless-error, ratification, de facto officer, or any other similar doctrine. See Pet. App. 9a-10a. And because this case involves a petition for review of agency action, the decision and order under review can be defended only on the grounds articulated by the agency, and the Commission cannot raise any new grounds for the first time in this Court. See SEC v. Chenery Corp., 318 U.S. 80, 87 (1943). For example, the constitutionality of ALJ removal procedures and the status of ALJs in other agencies have never been raised by any party in this case (or in Bandimere) and thus these are not arguments available to the government here. But see Bandimere, 844 F.3d at (McKay, J., dissenting) (speculating on these issues without benefit of briefing by any party); see also Bandimere v. SEC, 855 F.3d 1128, (10th Cir. 2017) (Lucero, J., dissenting from denial of rehearing en banc) (similar). The constitutionality of SEC ALJs has been raised in a number of pending proceedings. Only two of those this case and Bandimere have reached appellate decisions on the merits of the Appointments Clause question. The same question has also been raised in at least 13 other cases pending in the courts of appeals and 30 proceedings pending before the

102 35 Commission. See Pet. App. 300a-304a. These figures will only continue to increase until this Court settles the issue. The question presented by this petition whether SEC ALJs are Officers of the United States admits of only one answer. This dispute will grow no more ripe, and the issue no better developed, with time. This Court should grant certiorari now, in this case. * * * * The SEC s regime of unaccountable adjudicators has left countless casualties on the field not least Ray Lucia. After an unblemished career spanning forty years, Mr. Lucia has been rendered unemployable in his profession and on the verge of bankruptcy even though his free presentations, at which no securities were offered or sold and which concededly caused no investor harm, did not remotely amount to intentional fraud. The ALJ who presided over this case imposed on him the securities industry equivalent of capital punishment. Saad v. SEC, 718 F.3d 904, 906 (D.C. Cir. 2013) (citation omitted). The Framers designed the Appointments Clause precisely to prevent such abuses of power by unaccountable officials. This Court needs to decide, now, whether SEC ALJs are Officers of the United States. * Although the government could petition for a writ of certiorari in Bandimere, this case presents a better vehicle for the resolution of the Appointments Clause issue because (unlike Bandimere) this case raises no potential recusal issues. The constitutional issue also was more fully briefed in this case: At the en banc stage, petitioners and the government filed replacement briefs devoted solely to the Appointments Clause issue, and six amicus briefs were filed supporting petitioners.

103 36 CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. MARK A. PERRY Counsel of Record JASON NEAL KELLAM M. CONOVER SHANNON U. HAN RYAN N. WATZEL GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C (202) mperry@gibsondunn.com Counsel for Petitioners July 21, 2017

104

105 No. In the Supreme Court of the United States SECURITIES AND EXCHANGE COMMISSION, PETITIONER v. DAVID F. BANDIMERE ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT PETITION FOR A WRIT OF CERTIORARI ROBERT B. STEBBINS General Counsel MICHAEL A. CONLEY Solicitor DOMINICK V. FREDA Assistant General Counsel LISA K. HELVIN Senior Counsel Securities and Exchange Commission Washington, D.C NOEL J. FRANCISCO Solicitor General Counsel of Record CHAD A. READLER Acting Assistant Attorney General JEFFREY B. WALL EDWIN S. KNEEDLER Deputy Solicitors General HASHIM M. MOOPPAN Deputy Assistant Attorney General ALLON KEDEM Assistant to the Solicitor General DOUGLAS N. LETTER MARK B. STERN MARK R. FREEMAN MELISSA N. PATTERSON MEGAN BARBERO DANIEL AGUILAR Attorneys Department of Justice Washington, D.C SupremeCtBriefs@usdoj.gov (202)

106 QUESTION PRESENTED Whether administrative law judges of the Securities and Exchange Commission, who act as hearing officers in administrative proceedings, are inferior officers under the Appointments Clause, U.S. Const. Art. II, 2, Cl. 2. (I)

107 TABLE OF CONTENTS Page Opinions below... 1 Jurisdiction... 1 Constitutional and statutory provisions involved... 2 Statement... 3 Argument... 7 Conclusion Appendix A Court of appeals opinion (Dec. 27, 2016)... 1a Appendix B Court of appeals judgment (Dec. 27, 2016)... 68a Appendix C SEC opinion (Oct. 29, 2015)... 70a Appendix D SEC order (Oct. 29, 2015) a Appendix E Court of appeals order (May 3, 2017) a Cases: TABLE OF AUTHORITIES Buckley v. Valeo, 424 U.S. 1 (1976)... 8 Burgess v. FDIC, No , 2017 WL (5th Cir. Sept. 7, 2017)... 9 Freytag v. Commissioner, 501 U.S. 868 (1991)... 6 Landry v. FDIC, 204 F.3d 1125 (D.C. Cir.), cert. denied, 531 U.S. 924 (2000)... 5, 7 Raymond J. Lucia Cos. v. SEC: 832 F.3d 277 (D.C. Cir. 2016), petition for cert. pending, No (filed July 21, 2017)... 7, 8, 10 No , 2017 WL (D.C. Cir. June 27, 2017)... 8 Constitution, statutes, and regulations: U.S. Const. Art. II, 2, Cl. 2 (Appointments Clause)... 2, 5, 6, 7, 8, 9 (III)

108 IV Statutes and regulations Continued: Page Investment Advisers Act of 1940, 15 U.S.C. 80b-1 et seq U.S.C. 80b-3(e) U.S.C. 80b-3(f ) U.S.C. 80b-3(k) U.S.C. 80b-13(a)... 5 Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq U.S.C. 80a-9(b) U.S.C. 80a-41(a) U.S.C. 80a-42(a)... 5 Securities Act of 1933, 15 U.S.C. 77a et seq U.S.C. 77h U.S.C. 77i(a)... 5 Securities Exchange Act of 1934, 15 U.S.C. 78a et seq U.S.C. 78d U.S.C. 78d-1(a) U.S.C. 78d(b)(1) U.S.C. 78o (2012 & Supp. III 2015) U.S.C. 78u U.S.C. 78y(a)(1) U.S.C U.S.C U.S.C , 3 17 C.F.R.: Section (a)(5)... 3 Section Section Section (d)... 4 Section

109 Regulations Continued: V Page Section (a)... 4 Section (c)... 4 Section Miscellaneous: Office of Personnel Mgmt., ALJs by Agency, administrative-law-judges/#url=aljs-by- Agency (last visited Sept. 28, 2017)... 4

110 In the Supreme Court of the United States No. SECURITIES AND EXCHANGE COMMISSION, PETITIONER v. DAVID F. BANDIMERE ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT PETITION FOR A WRIT OF CERTIORARI The Solicitor General, on behalf of the Securities and Exchange Commission, respectfully petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Tenth Circuit in this case. OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a- 67a) is reported at 844 F.3d The order of the court of appeals denying panel rehearing and rehearing en banc (App., infra, 157a-168a) is reported at 855 F.3d The decision and order of the Securities and Exchange Commission (App., infra, 70a-156a) are not yet reported but are available at 2015 WL JURISDICTION The judgment of the court of appeals was entered on December 27, A petition for rehearing was denied on May 3, 2017 (App., infra, 157a-158a). On July 24, 2017, Justice Sotomayor extended the time within which (1)

111 2 to file a petition for a writ of certiorari to and including August 31, On August 22, 2017, Justice Sotomayor further extended the time within which to file a petition for a writ of certiorari to and including September 29, The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED The Appointments Clause of the Constitution (Art. II, 2, Cl. 2) provides: [The President] shall nominate, and by 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. Section 3105 of Title 5 of the United States Code provides: Each agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title. Administrative law judges shall be assigned to cases in rotation so far as practicable, and may not perform duties inconsistent with their duties and responsibilities as administrative law judges.

112 3 STATEMENT 1. Congress has created a comprehensive scheme for the commencement, adjudication, and judicial review of proceedings brought by the Securities and Exchange Commission (SEC or Commission) to enforce the Nation s securities laws. As relevant here, the Commission is authorized under the Securities Act of 1933, 15 U.S.C. 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., and the Investment Advisers Act of 1940, 15 U.S.C. 80b-1 et seq., to address statutory violations by instituting administrative proceedings before the agency. See, e.g., 15 U.S.C. 77h-1, 78d, 78o (2012 & Supp. III 2015), 78u-3, 80a-9(b), 80a- 41(a), 80b-3(e), (f ), and (k). In an administrative enforcement proceeding, the Commission itself may preside and issue a final decision. 17 C.F.R In the alternative, Congress has authorized the Commission to delegate its functions to a division of the Commission, an individual Commissioner, an administrative law judge, or an employee or employee board. 15 U.S.C. 78d-1(a). Exercising this authority, the Commission has provided by rule that it may delegate the initial stage of conducting an enforcement proceeding to a hearing officer. 17 C.F.R The hearing officer may be an administrative law judge (ALJ) appointed under 5 U.S.C. 3105, a single Commissioner, multiple Commissioners (short of a quorum of the Commission), or any other person duly authorized to preside at a hearing. 17 C.F.R (a)(5). The Commission historically has chosen to assign ALJs to act as hearing officers in its proceedings. Under 5 U.S.C. 3105, [e]ach agency shall appoint as many

113 4 administrative law judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title, which are provisions governing agency hearings. See 5 U.S.C. 556, 557. The Commission currently employs five ALJs, which are hired through a merit-selection process administered by the Office of Personnel Management. App., infra, 15a. 1 The Commission s ALJs are selected by its Chief ALJ, subject to approval by the Commission s Office of Human Resources on the exercise of delegated authority from the Commission. See ibid.; cf. 15 U.S.C. 78d(b)(1) (Commission s authority to appoint and compensate officers, attorneys, economists, examiners, and other employees ). An ALJ who acts as a hearing officer in an SEC enforcement proceeding generally has a specified number of days in which to issue an initial decision. 17 C.F.R The ALJ s initial decision may be reviewed by the Commission on its own initiative or at the request of a party or other aggrieved person, 17 C.F.R , (c), and that review is de novo. The Commission also may take additional evidence itself, 17 C.F.R , and may make any findings or conclusions that in its judgment are proper and on the basis of the record, 17 C.F.R (a). Regardless whether a party seeks the full Commission s review of an initial decision, no sanction ordered by an ALJ may take effect unless the Commission itself issues a final order. 17 C.F.R (d). A respondent who is aggrieved by a final order of the Commission may seek judicial review of that order by 1 See Office of Personnel Mgmt., ALJs by Agency, opm.gov/services-for-agencies/administrative-law-judges/#url= ALJs-by-Agency.

114 5 filing a petition for review directly in a federal court of appeals. See 15 U.S.C. 77i(a), 78y(a)(1), 80a-42(a), 80b-13(a). 2. In 2012, the SEC initiated an administrative proceeding against respondent, alleging violations of federal securities laws. App., infra, 2a. The Commission assigned an ALJ to preside over the initial stages of the administrative proceeding. Id. at 2a-3a. The ALJ issued an initial decision concluding that respondent had violated antifraud and registration provisions of the federal securities laws by operating as an unregistered broker and by failing to disclose potentially negative facts to investors. Id. at 72a. On review of the ALJ s initial decision, the Commission conducted an independent review of the record, except with respect to those findings not challenged on appeal. App., infra, 72a. The Commission found that respondent had violated federal securities laws, and it imposed disgorgement and civil penalty sanctions. Ibid. The Commission did not accept, however, the ALJ s recommendation that respondent s future activities should be subject to an industry-wide bar, and it instead imposed a more limited bar. Id. at 143a-145a. Respondent argued to the Commission that the ALJ who had rendered the initial decision in his proceeding was acting as an inferior officer within the meaning of the Appointments Clause, U.S. Const. Art. II, 2, Cl. 2, and that the ALJ had not been properly appointed under that Clause. App., infra, 3a. The Commission rejected that argument and concluded instead that its ALJs are agency employees, not inferior officers. Citing the D.C. Circuit s analysis in Landry v. FDIC, 204 F.3d 1125, cert. denied, 531 U.S. 924 (2000), which rejected an Appointments Clause challenge to the use of

115 6 ALJs by the Federal Deposit Insurance Corporation (FDIC), the Commission concluded that SEC ALJs, because they do not render final decisions or issue findings to which the Commission is required to defer, are employees rather than constitutional officers. App., infra, 121a-128a. 3. A divided panel of the court of appeals granted respondent s petition for review and set aside the Commission s decision. App., infra, 1a-67a. The court held that the ALJ who had presided over respondent s administrative hearing had exercised powers that required appointment as an inferior Officer under the Appointments Clause. For that conclusion, the majority relied on Freytag v. Commissioner, 501 U.S. 868 (1991), which held that special trial judges of the Tax Court are inferior officers. See App., infra, 10a ( Freytag controls the result of this case. ). The majority opined that the determination in Freytag had turned not on the special trial judges authority to render final decisions of the Tax Court in certain circumstances, as the D.C. Circuit had reasoned in Landry, but rather on the significance of the authority that special trial judges exercised: in taking testimony, conducting trials, ruling on the admissibility of evidence, and enforcing compliance with discovery orders. Id. at 25a-31a. The majority concluded that SEC ALJs exercise significant discretion in performing important functions commensurate with the [special trial judges ] functions described in Freytag. Id. at 20a (quoting Freytag, 501 U.S. at 882); see id. at 20a-25a. The majority also determined that the error here is structural, such that respondent did not need to show prejudice to prevail. Id. at 24a n.31.

116 7 Judge McKay dissented. App., infra, 51a-67a. In his view, Freytag did not mandate[ ] the result proposed here. Id. at 51a. Unlike SEC ALJs, he reasoned, the special trial judges at issue in Freytag could enter final decisions in a number of cases; and even where they could not, the Tax Court was required to defer to its special trial judges findings. Id. at 58a. By contrast, in his view, SEC ALJs possess only a purely recommendatory power. Id. at 59a (quoting Landry, 204 F.3d at 1132). 4. The court of appeals denied the government s petition for rehearing. App., infra, 157a-158a. Judge Lucero, joined by Judge Moritz, dissented from the denial of rehearing en banc. Id. at 159a-168a. ARGUMENT 1. The courts of appeals are divided over the question whether administrative law judges who act as hearing officers in SEC enforcement proceedings are inferior officers who must be appointed in accordance with the Appointments Clause. In the proceeding below, a divided panel of the Tenth Circuit held that SEC ALJs are inferior officers. The D.C. Circuit reached the opposite conclusion under materially identical circumstances in Raymond J. Lucia Cos. v. SEC, 832 F.3d 277 (2016) (Lucia). In Lucia, an SEC ALJ issued an initial decision finding that Raymond Lucia and his investment advisory firm (collectively, Lucia) had violated the anti-fraud provisions of the Investment Advisers Act of F.3d at The Commission sua sponte remanded the case to the ALJ for additional findings of fact, and the ALJ issued a revised initial decision. Id. at 283. On further review, the Commission found that Lucia had violated the Investment Advisers Act and ordered various

117 8 remedies. Ibid. The Commission also rejected Lucia s contention that the ALJ who presided over the initial hearing was not properly appointed under the Appointments Clause. Ibid. A panel of the D.C. Circuit denied Lucia s petition for review, holding that the Commission s ALJs are employees, not constitutional officers, because they do not exercise significant authority in their own right. Lucia, 832 F.3d at (citing Buckley v. Valeo, 424 U.S. 1, 126 (1976) (per curiam)). The court of appeals rejected Lucia s efforts to distinguish the court s earlier decision in Landry, finding no constitutionally meaningful distinctions between the roles of SEC ALJs and the FDIC ALJs at issue in Landry. Id. at 287. The court thus concluded that SEC ALJs are not constitutional officers because the Commission s ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit. Id. at 286. The D.C. Circuit granted Lucia s petition for rehearing en banc. On June 27, 2017, the en banc court issued a per curiam judgment denying the petition for review by an equally divided vote. No , 2017 WL On July 21, 2017, Lucia filed a petition for a writ of certiorari. See Lucia v. SEC, No A number of other cases pending before the courts of appeals also include Appointments Clause challenges to SEC ALJs. 2 2 See Gonnella v. SEC, No (2d Cir. filed Oct. 7, 2016); Bennett v. SEC, Nos , (8th Cir. filed Oct. 3, 2016); J.S. Oliver Capital Mgmt. v. SEC, No (9th Cir. filed Aug. 15, 2016); Feathers v. SEC, No (9th Cir. filed Jan. 12, 2015); Bennett v. SEC, No (10th Cir. filed May 22, 2017); Timbervest v. SEC, No (D.C. Cir. filed Nov. 13, 2015);

118 9 2. The Appointments Clause question at issue in this case and in Lucia warrants review by this Court. The Court may wish, however, to consider that question in Lucia, because the government s petition for rehearing en banc in this case was filed in the court of appeals while Justice Gorsuch was a member of that court. The government s response to the certiorari petition in Lucia is currently due on October 25, The government intends to address more fully in its response to the petition in Lucia why the Court should review the Appointments Clause question presented here. We therefore respectfully request that the Court hold this petition pending its consideration of the petition in Lucia. If the Court grants the petition in Lucia, the government suggests that the Court hold the petition in this case pending the final disposition of Lucia. If the Court denies the petition in Lucia, it should deny the petition in this case as well. Young v. SEC, No (D.C. Cir. filed May 24, 2016); Riad v. SEC, No (D.C. Cir. filed Aug. 4, 2016); The Robare Grp., Ltd. v. SEC, No (D.C. Cir. filed Dec. 27, 2016). A panel of the Fifth Circuit recently granted a stay of an FDIC order in an analogous case, expressly disagreeing with the D.C. Circuit s decision in Landry and concluding that the respondent had established a likelihood of success on his claim that the ALJ who presided over his proceeding was not properly appointed under the Appointments Clause. Burgess v. FDIC, No , 2017 WL (5th Cir. Sept. 7, 2017).

119 10 CONCLUSION The petition for a writ of certiorari should be held pending this Court s consideration of the petition for a writ of certiorari in Lucia v. SEC, No , and then disposed of as appropriate. Respectfully submitted. ROBERT B. STEBBINS General Counsel MICHAEL A. CONLEY Solicitor DOMINICK V. FREDA Assistant General Counsel LISA K. HELVIN Senior Counsel Securities and Exchange Commission SEPTEMBER 2017 NOEL J. FRANCISCO Solicitor General CHAD A. READLER Acting Assistant Attorney General JEFFREY B. WALL EDWIN S. KNEEDLER Deputy Solicitors General HASHIM M. MOOPPAN Deputy Assistant Attorney General ALLON KEDEM Assistant to the Solicitor General DOUGLAS N. LETTER MARK B. STERN MARK R. FREEMAN MELISSA N. PATTERSON MEGAN BARBERO DANIEL AGUILAR Attorneys

120 APPENDIX A UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT No DAVID F. BANDIMERE, PETITIONER v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, RESPONDENT IRONRIDGE GLOBAL IV, LTD; IRONRIDGE GLOBAL PARTNERS, LLC, AMICI CURIAE [Filed: Dec. 27, 2016] PETITION FOR REVIEW OF AN ORDER OF THE SECURITIES AND EXCHANGE COMMISSION (SEC No ) Before BRISCOE, MCKAY, and MATHESON, Circuit Judges. MATHESON, Circuit Judge. When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ( ALJs ) presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made (1a)

121 2a up of more than 4 million people, 1 most of them employees. Some of them are Officers of the United States, including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, 2, cl. 2. In this case we consider whether the five ALJs working for the Securities and Exchange Commission ( SEC ) are employees or inferior officers. Based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause. Exercising jurisdiction under 15 U.S.C. 77i(a) and 78y(a)(1), we grant Mr. Bandimere s petition for review. I. BACKGROUND The SEC is a federal agency with authority to bring enforcement actions for violations of federal securities laws. 15 U.S.C. 77h-1, 78d, 78o, 78u-3. An enforcement action may be brought as a civil action in federal court or as an administrative action before an ALJ. In 2012, the SEC brought an administrative action against Mr. Bandimere, a Colorado businessman, alleging he violated various securities laws. An SEC ALJ presided over a trial-like hearing. The ALJ s initial 1 Office of Pers. Mgmt., Historical Federal Workforce Tables, The first census in 1790 counted 3.9 million inhabitants in the United States. U.S. Census Bureau, 1790 Overview, The Perma.cc links throughout this opinion archive the referenced webpages.

122 3a decision concluded Mr. Bandimere was liable, barred him from the securities industry, ordered him to cease and desist from violating securities laws, imposed civil penalties, and ordered disgorgement. David F. Bandimere, SEC Release No. 507, 2013 WL , at *61-84 (ALJ Oct. 8, 2013). The SEC reviewed the initial decision and reached a similar result in a separate opinion. David F. Bandimere, SEC Release No. 9972, 2015 WL (Oct. 29, 2015). During the SEC s review, the agency addressed Mr. Bandimere s argument that the ALJ was an inferior officer who had not been appointed under the Appointments Clause. Id. at *19. The SEC conceded the ALJ had not been constitutionally appointed, but rejected Mr. Bandimere s argument because, in its view, the ALJ was not an inferior officer. Id. at * Mr. Bandimere filed a petition for review with this court under 15 U.S.C. 77i(a) and 78y(a)(1), which allow an aggrieved party to obtain review of an SEC order in any circuit court where the party resides or has his principal place of business. In his petition, Mr. Bandimere raised his Appointments Clause argument and challenged the SEC s conclusions regarding securities fraud liability and sanctions. 2 2 Other SEC respondents have attacked the validity of SEC ALJs by filing collateral lawsuits attempting to enjoin administrative enforcement actions. Circuit courts have rejected these attempts, holding that federal courts lacked jurisdiction because the respondents had failed to raise and exhaust the argument in the administrative proceedings. See, e.g., Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015). Here, Mr. Bandimere did not file a collateral lawsuit.

123 4a II. DISCUSSION The SEC rejected Mr. Bandimere s argument that the ALJ presided over his hearing in violation of the Appointments Clause. We review the agency s conclusion on this constitutional issue de novo. Hill v. Nat l Transp. Safety Bd., 886 F.2d 1275, 1278 (10th Cir. 1989). We first explain why we must address Mr. Bandimere s constitutional argument and then address its merits. A. Constitutional Avoidance Federal courts avoid unnecessary adjudication of constitutional issues. City of Mesquite v. Aladdin s Castle, Inc., 455 U.S. 283, 294 (1982). Here, we must consider the Appointments Clause issue. In its opinion, the SEC concluded Mr. Bandimere committed two securities fraud violations and two securities registration violations. 3 In his petition for review, Mr. Bandimere challenges the SEC s findings of securities fraud liability as arbitrary and capricious, but he does not challenge the registration violations on these nonconstitutional grounds. He attacks the SEC s opinion as a whole, however, including both his securi- He instead raised his constitutional argument before the SEC, which rejected it. We therefore have jurisdiction to address the Appointments Clause issue as properly presented in Mr. Bandimere s petition for review. 3 Specifically, the SEC held him liable for (1) securities fraud under Section 17(a) of the Securities Act of 1933 ( Securities Act ), Section 10(b) of the Securities and Exchange Act of 1934 ( Exchange Act ), and 17 C.F.R b-5; (2) failure to register as a broker before selling securities under Exchange Act Section 15(a); and (3) failure to register the securities he was selling under Securities Act Sections 5(a) and (c). SEC Release No. 9972, 2015 WL , at *2, *4, *7, *17.

124 5a ties fraud and registration liability, based on the Appointments Clause. 4 Because the sole argument attacking his registration liability is constitutional, we cannot avoid the Appointments Clause question. And because resolving this question relieves Mr. Bandimere of all liability, we need not address his remaining arguments on securities fraud liability. B. Appointments Clause Overview The Appointments Clause states: [The President] shall nominate, and by 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. U.S. Const. art. II, 2, cl. 2. The Appointments Clause embodies both separation of powers and checks and balances. Ryder v. United States, 515 U.S. 177, 182 (1995) ( The Clause is a bulwark against one branch aggrandizing its power at the expense of another branch.... ). 5 By defin- 4 Mr. Bandimere s petition states, The [SEC s] Opinion must be vacated because it resulted from a process in which an improperly appointed inferior officer played an integral role. Aplt. Br. at 18; see also id. at 10, James Madison argued in Federalist Nos. 48 and 51 that checks and balances are needed to sustain a workable separation of powers. The Federalist Nos. 48 and 51, at 308, (James Madi-

125 6a ing unique roles for each branch in appointing officers, the Clause separates power. It also checks and balances the appointment authority of each branch by providing (1) the President may appoint principal officers only with Senate approval and (2) Congress may confer appointment power over inferior officers to the President, courts, or department heads but may not itself make appointments. 6 The Appointments Clause also promotes public accountability by identifying the public officials who appoint officers. Edmond v. United States, 520 U.S. 651, 660 (1997). And it prevents the diffusion of that power by restricting it to specific public officials. Ryder, 515 U.S. at 182; Freytag, 501 U.S. at 878, 883. The Framers understood... that by limiting the appointment power, they could ensure that those who son) (Clinton Rossiter ed., 1961); see also M.J.C. Vile, Constitutionalism and the Separation of Powers 153, (1967). 6 In Federalist No. 76, Alexander Hamilton explained the Senateapproval requirement would be an excellent check upon a spirit of favoritism in the President, and would tend greatly to prevent the appointment of unfit characters from State prejudice, from family connection, from personal attachment, or from a view to popularity. The Federalist No. 76, at 456 (Alexander Hamilton) (Clinton Rossiter ed., 1961). In Weiss v. United States, 510 U.S. 163 (1994), the Supreme Court stated the Framers structured an alternative appointment method for inferior officers to promote accountability and check governmental power: any decision to dispense with Presidential appointment and Senate confirmation is Congress s to make, not the President s, but Congress s authority is limited to assigning the appointing power to the highly accountable President or the heads of federal departments, or, where appropriate, to the courts of law. 510 U.S. at 187.

126 7a wielded it were accountable to political force and the will of the people. Freytag, 501 U.S. at 884. C. Inferior Officers and Freytag 1. Inferior Officers and the Supreme Court The Supreme Court has defined an officer generally as any appointee exercising significant authority pursuant to the laws of the United States. Buckley v. Valeo, 424 U.S. 1, 126 (1976) (per curiam). The term inferior officer connotes a relationship with some higher ranking officer or officers below the President: Whether one is an inferior officer depends on whether he has a superior. Edmond, 520 U.S. at Other uses of inferior in the Constitution confirm the term speaks to a hierarchical, subordinate-superior relationship. The word appears once in Article I and twice in Article III, each time describing courts inferior to the Supreme Court. U.S. Const. art. I, 8, cl. 9; id. art. III, 1; see also Akhil Reed Amar, Intratextualism, 112 Harv. L. Rev. 747, (1999) (discussing the use of inferior in Articles I, II, and III). Statements from Alexander Hamilton and James Madison also indicate inferior means subordinate. In Federalist No. 81, Hamilton described inferior courts as those subordinate to the Supreme. The Federalist No. 81, at 484 (Alexander Hamilton) (Clinton Rossiter ed., 1961). In the brief debate about the Excepting Clause at the Federal Constitutional Convention in 1787, Madison mention[ed] (as in apparent contrast to the inferior officers covered by the provision) Superior Officers. Morrison v. Olson, 487 U.S. 654, 720 (1988) (Scalia, J., dissenting) (citing 2 The Records of the Federal Convention of (M. Farrand ed., rev. ed. 1966)). He also referred to subordinate officers in contradistinction to principal officers when explaining the appointment power during the Virginia ratification convention. 3 The Debates in the Several State Conventions on the Adoption of the Federal Constitution (Jonathan Elliot ed., 2d ed. 1836); see

127 8a This description of inferior may aid in understanding the distinction between principal and inferior officers. But we are concerned here with the distinction between inferior officers and employees. Like inferior officers, employees or lesser functionaries are subordinates. Buckley, 424 U.S. at 126 n.162. Justice Breyer has provided this summary of the different ways the Supreme Court has described inferior officers: Consider the [Supreme] Court s definitions: Inferior officers are, inter alia, (1) those charged with the administration and enforcement of the public law, Buckley, 424 U.S. at 139; (2) those granted significant authority, id. at 126; (3) those with responsibility for conducting civil litigation in the courts of the United States, id. at 140; and (4) those who can be said to hold an office, United States v. Germaine, 99 U.S. 508, 510 (1879), that has been created either by regulations or by statute, United States v. Mouat, 124 U.S. 303, (1888). Free Enter. Fund v. PCAOB, 561 U.S. 477, 539 (2010) (Breyer, J., dissenting) (citation style altered and some citations omitted). The list below contains examples of inferior officers drawn from Supreme Court cases spanning more than 150 years: a district court clerk, In re Hennen, 38 U.S. (13 Pet.) 230, 258 (1839); also Tuan Samahon, Are Bankruptcy Judges Unconstitutional? An Appointments Clause Challenge, 60 Hastings L.J. 233, 251 (2008) (discussing Madison s remarks at the Virginia convention).

128 9a an assistant-surgeon, United States v. Moore, 95 U.S. 760, 762 (1877); thousands of clerks in the Departments of the Treasury, Interior, and the othe[r] departments, Germaine, 99 U.S. at 511 (1878) an election supervisor, Ex parte Siebold, 100 U.S. 371, (1879); a federal marshal, id. at 397; a cadet engineer appointed by the Secretary of the Navy, United States v. Perkins, 116 U.S. 483, (1886); a commissioner of the circuit court, United States v. Allred, 155 U.S. 591, (1895); a vice consul temporarily exercising the duties of a consul, United States v. Eaton, 169 U.S. 331, 343 (1898); extradition commissioners, Rice v. Ames, 180 U.S. 371, 378 (1901); a United States commissioner in district court proceedings, Go-Bart Importing Co. v. United States, 282 U.S. 344, (1931); a postmaster first class, Buckley, 424 U.S. at 126 (1976) (citing Myers v. United States, 272 U.S. 52 (1926)); Federal Election Commission ( FEC ) commissioners, id.; an independent counsel, Morrison v. Olson, 487 U.S. 654, 671 (1988);

129 10a Tax Court special trial judges, Freytag, 501 U.S. at (1991); and military judges, Weiss v. United States, 510 U.S. 163, 170 (1994); Edmond, 520 U.S. at 666 (1997). 8 We think these examples are relevant and instructive. Although the Supreme Court has not stated a specific test for inferior officer status, [e]fforts to define [ inferior Officers ] inevitably conclude that the term s sweep is unusually broad, Free Enter. Fund, 561 U.S. at 539 (Breyer, J., dissenting), and the Freytag opinion provides the guidance needed to decide this appeal. 2. Freytag The question in Freytag was whether the Tax Court had authority to appoint special trial judges ( STJs ) under the Appointments Clause. 501 U.S. at As a threshold matter, the Court addressed whether STJs were inferior officers or employees. Id. at That question strongly resembles the one we face here. In our view, Freytag controls the result of this case. Under the then-applicable 26 U.S.C. 7443A(b), the Tax Court could assign four categories of cases to STJs. Id. at 873. For the first three categories, 7443A(b)(1), (2), and (3), the Chief Judge [could] assign the special trial judge not only to hear and report on a case but also to decide it. Id. In other words, STJs could make final decisions in those cases. But in the fourth category, 7443A(b)(4), STJs lacked final decision- 8 See also Edmond, 520 U.S. at 661 (listing examples of inferior officers); Free Enter. Fund, 561 U.S. at 540 (Breyer, J., dissenting) (listing examples of officers).

130 11a making power: the chief judge [could] authorize the special trial judge only to hear the case and prepare proposed findings and an opinion. The actual decision then [was] rendered by a regular judge of the Tax Court. Id. The Tax Court assigned the petitioners case to the STJ under 7443A(b)(4), the fourth category, which did not allow STJs to enter final decisions. Id. at The STJ issued a proposed opinion concluding the petitioners were liable, and the Tax Court adopted it. Id. at On appeal, the petitioners argued the STJs were inferior officers under the Appointments Clause and that the chief judge of the Tax Court could not appoint them because he was not the President, a court of law, or a department head. Id. at 878. The government contended STJs were not inferior officers because they did not have authority to enter a final decision in petitioners case. Id. at 881. The Court first expressly approved prior decisions from the Tax Court and the Second Circuit that held STJs were inferior officers. Id. Both courts considered the degree of authority exercised by the special trial judges to be so significant that it was inconsistent with the classifications of lesser functionaries or employees. Id. (discussing Samuels, Kramer & Co. v. Comm r of Internal Revenue, 930 F.2d 975 (2d Cir. 9 As discussed below, Ballard v. Commissioner of Internal Revenue, 544 U.S. 40 (2005), spelled out the STJs and Tax Court judges collaborative decision-making process in which STJs and Tax Court judges jointly worked over STJs preliminary in-house drafts to produce an opinion. 544 U.S. at 42.

131 12a 1991); First W. Gov t Sec., Inc. v. Comm r of Internal Revenue, 94 T.C. 549 (1990)). 10 The Court then turned to the government s argument that the STJs were employees because they lack[ed] authority to enter a final decision under 7443A(b)(4). Id. The Court said the argument ignore[d] the significance of the duties and discretion that special trial judges possess. Id. First, the STJ position was established by Law. Id. (quoting U.S. Const. art. II, 2, cl. 2). Second, the duties, salary, and means of appointment for that office are specified by statute. Id. 10 In Samuels, the Second Circuit concluded STJs are inferior officers. 930 F.2d at 985. It stated: Although the ultimate decisional authority in cases under section 7443A(b)(4) rests with the Tax Court judges, the special trial judges do exercise a great deal of authority in such cases. The special trial judges are more than mere aids to the judges of the Tax Court. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. Contrary to the contentions of the Commissioner, the degree of authority exercised by special trial judges is significant. They exercise a great deal of discretion and perform important functions, characteristics that we find to be inconsistent with the classifications of lesser functionary or mere employee. Id. at (quoting Buckley, 424 U.S. at 126). In First Western, the Tax Court concluded STJs are inferior officers: Because [they] may be assigned any case and may enter decisions in certain cases, it follows that special trial judges exercise significant authority. 94 T.C. at 557. Although a factor, final decision-making power was not the linchpin of the Tax Court s analysis. Id. And in any event, the Freytag Court endorsed the Second Circuit s and Tax Court s analyses because they relied on the degree of authority STJs possessed. Freytag, 501 U.S. at 881.

132 13a These characteristics, the Court stated, distinguish special trial judges from special masters, who are hired by Article III courts on a temporary, episodic basis, whose positions are not established by law, and whose duties and functions are not delineated in a statute. Id. Third, STJs perform more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the [STJs] exercise significant discretion. Id. at Accordingly, the Court held STJs were inferior officers. Id. Next, the Court addressed a standing argument from the government. Id. at 882. The government had conceded STJs act as inferior officers when hearing cases under 7443A(b)(1), (2), and (3), but argued petitioners lack[ed] standing to assert the rights of taxpayers whose cases [were] assigned to [STJs] under [those three categories]. Id. The Court stated, Even if the duties of [STJs] under [ 7443A(b)(4)] were not as significant as we and the two courts have found them to be, our conclusion would be unchanged. Id. (emphasis added). The Court explained that an inferior officer does not become an employee because he or she on occasion performs duties that may be performed by an employee not subject to the Appointments Clause. Id. If a special trial judge is an inferior officer for purposes of subsections (b)(1), (2), and (3), he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed. Id. The Court thus rejected the government s standing argument as beside the point. Id.

133 14a In the end, the Freytag majority held the Tax Court was a Cour[t] of Law with authority to appoint inferior officers like the STJs. Id. at 890, 892. Justice Scalia s partial concurrence, joined by three other justices, agreed with the majority s conclusion regarding the STJs status: I agree with the Court that a special trial judge is an inferior Office[r] within the meaning of [the Appointments Clause]. Id. at 901 (Scalia, J., concurring) (first alteration in original). Thus, a unanimous Supreme Court concluded STJs were inferior officers. D. SEC ALJs The SEC conceded in its opinion that its ALJs are not appointed by the President, a court of law, or the head of a department. SEC Release No. 9972, 2015 WL , at *19. The sole question is whether SEC ALJs are inferior officers under the Appointments Clause. Under Freytag, we must consider the creation and duties of SEC ALJs to determine whether they are inferior officers. 501 U.S. at The APA created the ALJ position. 5 U.S.C. 556(b)(3); see also Mullen v. Bowen, 800 F.2d 535, 540 n.5 (6th Cir. 1986) ( [T]he ALJ s position is not a creature of administrative law; rather, it is a direct creation of Congress under the [APA]. ). Section 556 of the APA describes the duties of the presiding employe[e] at an administrative adjudication. 5 U.S.C It states, There shall preside at the taking of evidence... (1) the agency; (2) one or more members of the body which comprises the agency; or (3) one or more administrative law judges appointed under section 3105 of this title. Id. 556(b).

134 15a Under 5 U.S.C. 3105, Each agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with [5 U.S.C. 556, 557]. Agencies hire ALJs through a merit-selection process administered by the Office of Personnel Management ( OPM ), which places ALJs within the civil service (i.e., the competitive service ). 5 U.S.C. 1302; 5 C.F.R ALJ applicants must be licensed attorneys with at least seven years of litigation experience. 5 C.F.R ; Office of Pers. Mgmt., Qualification Standard for Administrative Law Judge Positions, OPM administers an exam and uses the results to rank applicants. 5 C.F.R Agencies may select an ALJ from the top three ranked candidates. 11 The SEC s Chief ALJ hires from the top three candidates subject to approval and processing by the [SEC s] Office of Human Resources. Notice of Filing at 2, Timbervest, LLC, File No , G8M2-36P3 (SEC Division of Enforcement filing in administrative enforcement action). Once hired, ALJs receive career appointments, 5 C.F.R (a), and are removable only for good cause, 5 U.S.C Their pay is detailed in 5 U.S.C The SEC currently employs five ALJs. Office of Pers. Mgmt., ALJs by Agency, 11 See Vanessa K. Burrows, Cong. Res. Serv., Administrative Law Judges: An Overview at 2 (2010), Robin J. Arzt et al., Fed. Admin. Law Judge Found., Advancing the Judicial Independence and Efficiency of the Administrative Judiciary: A Report to the President-Elect of the United States, 29 J. Nat l Ass n Admin. L. Judiciary 93, 101 (2009).

135 16a The SEC has authority to delegate any of its functions except rulemaking to its ALJs. 15 U.S.C. 78d-1(a). And SEC regulations task ALJs with conduct[ing] hearings and make them responsible for the fair and orderly conduct of the proceedings. 17 C.F.R SEC ALJs have the authority to do all things necessary and appropriate to discharge [their] duties. 17 C.F.R The table below lists examples of those duties. Duty Administer oaths and affirmations Consolidate proceedings involving a common question of law or fact Determin[e] the scope and form of evidence, rebuttal evidence, if any, and crossexamination, if any Provision(s) 5 U.S.C. 556(c)(1) 17 C.F.R (a)(1) 17 C.F.R (a) 17 C.F.R (a) 17 C.F.R Enter default judgment 17 C.F.R Examine witnesses 17 C.F.R (a)(4) Grant extensions of time or 17 C.F.R stays Hold prehearing conferences 17 C.F.R (a)(6) 12 Many of the SEC regulations refer to the duties of the hearing officer. Under 17 C.F.R (a)(5), a hearing officer includes an ALJ. This opinion applies only to SEC ALJs specifically and not to hearing officers generally.

136 17a Hold settlement conferences and require attendance of the parties Inform the parties about alternative means of dispute resolution 5 U.S.C. 556(c)(6) 5 U.S.C. 556(c)(8) 17 C.F.R (e) 5 U.S.C. 556(c)(7) 17 C.F.R (k) Issue protective orders 17 C.F.R Issue, revoke, quash, or modify subpoenas Order and regulate depositions Order and regulate document production Prepare an initial decision containing factual findings and legal conclusions, along with an appropriate order Punish contemptuous conduct by excluding a person from a deposition, hearing, or conference or by suspending a person from representing others in the proceeding 5 U.S.C. 556(c)(2) 17 C.F.R (a)(2) 17 C.F.R (b) 17 C.F.R (e) 17 C.F.R C.F.R U.S.C. 556(c)(10) 17 C.F.R (a)(8) 17 C.F.R (a) 17 C.F.R (i) 17 C.F.R C.F.R (a)

137 18a Regulate the course of the hearing and the conduct of the parties and counsel Reject deficient filings, order a party to cure deficiencies, and enter default judgment for failure to cure deficiencies Reopen any hearing prior to filing an initial decision or prior to the fixed time for the parties to file final briefs with the SEC Rule on all motions, including dispositive and procedural motions Rule on offers of proof and receive relevant evidence 5 U.S.C. 556(c)(3) Set aside, make permanent, limit, or suspend temporary sanctions the SEC issues Take depositions or have depositions taken 5 U.S.C. 556(c)(5) 17 C.F.R (a)(5) 17 C.F.R (d) 17 C.F.R (b), (c) 17 C.F.R ( j) 5 U.S.C. 556(c)(9) 17 C.F.R (a)(7) 17 C.F.R (h) 17 C.F.R C.F.R C.F.R (a)(3) 17 C.F.R (c) 17 C.F.R (b) 17 C.F.R U.S.C. 556(c)(4) E. SEC ALJs Are Inferior Officers Under Freytag Following Freytag, we conclude SEC ALJs are inferior officers under the Appointments Clause. As the SEC acknowledges, the ALJ who presided over Mr. Bandimere s hearing was not appointed by the President, a court of law, or a department head. He there-

138 19a fore held his office in conflict with the Appointments Clause when he presided over Mr. Bandimere s hearing. Freytag held that STJs were inferior officers based on three characteristics. Those three characteristics exist here: (1) the position of the SEC ALJ was established by Law, Freytag, 501 U.S. at 881 (quoting U.S. Const. art. II, 2, cl. 2); (2) the duties, salary, and means of appointment... are specified by statute, id.; and (3) SEC ALJs exercise significant discretion in carrying out... important functions, id. at 882. First, the office of the SEC ALJ was established by law. The APA established the ALJ position. 5 U.S.C. 556(b)(3). In addition, the Securities and Exchange Act of 1934 authorizes the SEC to delegate any of its functions with the exception of rulemaking to ALJs, The dissent s concern about how this opinion might affect the SEC ALJs role in rulemaking is misplaced. Dissent at 14. SEC ALJs do not have a rulemaking role: the Exchange Act does not allow the SEC to delegate rulemaking authority to its ALJs. 15 U.S.C. 78d-1(a) ( Nothing in this section shall be deemed... to authorize the delegation of the function of rule making.... ); see also Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 281 (D.C. Cir. 2016) (stating the authority to delegate [does] not extend to the [SEC s] rulemaking authority ). Other agencies ALJs rarely exercise rulemaking authority. See, e.g., Perez v. Mortg. Brokers Ass n, 135 S. Ct. 1199, 1222 n.5 (2015) (Thomas, J., concurring) ( Today,... formal rulemaking is the Yeti of administrative law. There are isolated sightings of it in the ratemaking context, but elsewhere it proves elusive. ); Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797 (2013) ( [F]ormal rulemaking is extremely rare.... ). Nevertheless, to the extent the dissent is concerned with other ALJs rulemaking authority, we do not address the issue because our sole question is whether SEC ALJs are inferior officers.

139 20a and 17 C.F.R , a regulation promulgated under the Act, gives the agency s Office of Administrative Law Judges power to conduct hearings and proceedings. See 15 U.S.C. 78d-1(a) (authorizing SEC to delegate functions to ALJs); 17 C.F.R (stating statutory basis for SEC regulations). Second, statutes set forth SEC ALJs duties, salaries, and means of appointment. 5 U.S.C (duties); id. 5372(b) (salary); id. 1302, 3105 (means of appointment). 14 SEC ALJs are not hired... on a temporary, episodic basis. Freytag, 501 U.S. at 881. They receive career appointments and can be removed only for good cause. 5 U.S.C. 7521; 5 C.F.R (a). Third, SEC ALJs exercise significant discretion in performing important functions commensurate with the STJs functions described in Freytag. SEC ALJs have authority to do all things necessary and appropriate to discharge his or her duties. 15 This includes authority to shape the administrative record by taking testimony, 16 regulating document production and depositions, 17 ruling on the admissibility of evidence, 18 receiving evidence, 19 ruling on dispositive and procedur- 14 The SEC concedes that the way it appoints its ALJs does not comply with the Appointments Clause. SEC Release No. 9972, 2015 WL at * C.F.R U.S.C. 556(b), (c)(4) C.F.R , Id. 556(c)(3); 17 C.F.R (a)(3) C.F.R (c).

140 21a al motions, 20 issuing subpoenas, 21 and presiding over trial-like hearings. 22 When presiding over trial-like hearings, SEC ALJs make credibility findings to which the SEC affords considerable weight during agency review. 23 They also have authority to issue initial decisions that declare respondents liable and impose sanctions. 24 When a respondent does not timely seek agency review, the action of [the ALJ] shall, for all purposes, 20 5 U.S.C. 556(c)(9); 17 C.F.R (a)(3), (7), (h), , U.S.C. 556(c)(2); 17 C.F.R (a)(2), (b) U.S.C. 556(b); 17 C.F.R (a). 23 SEC Release No. 9972, 2015 WL , at *15 n.83 (deferring to SEC ALJ s credibility findings in the face of conflicting testimony). The dissent argues STJs exercise significant authority because the Tax Court was required to defer to the [STJs ] factual and credibility findings unless they were clearly erroneous, Dissent at 3 (quoting Landry, 204 F.3d at 1133). But SEC ALJs credibility findings also receive deference. The SEC affords their credibility findings considerable weight and deference, Thomas C. Bridge, SEC Release No. 9068, 2009 WL , at *18 n.75 (Sept. 29, 2009), and accepts the findings absent substantial evidence to the contrary, Steven Altman, SEC Release No , 2010 WL , at *10 (Nov. 10, 2010). See also Robert Thomas Clawson, SEC Release No , 2003 WL , at *2 (July 9, 2003) (stating the SEC accepts the ALJs credibility findings absent overwhelming evidence to the contrary ). Both the Tax Court and the SEC defer to credibility findings but are not required to accept those findings if they are undermined by other evidence. Thus, SEC ALJs, like STJs, exercise significant authority in part because the SEC defers to their credibility findings U.S.C. 556(c)(10); 17 C.F.R (a)(8), (a), (i), ; see also SEC Release No. 507, 2013 WL

141 22a including appeal or review thereof, be deemed the action of the Commission. 25 Even when a respondent timely seeks agency review, the agency may decline to review initial decisions adjudicating certain categories of cases. 26 Further, SEC ALJs have power to enter default judgments 27 and otherwise steer the outcome of proceedings by holding and requiring attendance at settlement conferences. 28 They also have authority to set U.S.C. 78d-1(c). The SEC and the dissent argue the SEC ALJs do not exercise significant authority when issuing initial decisions because the agency retains a right to review the decisions de novo. But this argument is incomplete. The agency has discretion to engage in de novo review, 15 U.S.C. 78d-1(b), but also has discretion not to engage in de novo review before an initial decision becomes final, 17 C.F.R (d)(2) (stating the agency can make an initial decision final by entering an order). In fact, the agency has no duty, based on the regulation s plain language, to review an unchallenged initial decision before entering an order stating the decision is final. 17 C.F.R (d)(2). Thus, SEC ALJs exercise significant authority in part because their initial decisions can and do become final without plenary agency review. Indeed, 90 percent of those initial decisions become final without plenary review. SEC, ALJ Initial Decisions, sec.gov/alj/aljdec.shtml (archiving initial decisions); see also Amici Br. at Further, an SEC ALJ s authority to issue an initial decision is significant because, even if reviewed de novo, the ALJ plays a significant role as detailed above in conducting proceedings and developing the record leading to the decision, and the decision publicly states whether respondents have violated securities laws and imposes penalties for violations. Id (c) (requiring the agency to publish the initial decision on the SEC docket) C.F.R (b)(2) C.F.R U.S.C. 556(c)(6), (8); 17 C.F.R (e).

142 23a aside, make permanent, limit, or suspend temporary sanctions that the SEC itself has imposed. 29 In sum, SEC ALJs closely resemble the STJs described in Freytag. Both occupy offices established by law; both have duties, salaries, and means of appointment specified by statute; and both exercise significant discretion while performing important functions that are more than ministerial tasks. Freytag, 501 U.S. at ; see also Samuels, 930 F.2d at 986. Further, both perform similar adjudicative functions as set out above. 30 We therefore hold that the SEC ALJs C.F.R , ; see also 15 U.S.C. 78u-3(c) (describing temporary order); 17 C.F.R (a)(11) (stating a temporary sanction is a temporary cease-and-desist order or a temporary suspension of... registration ); id (b), (a), (b), (a) (describing a temporary sanction and stating an SEC commissioner presides over the hearing and that the agency must issue the order); id (a)(1) (stating an initial decision shall specify which terms or conditions of a temporary sanction shall become permanent ); id (a)(2) (stating an initial decision shall specify whether a temporary suspension of a respondent s registration, if any, shall be made permanent ); id (b) (stating an order modifying a temporary sanction shall be effective 14 days after service (emphasis added)). 30 The dissent complains that the majority opinion lists the duties of SEC ALJs, without telling us which, if any, were more important to its decision than others and why. Dissent at 11. But this misses the point of our following Freytag. There, the Court identified four duties that supported the STJs inferior officer status: They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. 501 U.S. at We point out above that SEC ALJs perform comparable duties, and we spell out even more of their discretionary functions.

143 24a are inferior officers who must be appointed in conformity with the Appointments Clause. 31 This holding serves the purposes of the Appointments Clause. The current ALJ hiring process whereby the OPM screens applicants, proposes three finalists to the SEC, and then leaves it to somebody at the agency to pick one, is a diffuse process that does not lend itself to the accountability that the Appointments Clause was written to secure. In other words, it is unclear where the appointment buck stops. The current hiring system would suffice under the Constitution if SEC ALJs were employees, but we hold under Freytag that they are inferior officers who must be appointed as the Constitution commands. As the Supreme Court said in Freytag, The Appointments Clause prevents Con- 31 Those who challenge agency action typically have the burden to show prejudicial error. 5 U.S.C. 706; Shinseki v. Sanders, 556 U.S. 396, (2009). The error here is structural because the Supreme Court has recognized the separation of powers as a structural safeguard. Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 239 (1995) (emphasis omitted). Structural errors are not subject to prejudicial-error review. See Rivera v. Illinois, 556 U.S. 148, 161 (2009) (stating constitutional errors concerning the qualification of the jury or judge require automatic reversal (emphasis omitted)); Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 796 F.3d 111, 123 (D.C. Cir. 2015) ( [A]n Appointments Clause violation is a structural error that warrants reversal regardless of whether prejudice can be shown. ); United States v. Solon, 596 F.3d 1206, 1211 (10th Cir. 2010) (stating structural errors are subject to automatic reversal). Mr. Bandimere argues, [The SEC ALJ] is an inferior officer whose unconstitutional appointment is a structural constitutional error that invalidates the proceeding. Aplt. Br. at 18. The SEC does not dispute that an Appointments Clause error here is structural and that there is no need to show prejudice.

144 25a gress from dispensing power too freely; it limits the universe of eligible recipients of the power to appoint. 501 U.S. at 880. F. The SEC s Arguments 1. Final Decision-Making Power In rejecting Mr. Bandimere s Appointments Clause argument during agency review, the SEC s opinion concluded the ALJs are not inferior officers because they cannot render final decisions and the agency retains authority to review ALJs decisions de novo. The SEC makes similar arguments here. It contends the Freytag Court relied on the STJs final decision-making power when it held they were inferior officers. The agency draws on Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), in which the D.C. Circuit attempted to distinguish Freytag and held that FDIC ALJs were employees. 204 F.3d at In Landry, the D.C. Circuit stated Freytag laid exceptional stress on the STJs final decisionmaking power. Id. The court therefore considered dispositive the FDIC ALJs inability to render final decisions. Id. This past August, the D.C. Circuit addressed the same question we face here. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283 (D.C. Cir. 2016). The D.C. Circuit followed Landry and concluded that SEC ALJs are employees and not inferior officers. Id. at The holding was based on the court s conclusion that SEC ALJs cannot render final decisions. Id. at 285 ( [T]he parties principally disagree about whether [SEC] ALJs issue final decisions of the [SEC]. Our analysis begins, and ends, there. ). We disagree with the SEC s reading of Freytag and its argument that

145 26a final decision-making power is dispositive to the question at hand. First, both the agency and Landry place undue weight on final decision-making authority. Freytag stated the government s argument that STJs should be deemed employees when they lacked the ability to enter final decisions ignore[d] the significance of the duties and discretion that [STJs] possess. 501 U.S. at 881. The Supreme Court held STJs are inferior officers because their office was established by law; their duties, salaries and means of appointments were specified by statute ; and they exercise[d] significant discretion in carrying out... important functions. Id. at Moreover, Freytag agreed with the Second Circuit s Samuels decision, id., which held that STJs are inferior officers because they exercise a great deal of discretion and perform important functions in 7443A(b)(4) cases, Samuels, 930 F.2d at 986. The Second Circuit did not rely on the STJs ability to enter final decisions under 7443A(b)(1), (2), and (3). Id. at Rather, it said STJs are inferior officers even though the ultimate decisional authority in cases under section 7443A(b)(4) rests with the Tax Court judges. Id. at 985. Like Freytag, Samuels hinged on the STJs duties and not on final decision-making power. After stating its holding that STJs are inferior officers based on their duties, the Freytag Court responded to the government s standing argument. 501 U.S. at 882. The Court stated, Even if the duties of special trial judges under subsection (b)(4) were not as significant as we and the two courts have found them to be, our conclusion would be unchanged. Id. (emphasis

146 27a added). This sentence reaffirms what the Court previously concluded: it found the duties of the STJs are sufficiently significant to make them inferior officers. Id. That conclusion did not depend on the STJs authority to make final decisions. 32 Further, the Court s even if argument was a response to (1) the government s concession that STJs are inferior officers in 7443A(b)(1), (2), and (3) cases, where they had final decision-making authority, 33 and (2) the government s argument that the petitioners lacked standing to rely on the STJs authority in those types of cases to establish the STJs inferior officer 32 Judge Randolph rebutted the Landry majority by arguing the following: The [Freytag] Court introduced its alternative holding thus: Even if the duties of special trial judges [ just described] were not as significant as we and the two courts have found them to be, our conclusion would be unchanged. 501 U.S. at 882 (italics added). What conclusion did the Court have in mind? The conclusion it had reached in the preceding paragraphs namely, that although special trial judges may not render final decisions, they are nevertheless inferior officers of the United States within the meaning of Article II, 2, cl. 2. The same conclusion, the same holding, had also been rendered in [Samuels], a decision the Supreme Court cited and expressly approved. See 501 U.S. at 881. There the Second Circuit held that a special trial judge performing the same advisory function as the judge in Freytag was an inferior officer; the court of appeals did not mention the fact that in other types of cases, the judge could issue final judgments. Landry, 204 F.3d at 1142 (Randolph, J., concurring). 33 The Commissioner concedes that in cases governed by subsections (b)(1), (2), and (3), special trial judges act as inferior officers who exercise independent authority. 501 U.S. at 882.

147 28a status in 7443A(b)(4) cases. 34 Based on the government s concession, the Court stated STJs could not transform to employees by perform[ing] duties that may be performed by an employee not subject to the Appointments Clause. Id. The Court thus rejected the standing argument as beside the point. Id. The Court s rejection of the government s standing argument is a far cry from holding that final decisionmaking authority is the predicate for inferior officer status. Indeed, the Court did not hold that STJs are inferior officers because they have final decisionmaking authority in 7443A(b)(1), (2), and (3) cases. Rather, it accepted the government s concession that STJs are inferior officers in those cases for the purpose of responding to the standing argument. Thus, the Court s even if argument did not modify or supplant its holding that STJs were inferior officers based on the significance of [their] duties and discretion. Id. at 881. The SEC reads Freytag as elevating final decisionmaking authority to the crux of inferior officer status. But properly read, Freytag did not place exceptional stress on final decision-making power. 35 To the con- 34 But the Commissioner urges that petitioners may not rely on the extensive power wielded by the [STJ] in declaratory judgment proceedings and limited-amount tax cases because petitioners lack standing to assert the rights of taxpayers whose cases are assigned to [STJs] under subsections (b)(1), (2), and (3). Id. 35 Compare Freytag, 501 U.S. at (rejecting the government s argument that STJs were employees when they lacked final decision-making power), with Landry, 204 F.3d at 1134 (asserting Freytag laid exceptional stress on the STJs final decisionmaking power ).

148 29a trary, it rebutted the government s argument that STJs were inferior officers when they lacked final decision-making power (i.e., 7443A(b)(4) cases) because the argument ignore[d] the significance of the duties and discretion that [STJs] possess. Freytag, 501 U.S. at 881. Final decision-making power is relevant in determining whether a public servant exercises significant authority. But that does not mean every inferior officer must possess final decision-making power. Freytag s holding undermines that contention. In short, the Court did not make final decision-making power the essence of inferior officer status. Nor do we. Second, the SEC s argument finds no support in other Supreme Court decisions describing inferior officers. In Edmond, the Supreme Court considered final decisionmaking power as relevant to the difference between a principal and inferior officer, not the difference between an officer and an employee. 520 U.S. at 665. The Court held Coast Guard Court of Criminal Appeals judges were inferior officers instead of principal officers because they ha[d] no power to render a final decision on behalf of the United States unless permitted to do so by other Executive officers, and hence they [were] inferior within the meaning of Article II. Id. In other words, the Court classified the judges as inferior officers even though they had no final decisionmaking power. Id. In Buckley, the Court held FEC commissioners were inferior officers because they exercised significant authority, including the responsibility for conducting civil litigation in the courts of the United States for vindicating public rights. 424 U.S. at , 140.

149 30a The Buckley Court analyzed significant authority as a matter of degree without discussing final decisionmaking power. Id.; see also Ass n of Am. Railroads v. U.S. Dep t of Transp., 821 F.3d 19, 38 (D.C. Cir. 2016) (stating Edmond clarified [that] the degree of an individual s authority is relevant in marking the line between officer and nonofficer, not between principal and inferior officer (citing Edmond, 520 U.S. at 662)). The Court has not equated significant authority with final decision-making power in Buckley, Freytag, Edmond, or elsewhere. Nor has it indicated that each of the officers it has deemed inferior possesses that power. 36 Further, Justice Breyer has stated that efforts to define [ inferior Officer ] inevitably conclude that the term s sweep is unusually broad. Free Enter. Fund, 561 U.S. at 539 (Breyer, J., dissenting). 36 Whether SEC ALJs can enter final decisions is not dispositive to our holding because it was not dispositive to Freytag s holding. Nevertheless, the SEC s argument that its ALJs can never enter final decisions is not airtight. Without a timely petition for review, SEC ALJ s actions are deemed the action of the Commission. 15 U.S.C. 78d-1(c). The agency retains authority to review initial decisions de novo and may determine the date on which an unchallenged initial decision is final. 15 U.S.C. 78d-1(b); 17 C.F.R (d)(2); Lucia, 832 F.3d at But the agency may simply enter an order stating an initial decision is final without engaging in any review. 17 C.F.R (d)(2). And the agency can also decline to review an initial decision even when there is a timely petition for review. 17 C.F.R (b)(2). Thus, the Exchange Act and the agency s regulations provide a path for an initial decision to become final without plenary agency review. In practice, most initial decisions follow that path 90 percent. See SEC, ALJ Initial Decisions, aljdec.shtml.

150 31a Third, supervision by superior officers is not unique to employees. It is a common feature of inferior officers as well. 37 The military judges at issue in Edmond were inferior officers based on their inability to render a final decision... unless permitted to do so by other Executive officers. 520 U.S. at 665. Thus, the fact that the SEC can reverse its ALJs does not mean they are employees rather than inferior officers. 2. Deference to Congress The SEC further contends Congress intended its ALJs to be employees. It urges us to accor[d] significant weight to congressional intent in determining whether the ALJs are inferior officers. Aplee. Br. at 41. The SEC overstates its arguments. In its brief, it has not cited statutory language expressly stating ALJs are employees for purposes of the Appointments Clause. Nor has it cited legislative history indicating Congress has specifically addressed the question whether ALJs are inferior officers. And to the extent the SEC seeks to infer congressional intent from congressional action, the evidence is mixed. On the one hand, the SEC stresses that Congress was deliberate in constructing the statutory framework governing the hiring of ALJs and the powers ALJs have in relation to their agencies. Aplee. Br. at Edmond, 520 U.S. at 663 (stating an inferior officer is directed and supervised at some level by others who were appointed by Presidential nomination with advice and consent of the Senate ); Landry, 204 F.3d at 1142 (Randolph, J., concurring) ( The fact that an ALJ cannot render a final decision and is subject to the ultimate supervision of the FDIC shows only that the ALJ shares the common characteristic of an inferior Officer. ).

151 32a This includes placing the position within the civil service and tasking the OPM to prescribe rules governing ALJ hiring. 5 U.S.C. 1302, 3105, 3313; 5 C.F.R The SEC argues this suggests congressional intent to classify ALJs as employees. But, on the other hand, and as detailed previously, Congress granted significant authority to SEC ALJs in the APA and the Exchange Act and has authorized the agency to delegate any of its [non-rulemaking] functions to ALJs. 5 U.S.C. 556, 557; 15 U.S.C. 78d-1(a). When it has faced a case or controversy concerning separation of powers, the Supreme Court has determined whether the legislative or executive branches or both have violated the Constitution. See, e.g., Bowsher v. Synar, 478 U.S. 714 (1986); INS v. Chadha, 462 U.S. 919 (1983); Buckley, 424 U.S. at 1; Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803). This has been so even when a congressional scheme was carefully devised and effective. Bowsher, 478 U.S. at However carefully devised the ALJ system may be generally and the SEC ALJ program particularly, see Lucia, 832 F.3d at 289, that should not excuse failure to comply with the Appointments Clause. As a circuit court, we must follow Supreme Court precedent. Hutto v. Davis, 454 U.S. 38 In Bowsher, the Court stated: No one can doubt that Congress and the President are confronted with fiscal and economic problems of unprecedented magnitude, but the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution. Convenience and efficiency are not the primary objectives or the hallmarks of democratic government. 478 U.S. at 736 (ellipsis omitted) (quoting Chadha, 462 U.S. at 944).

152 33a 370, 375 (1982) (per curiam) ( [A] precedent of [the Supreme] Court must be followed by the lower federal courts. ). And as explained, Freytag governs our result here. Moreover, the Supreme Court s treatment of the government s deference argument in Freytag is instructive here. The government contended the Supreme Court should defer to the Executive Branch s decision that there has been no legislative encroachment on Presidential prerogatives under the Appointments Clause. 501 U.S. at 879. The Court rejected that argument: [T]he Clause forbids Congress to grant the appointment power to inappropriate members of the Executive Branch. Neither Congress nor the Executive can agree to waive this structural protection.... The structural interests protected by the Appointments Clause are not those of any one branch of Government but of the entire Republic. Id. at 880; see also NLRB v. Noel Canning, 134 S. Ct. 2550, 2594 (2014) (Scalia, J., concurring in the judgment) ( [T]he political branches cannot by agreement alter the constitutional structure. ). As stated, we question whether Congress has clearly classified SEC ALJs as employees. But even if it had, we would still follow Freytag. G. The Dissent s Arguments We address three of the dissent s main arguments. First, it points out the STJs had power to bind the Government and third parties, and the SEC ALJs do not. Dissent at 1. This is the final authority argument the SEC makes here and that the D.C. Circuit relied on in Landry and Lucia. We have addressed this argument above.

153 34a Second, the dissent contends that even where [STJs] could not enter final decisions, their initial decisions had binding effect. Id. at 2. The SEC did not make this argument. In any event, the contention is incorrect because it rests on a misapprehension of the Tax Court judges and STJs roles in cases where the Tax Court judges must make the final decisions, such as Freytag. See Ballard v. Comm r of Internal Revenue, 544 U.S. 40, 44 (2005) (citing 26 U.S.C. 7443A(c)) (stating Tax Court judges must make the [u]ltimate decision in cases involving tax deficiencies that exceed $50,000 ). The dissent asserts that the STJs in effect made the final decisions in those cases because the Tax Court purported to adopt its [STJs ] opinions verbatim in 880 out of 880 cases between 1983 and Dissent at 8. At first blush, that assertion suggests the Tax Court rubber stamped 880 STJ recommendations without making a single change. But a full reading of the dissent s cited sources shows that assertion is incorrect. In Ballard, a case the dissent mistakenly relies on to attempt to differentiate STJs and SEC ALJs, 39 the Supreme Court described the Tax Court s process of reviewing STJ s recommendations based on the government s own explanation of how Tax Court judges and STJs worked together. 544 U.S. at 58, 65 (stating the government describe[d] and defend[ed] its pro- 39 The dissent relies on Ballard, Dissent at 2-4, yet objects to our use of the case to rebut its argument that the Tax Court deferred to STJs on questions of law. Id. at 5 n.1. We do not rely on Ballard in reaching our holding or in responding to the SEC s arguments (because the SEC did not rely on it). We discuss the case only to respond to the dissent.

154 35a cess). Beginning in 1983, STJs submitted reports to the Tax Court judges tasked with making the final decision in each particular case. Id. at 58. In each case, the Tax Court judge treated the report as an inhouse draft and engaged in a collaborative process with the STJ in which they worked over the report and produced an opinion of the [STJ]. Id. at 57. When the collaborative process [was] complete, the Tax Court judge issue[d] a decision in all cases agreeing with and adopting the opinion of the [STJ]. Id. (alterations and quotations omitted). In sum, the Tax Court judges adopted opinions they had a hand in supervising and producing. The law review article the dissent cites explains why it is simply not true that the Tax Court rubber stamped 880 of 880 STJ opinions: the Tax Court judge treated the report and recommendation of the [STJ] as a draft of an opinion that would, after a collaborative effort with the Tax Court judge, ultimately be adopted by the Tax Court. Christopher M. Pietruszkiewicz, Conflating Standards of Review in the Tax Court: A Lesson in Ambiguity, 44 Hous. L. Rev. 1337, 1360 (2008). The dissent s conclusion that the STJs initial report often decided the case, Dissent at 3, overstates the STJs role. And their actual role hardly supports the notions that Tax Court judges appeared to defer to its [STJs] on conclusions of law or that [the STJs] had as much authority as Tax Court judges themselves. Id. at 3, Even if the Tax Court did not review STJs 40 The dissent states the Tax Court judge in Freytag adopted the STJ s report verbatim. Dissent at 5 n.1. There is no indication that is true. By the time of the Freytag trial in 1987, the Tax Court had been practicing the collaborative process described

155 36a recommendations in most cases, that would not distinguish STJs from SEC ALJs. Most of the SEC ALJs initial decisions about 90 percent become final without any review or revision from an SEC Commissioner. 41 The dissent is left with its argument that in certain cases the STJs had the power to bind third parties and the government itself. Id. at 6 n.2. But, as previously explained, Freytag did not regard this ground as dispositive to hold the STJs are inferior officers. 42 above for four years. See Ballard, 544 U.S. at 57 (stating the Tax Court began the collaborative process in 1983). The Tax Court judge in Freytag received the STJ s report and within four months adopted the STJ s opinion, Freytag, 501 U.S. at 872 n.2 (emphasis added), which, as we learn from Ballard, is the document produced by the STJ and the Tax Court judge collaboratively, Ballard, 544 U.S. at 58. In other words, Freytag appears to be an example of the collaborative process at work the STJ provided the Tax Court judge a report, and the Tax Court judge later adopted the STJ s opinion that resulted from the joint efforts of the STJ and Tax Court judge. Nevertheless, the dissent infers the Tax Court judge adopted the STJ s recommendation verbatim, Dissent at 5 n.1, even though the Supreme Court declined to assume rubber stamp activity on the part of the [Tax Court judge], Freytag, 501 U.S. at 872 n Amici report and the agency does not dispute that approximately 90 percent of SEC ALJs initial decisions issued in 2014 and 2015 became final without agency plenary review. Amici Br. at Our review of the SEC s archives confirms this information. See SEC, ALJ Initial Decisions, shtml. 42 The dissent does not state it disagrees with our reading of Freytag. Rather, it relies on passages from the petitioners brief in Freytag to describe the characteristics of the STJs. What really counts, however, are the STJs features the Supreme Court relied

156 37a Moreover, even if the STJs exercise more authority than the SEC ALJs, it does not follow that the former are inferior officers and the latter are employees or that the latter do not exercise significant authority. We agree that ALJs are not identical to STJs. But, as explained in detail above, STJs and ALJs closely resemble one another where it counts. SEC ALJs can still be inferior officers without possessing identical powers as STJs, just like STJs can still be inferior officers without possessing identical powers as FEC commissioners and assistant surgeons. See Buckley, 424 U.S. at ; Moore, 95 U.S. at Third, the dissent expresses concerns about the probable consequences of today s decision. Dissent at 11. It goes on to raise issues that are not before us and that the parties did not brief. We recognize that our holding potentially implicates other questions. But no other issues have been presented to us here, and we therefore cannot address them. Nothing in this opinion should be read to answer any but the precise question before this court: whether SEC ALJs are employees or inferior officers. Questions about officer removal, officer status of other agencies ALJs, civil service protection, rulemaking, on to determine they are inferior officers. The Freytag opinion not one side s advocacy brief is the proper source for analysis. And, as our analysis shows, Freytag leads us to conclude the SEC ALJs are inferior officers. 43 The dissent does not explain or even acknowledge the differences between inferior and principal officers. Nor does it recognize that inferior officers are subordinates who are still considered officers even when a superior officer directs their actions or makes final decisions.

157 38a and retroactivity, see Dissent at 11-15, are not issues on appeal and have not been briefed by the parties. Having answered the question before us, and thus resolved Mr. Bandimere s petition, we must leave for another day any other putative consequences of that conclusion. III. CONCLUSION SEC ALJs are more than mere aids to the agency. Samuels, 930 F.2d at 986. They perform more than ministerial tasks. Freytag, 501 U.S. at 881. The governing statutes and regulations give them duties comparable to the STJs duties described in Freytag. SEC ALJs carry out important functions, id. at 882, and exercis[e] significant authority pursuant to the laws of the United States, Buckley, 424 U.S. at 126. The SEC s power to review its ALJs does not transform them into lesser functionaries. Rather, it shows the ALJs are inferior officers subordinate to the SEC commissioners. Edmond, 520 U.S. at 663. The SEC ALJ held his office unconstitutionally when he presided over Mr. Bandimere s hearing. We grant the petition for review and set aside the SEC s opinion.

158 39a No , Bandimere v. SEC BRISCOE, Circuit Judge, concurring. I write not to differ with the rationale of the majority opinion, but rather to fully join it. My focus here is on the dissent. I group my concerns in two categories: (I) the dissent s predictions about speculative repercussions of the opinion, by which it reaches what appear to be several erroneous conclusions; and (II) its application of a truncated legal framework to a misstated version of the facts of record. I Underlying the dissent s position is a concern about the next case, and the one after that. The dissent suggests that a probable consequence[] of the opinion is that all 1,792 federal ALJs are at risk of being declared inferior Officers. Dissent at 11 & n.5. But this was no less true when Freytag v. Commissioner of Internal Revenue was decided. 501 U.S. 868 (1991). A risk always exists that a court will be called on to decide whether any particular federal employee or group of employees has been delegated sufficient authority to fall within the ambit of the Appointments Clause, U.S. Const. art. II, 2, cl. 2, the Constitution s structural safeguard tethering key personnel Officers to the sovereign power of the United States, and thus to the people. Answering that question in the affirmative as to the SEC s five ALJs does no mischief to bedrock principles of constitutional law. Dissent at 16. Further, the majority has not affected thousands of administrative actions, id. at 11, by answering that question. Freytag instead commands that courts engage in a case-by-case analysis. 501 U.S. at

159 40a Specifically, a court must determine whether a federal employee (or class of employees) is subject to the Appointments Clause by answering whether the employee exercises significant authority pursuant to the laws of the United States, and, in turn, by analyzing the aggregate duties and functions the employee performs or is authorized to perform. Id. at 881 (quotation marks and citations omitted). That power sometimes comes in the form of final decision-making authority, id. at 882; other times, not. Id. at The majority merely and correctly applies Freytag s test to answer that question as to the SEC s five ALJs. Relatedly, the dissent errs when it suggests that the majority is operating without much precedent. Dissent at 16. The majority simply applies Freytag s framework, as all lower courts must do. In truth, the dissent takes issue with and devotes much of its analysis to suggesting that the majority ought to follow the D.C. Circuit s misapplication of Freytag wrought in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), and bolstered by Raymond J. Lucia Cos., Inc. v. Securities and Exchange Commission, 832 F.3d 277 (D.C. Cir. 2016). The critical difference between the majority and Landry and Lucia is that the majority recognizes that Freytag does not make final decision-making authority the sine qua non of inferior Officer status. 501 U.S. at The D.C. Circuit erroneously suggested as much in Landry when it said, over Judge Randolph s contrary view, that the Freytag Court saw final decision-making authority as exceptional[ly] important and critical to determining Officer status. 204 F.3d at And Lucia compounded that error when it acknowledged

160 41a that the parties identified (as here) other powers the SEC s ALJs exercise but then narrowed its analysis to and rested its holding entirely on whether those ALJs can issue final decisions for the SEC. See 832 F.3d at 285 (acknowledging that the parties principally, not only, disagree[d] about whether the SEC s ALJs issue final decisions of the SEC and explaining that the court s analysis begins, and ends, with that question); id. at (analyzing only whether the SEC s ALJs can render final decisions). The majority applies precedent: Freytag, not Landry or Lucia. The dissent also contends that the majority s opinion will be used to strip all ALJs of their dual layer for-cause protection. Dissent at 14. This troubling statement calls for a response because the dissent essentially predetermines the holdings of hypothetical cases not before this court. In some future case, a litigant may argue that all ALJs are inferior Officers. But as the majority here explains and Freytag commands whether a particular federal employee or class of employees are Officers subject to the Appointments Clause requires a position-by-position analysis of the authority Congress by law and a particular executive agency by rule and practice has delegated to its personnel. 501 U.S. at Some ALJs within particular agencies may exercise so little authority and also be subject to such complete oversight (e.g., unlike here, de novo review) that they are not Officers. The majority rightly does not attempt to answer whether each ALJ in every federal agency is an Officer because Freytag disclaims such sweeping pronouncements, id., and, in any event,

161 42a it is not necessary to do so to resolve Mr. Bandimere s appeal. The dissent also does not stop after incorrectly stating that the majority has addressed an issue not before us. It instead goes on to suggest that the majority s nonanswer to an unasked question may lead to the implosion of the federal civil service, at least as to all federal ALJs. But the dissent is wrong as to the outcome of such a hypothetical future case. And in suggesting that this outcome follows from the majority s opinion, the dissent unnecessarily sounds alarms which demand rejoinder. Specifically, the dissent worries that the consequence of the majority s opinion is that all federal ALJs are inferior Officers, that all federal ALJs are thus afforded the double-for-good-cause-removal protection forbidden by Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), and that, as a result, all federal ALJs will lose their civil service protections. Warning of the dangers of such a conclusion, the dissent suggests that the Social Security Administration will be impaired when its 1,537 ALJs lose their civil service protections. But there are at least two errors in the dissent s speculation about facts not before this court. First, it may well be that within the Social Security Administration ALJs are removable in a manner that does not run afoul of Free Enterprise Fund. For example, if the person or persons responsible for firing those ALJs are not afforded good-cause removal protections, then the Administration s ALJs will retain their civil service protections even if they are inferior Officers. The dissent cannot say for certain whether

162 43a this is so, because we have no briefing on the subject in this case, which deals only with the SEC. Second, even assuming that all federal ALJs are Officers who are removable only for good cause and that they are all selected by Officers who are also removable only for good cause, the dissent knocks down a straw man by suggesting that Free Enterprise Fund might require stripping all ALJs of their civil service protections. Rather, as Free Enterprise Fund reminds us, courts normally are required to afford the minimum relief necessary to bring administrative overreach in line with the Constitution: Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the problem, severing any problematic portions while leaving the remainder intact. Because the unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions, the normal rule is that partial, rather than facial, invalidation is the required course.... Concluding that the removal restrictions are invalid leaves [an Officer] removable... at will, and leaves the President separated from [the Officer] by only a single level of good-cause tenure. Id. at (quotation marks, alterations, and citations omitted). The D.C. Circuit just recently employed this principle in PHH Corp. v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016). There, the court held, inter alia, that the Consumer Financial Protection Bureau (CFPB) was so structured as to violate Article II because it was headed by a single director

163 44a who was removable only for good cause. Id. at But the remedy for this unconstitutional structure was not as the petitioners had urged the abrogation of the CFPB. Id. at 37. Applying Free Enterprise Fund and other Supreme Court precedents, the D.C. Circuit instead struck the single offending clause from the CFPB s implementing legislation and rendered the director removable by the President at will, rather than for good cause. Id. at Thus, contrary to the dissent s suggestions, the majority s opinion portends no change to any ALJ s robust protections. The dissent states that all 1,792 federal ALJs are removable only by the United States Merit Systems Protect Board (MSPB), and only for good cause. Dissent at 14. Assuming arguendo that is always correct, see 5 U.S.C. 7521, cursory research on this un-briefed issue reveals that the MSPB is composed of three members, each of whom are appointed directly by the President but removable only for good cause. 5 C.F.R So even if this court were faced with the hypothetical future case that troubles the dissent, there is no cause for alarm that the administrative state will be eroded (and of course, that is of no import to whether the government is following Article II). See Free Enterprise Fund, 561 U.S. at 499. A court faced with such a challenge would be empowered only to order the minimal remedy effective to cure the Article II error, id. at : rendering the MSPB s three members removable by the President at will. While the dissent opines on the hypothetical consequences of the majority s opinion, today s decision will have none of the consequences to the nationwide civil service that the dissent predicts.

164 45a Additionally, the dissent is incorrect when it argues that the majority is not showing appropriate deference to Congress, Dissent at 16, on this structural constitutional question, as when it states: Whether federal ALJs should receive such dual for-cause protections is perhaps a question that could be debated, but Congress has already decided this question in favor of protecting ALJs.... Id. at 14 n.8. Freytag rejected this exact argument and recognized that [t]he structural interests protected by the Appointments Clause are not those of any one branch of Government but of the entire Republic. 501 U.S. at 880. With respect to removal specifically, even if Congress sought to insulate all federal ALJs from Executive control by placing them behind double layers of good-cause removal protection, Free Enterprise Fund holds that a court would be obliged to afford that decision no deference and instead to strike the unsound architecture. 561 U.S. at 497. In any event, the dissent s dire predictions about hypothetical consequences of the majority s holding are exaggerated. II Turning to the dissent s proposal for deciding this case on the facts here, the dissent appears to sub silentio urge this court to adopt Landry and Lucia s misstatement of Freytag s test for determining whether a federal employee is an inferior Officer. That is, the dissent focuses almost exclusively on whether the SEC s ALJs exercise final decisionmaking authority, calling it the [m]ost important[] consideration that makes all the difference in deciding whether the ALJs are Officers. Dissent at 1 (citing, inter alia, Lucia, 832 F.3d

165 46a at ); see id. at 6 n.2 (arguing that [d]elegated sovereign authority has long been understood to be a key characteristic of a federal office ); id. at 7-8 (contending, absent citation to authority, that this question is not about the SEC s delegation to its ALJs of day-to-day discretion because the Appointments Clause does not care about that ). But as the majority points out, this mode of analysis and the D.C. Circuit s repeated application of it is wrong. Freytag instead compels courts, as the majority does here, to examine all of the duties and functions a federal employee has been delegated and then to determine whether that person is exercising the authority of the United States (an Officer) or simply carrying out ministerial government tasks (an employee). 501 U.S. at Here, the distinction is exemplified by whether the government employee in question was engaged in the ministerial task of transcribing the record at Mr. Bandimere s hearing or was the person who decided on behalf of the United States that his testimony there was not believable and in what respects, critical issues to determining whether he ought to incur civil penalties. See id. Likewise, final decision-making authority is but one sovereign power, albeit an important one that is typically sufficient to render an employee an Officer. See, e.g., id. at 882. Though final decision-making authority might be sufficient to make an employee an Officer, that does not mean such authority is necessary for an employee to be an Officer, contrary to the dissent s suggestion and Lucia s holding by its refusal to consider any of the SEC s ALJs other duties and functions. 832 F.3d at 285. Conducting the correct, nuanced anal-

166 47a ysis of the powers Congress by statute and the SEC by rule and practice have afforded its ALJs, the majority correctly reasons that the SEC s ALJs exercise significant authority and are thus inferior Officers, subject to the Appointments Clause. The dissent therefore errs as do Landry and Lucia by applying a truncated version of Freytag s legal framework. Further, even as to its analysis of the SEC s ALJs decision-making authority, the dissent mischaracterizes the factual record in a manner that it is imperative to correct. Specifically, the dissent states and then repeatedly relies on the fact that the SEC is not required to afford its ALJs any deference and that it conducts de novo review of their decisions to conclude that the ALJs do not have the sovereign power to bind the Government and third parties. Dissent at 1. The dissent also calls this a difference that makes all the difference between the SEC s ALJs and the special trial judges at issue in Freytag. Id. The dissent additionally states that even where special trial judges in Freytag could not enter binding decisions, their initial decisions had binding effect because the Tax Court was required to presume correct their factual findings, including findings of intent, and to defer to [a] special trial judge s determinations of credibility. Id. at 2 (citations omitted). The dissent is undoubtedly correct that [s]uch deference was a delegation of significant authority to the special trial judges. Id. As the dissent goes on to explain, [m]any cases before the Tax Court... involve critical credibility assessments, rendering the appraisals of the special trial judge who presided at trial vital to the Tax Court s ultimate determination. And...

167 48a findings of fact often conclusively decide tax litigation, as they did in Freytag. Id. at 2-3(quotation marks, alteration, and citation omitted). The dissent is also correct that, it cannot be reasonably disputed that findings of fact may well be determinative of guilt or innocence. Id. (quoting Napue v. Illinois, 360 U.S. 264, 269 (1959)). Indeed, as Napue emphasized, assessing the truthfulness and reliability of a given witness during live testimony is one such critical factual determination. 360 U.S. at 269. The dissent rightly points out that if an agency deferred to its personnel on such critical issues, the Appointments Clause would be offended. Dissent at 5 n.1. But the dissent then applies these statements in an attempt to distinguish the special trial judges imbued with that authority from the SEC s ALJs: The Securities and Exchange Commission, by contrast, is not required to give its ALJs any deference and may review its ALJs conclusions of law and findings of fact de novo. Id. at 6. At the same time, however, the dissent admits that the SEC may sometimes defer to the credibility determinations of its ALJs. Id. at 7 n.3. And the dissent does not attempt to reconcile that concession with its earlierstated admission that credibility assessments may be outcome determinative. Lucia relied in part on this same distinction. 832 F.3d at 286 (stating that the SEC conducts de novo review of its ALJs decisions); id. at 288 (stating that the SEC reviews an ALJ s decisions de novo, but acknowledging that the SEC may sometimes defer to the credibility determinations of its ALJs, and citing Landry, 204 F.3d at 1133, and the SEC s own regulations and orders sanctioning this practice).

168 49a This characterization of the SEC s actual process of reviewing its ALJs decisions is wrong, notwithstanding its attempt to characterize its review as de novo. David F. Bandimere, SEC Release No. 9972, 2015 WL , at *20 (Oct. 29, 2015). In footnotes 83 and 114 of its opinion in Mr. Bandimere s case, the SEC reveals the full effect of affording its ALJs the very deference that the dissent explains runs afoul of the Appointments Clause. Id. at *15 n.83, *20 n.114. Specifically, the SEC determined that Mr. Bandimere s falsely telling [Mr.] Loebe that excess profits would go to a Christian charity rather than to pay him [was] evidence of [his] intent to deceive. Id. at *15. In making that determination, the SEC explained that Mr. Bandimere testified that he did not remember making this statement to [Mr.] Loebe, but the ALJ found [Mr.] Loebe s testimony more credible than [Mr.] Bandimere s as to this issue. Id. at *15 n.83. Then, instead of rendering its own credibility determination with respect to the conflicting testimony, the SEC applied its rule that [a]n ALJ s credibility findings are entitled to considerable weight. Id. (citations omitted). The SEC thus engages in deferential, not de novo review of key aspects of its ALJs decisions. The SEC admitted as much when it addressed Mr. Bandimere s Appointments Clause challenge. It professed to review its ALJs decisions de novo. Id. at *20. The dissent simply takes the SEC at its word. Yet the SEC added the following caveat to that statement: We do not view the fact that we accord Commission ALJs deference in the context of demeanorbased credibility determinations to afford our ALJs with the type of authority that would qualify them as inferior officers. Id. at *20 n.114. The SEC at-

169 50a tempted to shore up its conclusion on this Article II question with the disclaimer that it will disregard explicit determinations of credibility when [its] de novo review of the record as a whole convinces [it] that a witness s testimony is credible (or not) or that the weight of the evidence warrants a different finding as to the ultimate facts at issue. Id. (quotation marks and citations omitted). But that proviso is cold comfort to a defendant, like Mr. Bandimere, whose liability for massive civil penalties depends in no small part on the United States s assessment of his credibility during live testimony, credibility determined by the only government employee designated to preside over that testimony an ALJ. And whatever the SEC means by its disclaimer, it does not equate to de novo review. Rather, whether the SEC disagrees with its ALJs credibility determinations triggers its own rule that an ALJ s evaluation of a witness s live testimony is entitled to considerable weight. Id. at *15 n.83. Thus, at minimum, the SEC s ALJs exercise significant discretion over issues of credibility, unchecked by faux de novo review. As the dissent concedes, affording bureaucrats such deference permits them to exercise the sovereign authority of the United States in an often-outcomedeterminative fashion that is incompatible with the Appointments Clause. Therefore, even under the dissent s (and Lucia s) truncated Freytag analysis, the majority correctly holds that the SEC s ALJs are inferior Officers.

170 , Bandimere v. SEC 51a MCKAY, Circuit Judge, dissenting Notwithstanding the majority s protestations otherwise, today s opinion carries repercussions that will throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause. While the Supreme Court perhaps opened the door to such an approach in Freytag v. Commissioner, 501 U.S. 868 (1991), I would not throw it open any further, but in my view that is exactly what the majority has done. I do not believe Freytag mandates the result proposed here, and the probable consequences are too troublesome to risk without a clear mandate from the Supreme Court. I respectfully dissent. The majority compares SEC ALJs to the Tax Court s special trial judges, and it reasons that because the duties of an ALJ are enough like those of a special trial judge, ALJs must be Officers too. But the similarities between Freytag and this case matter far less than the differences. Most importantly, the special trial judges at issue in Freytag had the sovereign power to bind the Government and third parties. SEC ALJs do not. And under the Appointments Clause, that difference makes all the difference. See Officers of the United States Within the Meaning of the Appointments Clause, 31 Op. O.L.C. 73, (2007); Raymond J. Lucia Companies v. SEC, 832 F.3d 277, (D.C. Cir. 2016). The requirements of the Appointments Clause are designed to preserve political accountability relative to important Government assignments. Edmond v.

171 52a United States, 520 U.S. 651, 663 (1997). It ensures that members of the executive branch cannot escape responsibility for significant decisions by hiding behind unappointed officials or otherwise pretending that those decisions are not [their] own. Free Enter. Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 497 (2010). Such government officials those who exercise the power of the United States must be accountable to the President, who himself is accountable to the people. Dep t of Transp. v. Ass n of Am. R.Rs., 135 S. Ct. 1225, 1238 (2015) (Alito, J., concurring). It is not surprising, then, that the Tax Court s special trial judges were held to be officers in Freytag. 501 U.S. at It is clear from the context, if not the Freytag opinion, that these special trial judges had been delegated significant authority much more authority than SEC ALJs. In some cases, special trial judges could enter final decisions on behalf of the Tax Court. Freytag, 501 U.S. at 882. In those cases, it was conceded in Freytag that the special trial judges acted as inferior officers. Id. But even where special trial judges could not enter final decisions, their initial decisions had binding effect. Where the special trial judges did not issue a final decision, the Tax Court was still required to presume correct the special trial judge s factual findings, including findings of intent, and to defer to the special trial judge s determinations of credibility. See Landry v. FDIC, 204 F.3d 1125, 1133 (D.C. Cir. 2000). Such deference was a delegation of significant authority to the special trial court judges. Many cases before the Tax Court, including the ones at issue in Freytag, involve critical credibility assessments, rendering the

172 53a appraisals of the [special trial] judge who presided at trial vital to the Tax Court s ultimate determinations. Ballard v. Comm r, 544 U.S. 40, 60 (2005). In Ballard, for example, [t]he Tax Court s decision repeatedly [drew] outcome-influencing conclusions regarding the credibility of Ballard... and several other witnesses. Id. And as the Freytag petitioners argued, [f]indings of fact often conclusively decide tax litigation, as they did in [that] case. Pet rs Br. at 23, Freytag v. Comm r, 501 U.S. 868 (1991) (No ), 1991 WL Thus, even when the special trial judge was not authorized to enter a final decision, his initial report often decided the case. The majority says this overstates the role of special trial judges, but it cannot be reasonably disputed that findings of fact may well be determinative of guilt or innocence. Napue v. Illinois, 360 U.S. 264, 269 (1959). The majority barely mentions that the Tax Court was required to defer to the special trial judges factual and credibility findings unless they were clearly erroneous. Landry, 204 F.3d at But the powers of the special trial judges must be understood in context. As Freytag illustrates, a special trial judge s initial decision is not like an ALJ s it is the difference between chiseling in stone and drafting in pencil. The majority also fails to appreciate that the Tax Court appeared to defer to its special trial judges on conclusions of law as well. But this point was squarely before the Supreme Court. As the Freytag petitioners argued, [i]n practice, special trial judge factual findings and legal opinions are routinely adopted verbatim by the regular Tax Court judges to whom they

173 54a are assigned. Brief for Petitioner, supra, at 7. Between 1983 and 1991, when Freytag was decided, every initial report submitted by a special trial judge was purportedly adopted verbatim a fact made known to the Freytag Court. See Pet rs Br., supra, at Every reported decision, including the Tax Court s decision in Freytag, invariably beg[an] with a stock statement that the Tax Court judge agrees with and adopts the opinion of the special trial judge. Ballard, 544 U.S. at 46 (citation omitted) (original brackets omitted); see, e.g., Freytag v. Comm r, 89 T.C. 849, 849 (1987) ( The Court agrees with and adopts the opinion of the Special Trial Judge that is set forth below. ). Following that disclaimer was an opinion issued in the name of the special trial judge. Freytag thus illustrates another point that the majority misses: the Tax Court may not have even reviewed the supposedly nonfinal decisions of its special trial judges. As the Freytag petitioners argued before the Supreme Court, that case was a perfect example of how special trial judges routinely do the Tax Court s work with only the most cursory supervision, if any. Pet rs Br., supra, at 23. There, after one of the longest trials in Tax Court history, which involved 14 weeks of complex financial testimony spanning two years of trial and which produced 9,000 pages of transcript and... 3,000 exhibits, the Tax Court purported to adopt the special trial judge s report verbatim and filed it as the Tax Court s decision on the very same day it received the report. Id. at 23, 9. As the Freytag petitioners argued to the Supreme Court, [t]he special trial judge s filing of his report and its verbatim adoption by [Tax Court] Chief Judge

174 55a Sterrett appear from the record to have been virtually simultaneous. Id. at 8. That decision resolved several unsettled, important legal questions. Yet, according to the docket, the Tax Court judge filed the decision as his own on the same day that the special trial judge filed his proposed findings and opinions. See id. 1 1 The majority s emphasis on Ballard is misplaced; that case has little to do with the question before us. In Ballard, a case decided 14 years after Freytag, the government averred that a Tax Court special trial judge s report was treated as an in-house draft to be worked over collaboratively by the regular [Tax Court] judge and the special trial judge. See 544 U.S. 40, 57. The majority puts this averment forward as fact, but the Ballard Court [did] not know what happened in the Tax Court, a point that is important to underscore here. Ballard, 544 U.S. at 67 (Kennedy, J., concurring). Indeed, the Court could not have known: the special trial judges initial reports were not disclosed even to the Supreme Court. As the concurring opinion clarified, Ballard should be interpreted as indicating that there might be such a practice, not that there is. Id. The majority ignores this. The majority also fails to explain why Ballard should color an interpretation of Freytag when the purported practice had not yet been disclosed, let alone put in front of the Freytag Court. The majority next states that there is no indication the Tax Court judge in Freytag adopted the STJ s report verbatim but the Tax Court judge purported to do just that. Freytag, 89 T.C. at 849. Indeed, [i]n the 880 cases heard between and , there appear to be no instances in which a special trial judge issued a report and recommendation that the Tax Court publicly modified or rejected. Christopher M. Pietruszkiewicz, Conflating Standards of Review in the Tax Court: A Lesson in Ambiguity, 44 Houston L. Rev. 1337, 1360 (2008). What s more, after Ballard was decided, the Tax Court tried to make good by releasing the undisclosed reports from every case heard initially by a special trial judge since Louise Story, Tax Court Lifts Secrecy, Putting Some Cases in New Light, N.Y. Times, Sept. 24,

175 56a The Freytag petitioners point was that special trial judges had as much authority as Tax Court judges themselves. The petitioners referred to them as fullfledged surrogates for the Tax Court judges, who exercise virtually the same powers as presidentiallyappointed Tax Court judges. Id. at 12, 27. The Supreme Court, then, was thoroughly briefed on the true power of the special trial judges: In some cases, special trial judges could enter final decisions on behalf of the Tax Court. In others, special trial judges had, by rule, near-final say on outcome-determinative facts. And in practice they had de facto power to issue findings and opinions that may be adopted verbatim by the Tax Court without meaningful review even in the most complex, significant and far-reaching cases, as they were [in Freytag]. Id. at 27. Thus, the special trial judges exercised significant authority pursuant to the 2005, at C6. It could find initial reports in only 117 of the 923 cases. Id. Of those 117 cases, the Tax Court modified the special trial judges recommendations only 4 times. Id. Such figures demonstrate the level of deference afforded to special trial judges. Following its lengthy discussion of the Tax Court s purported collaborative practice, the majority says [w]hat really counts... are the STJs features the Supreme Court relied on in Freytag. Maj. Op. at 35. But Freytag did not rely on this purported practice indeed; it had not yet been disclosed by the Tax Court. Taking the majority at its word, its own reliance on Ballard seems out of place. Instead, we should look to what was actually before the Freytag Court. In any event, whether the Tax Court in practice deferred to the special trial judges on both facts and law, or whether it directed the outcome of a case while escaping responsibility by disclaiming the decision is a distinction without a difference. Either way, the Appointments Clause would be offended.

176 57a laws of the United States. Freytag, 501 U.S. at 881 (quoting Buckley v. Valeo, 424 U.S. 1, 126 (1976)). 2 The majority says that SEC ALJs closely resemble the STJs described in Freytag. Maj. Op. at 21. But that is simply not the case. The Securities and Exchange Commission, by contrast, is not required to give its ALJs any deference. The Commission may review its ALJs conclusions of law and findings of fact de novo. 17 C.F.R (a). It employs ALJs in its discretion, and all final agency orders are those of the Commission, not of its ALJs. An ALJ serving as a hearing officer prepares only an initial decision. Id (a)(1). And at any time during the administrative process, the Commission may direct that any matter be submitted to it for review. Id (a). The Commission thus retains plenary authority over the course of its administrative proceedings and the rulings of its law judges both before and after the issuance of the initial decision and irrespective of whether any party has sought relief. Mendenhall, Exchange Act Release No , 2015 WL , at *1 (Mar. 19, 2015). 3 2 Put another way, the special trial judges had been delegated a portion of the sovereign powers of the federal government; they could act on behalf of the Tax Court, and they had the power to bind third parties and the government itself. See Lucia, 832 F.3d at 285. Delegated sovereign authority has long been understood to be a key characteristic of a federal office. See 31 Op. O.L.C. 73 (reviewing historical precedents leading up to Buckley). And it is delegated sovereignty that is lacking here. 3 It is true, as the majority points out, that the Commission may sometimes defer to the credibility determinations of its ALJs. But because the Commission has retained plenary authority over its ALJs, it is not required to adopt the credibility determinations

177 58a On appeal, the Commission is not limited by the record before it. It may expand the record by hearing additional evidence itself or it may remand for further proceedings. Bandimere, SEC Release No. 9972, 2015 WL (Oct. 29, 2015) (internal quotation marks and brackets omitted). The Commission may affirm, reverse, modify, set aside the initial decision or remand, in whole or in part, and it may make any findings or conclusions that in its judgment are proper and on the basis of the record. 17 C.F.R (a). If a majority of participating Commissioners do not agree to a disposition on the merits, the initial decision shall be of no effect. Id (f ). The majority says that, like special trial judges, SEC ALJs also exercise significant discretion. Maj. Op. at 19. But again the majority misses the point. It is not about day-to-day discretion the Appointments Clause does not care about that. Special trial judges exercise[d] significant discretion in setting the record because the Tax Court was required to defer to its special trial judges findings. We say, for example, that a district court has significant discretion in sentencing because we review for abuse of discretion. United States v. Tindall, 519 F.3d 1057, 1065 (10th Cir. 2008); see also, e.g., Murphy v. Deloitte & Touche Grp. Ins. Plan, 619 F.3d 1151, 1164 (10th Cir. 2010) (recognizing that a district court has substantial discretion in handling discovery requests, because our of an ALJ. Lucia, 832 F.3d at 288 (citation omitted). By contrast, the Tax Court was required to defer to its special trial judges. In my estimate, this power to bind the government is, in large part, what separates purely recommendatory power from significant authority, and ALJs from special trial judges.

178 59a standard of review is highly deferential). Similarly, a special trial judge had significant discretion because the Tax Court had to review its findings equally deferentially. The Commission, by contrast, does not have to review its ALJ s opinions with any deference. An SEC ALJ, thus, does not exercise significant discretion in any meaningful way. SEC ALJs, then, possess only a purely recommendatory power, Landry, 204 F.3d at 1132, which separates them from constitutional officers. The Supreme Court has suggested as much. See Free Enter. Fund, 561 U.S. at 507. In Free Enterprise Fund, the Court explained that its holding does not address that subset of independent agency employees who serve as administrative law judges and that unlike members of the [Public Company Accounting Oversight] Board, who were officers, many administrative law judges... perform adjudicative rather than enforcement or policymaking functions, or possess purely recommendatory powers. Id. at 507 n.10 (citation omitted). The results speak for themselves: Unlike the Tax Court, which purported to adopt its special tax judges opinions verbatim in 880 out of 880 cases between 1983 and 2005, the Commission followed its ALJs recommendations in their entirety in only 3 of the 13 appeals decided thus far in In the other 10 cases, the 4 See Grossman, Release No , 2016 WL (Sept. 30, 2016); Schalk, Release No , 2016 WL (Sept. 21, 2016); Cohen, Release No , 2016 WL (Sept. 9, 2016); optionsxpress, Inc., Release No , 2016 WL (Aug. 18, 2016); Gonnella, Release No , 2016 WL (Aug. 10, 2016); Aesoph, Release No , 2016 WL (Aug. 5, 2016); Malouf, Release No , 2016 WL (July 27, 2016); J.S.

179 60a In the end, then, it is the Commission that ultimately controls the record for review and decides what is in the record. Lucia, 832 F.3d at 288 (citation omitted); see also Nash v. Bowen, 869 F.2d 675, 680 (2d Cir. 1989) (recognizing that, under 5 U.S.C. 557(b), the agency retains all the powers which it would have in making the initial decision ). It is the Commission that enters the final order in all cases and it is the commissioners who shoulder the blame. Commission disagreed with its ALJs for various reasons: In one case, the Commission reversed its ALJ because the SEC Enforcement Division failed to meet its burden; in another, it held that civil penalties, which the ALJ had recommended, were not available due to the statute of limitations. The majority argues that the current process for selecting ALJs does not lend itself to... accountability, Maj. Op. at 23, but it is quite clear where the buck stops. Because the Commission is not bound in any way by its ALJ s decisions, unlike the Tax Court, the blame for its unpopular decisions will fall squarely on the commissioners and, in turn, the president who appointed them. So long as the commissioners have been validly appointed, the Appointments Clause is satisfied. Putting aside that the Commission is not bound in any way by an ALJ s recommendations, amici s at- Oliver Capital Management, L.P., Release No , 2016 WL (June 17, 2016); Riad, Release No , 2016 WL (June 13, 2016); Page, Release No. 4400, 2016 WL (May 27, 2016); Doxey, Release No , 2016 WL (May 5, 2016); Young, Release No , 2016 WL (March 24, 2016); Wulf, Release No , 2016 WL (Mar. 21, 2016).

180 61a tempt to analogize SEC ALJs to magistrate judges only serves to highlight the difference between ALJs and constitutional officers. Unlike ALJs, magistrate judges have been delegated sovereign authority and have the power to bind the government and third parties. Magistrate judges are authorized to issue arrest warrants, 18 U.S.C. 3041; determine pretrial detention, id. 3141, 3142; detain a material witness, id. 3144; enter a sentence for a petty offense, without the consent of the United States or the defendant, 28 U.S.C. 636(a)(4); and issue final judgments in misdemeanor cases and all civil cases with the consent of the parties, id. 636(a)(5), (c); 18 U.S.C Magistrate judges may also impose sanctions for contempt. 28 U.S.C. 636(e). SEC ALJs can do none of these things. The majority s reliance on Supreme Court decisions from the nineteenth century and early twentieth century is equally problematic. The majority s casual citation to these cases might lead one to believe there is a body of caselaw to which we can analogize. But these decisions often employed circular logic, granting officer status to an official based in part upon his appointment by the head of a department. Landry, 204 F.3d at For example, United States v. Mouat, 124 U.S. 303 (1888), cited by the majority, held that [u]nless a person... holds his place by virtue of an appointment by the President, or of one of the courts of justice or heads of Departments authorized by law to make such an appointment, he is not, strictly speaking, an officer of the United States. Id. at 307; see also Free Ent. Fund, 561 U.S. at 539 (Breyer, J., dissenting) (quoting commentary that described early precedent as circular and [the Court s] later law as not particularly useful ).

181 62a Finally, I began this dissent by expressing my fears of the probable consequences of today s decision. It does more than allow malefactors who have abused the financial system to escape responsibility. Under the majority s reading of Freytag, all federal ALJs are at risk of being declared inferior officers. Despite the majority s protestations, its holding is quite sweeping, and I worry that it has effectively rendered invalid thousands of administrative actions. Today s judgment is a quantitative one it does not tell us how much authority is too much. It lists the duties of SEC ALJs, without telling us which, if any, were more important to its decision than others and why. And I worry that this approach, and the end result, leaves us with more questions than it answers. Are all federal ALJs constitutional officers? Take, for example, the 1,537 Social Security Administration (SSA) ALJs, 5 who collectively handle hundreds of thousands of hearings a year. 6 SSA ALJs, like SEC ALJs, are civil service employees in the competitive service system. 5 C.F.R (b). In addition to presiding over sanctions actions, which are adversarial, see 20 C.F.R , SSA ALJs conduct nonadversarial hearings to review benefits decisions, see id , 405.1(c), In these proceedings, 5 See Office of Pers. Mgmt., ALJs by Agency, gov/services-foragencies/administrative-law-judges/#url=aljs-by- Agency (last visited Oct. 31, 2016). According to the Office of Personnel Management s latest count, there are 1,792 total federal administrative law judges. Id. 6 See SSA, Annual Performance Report , Table 3.1h, at 82, available at _2016_APR_508_compliant.pdf.

182 63a the claimant may appear, submit evidence, and present and question witnesses. Id , , , Like SEC ALJs, SSA ALJs regulate the course of the hearing and the conduct of representatives, parties, and witnesses. Id (b)(8). Like SEC ALJs, SSA ALJs administer oaths and affirmations, see id , and examine witnesses, id (b)(9). Like SEC ALJs, SSA ALJs may receive, exclude, or limit evidence. Id (b)(10). If a claimant is dissatisfied with an SSA ALJ s decision, he may seek the SSA s Appeals Council s review. The Appeals Council may then deny or dismiss the request for review or grant it. Id , Like the Securities and Exchange Commission, the Appeals Council may also review an ALJ s decision on its own motion. Id (a), (a). After it has reviewed all the evidence in the ALJ s hearing record and any additional evidence received, the Appeals Council will make a decision or remand the case to an ALJ. Id , , , The Appeals Council may affirm, modify or reverse the ALJ s decision. Id. If no review is sought and the Appeals Council does not review the ALJ s decision on its own motion, the ALJ s decision becomes final. See id , , , This should all sound familiar. SSA ALJs have largely the same duties as SEC ALJs, and the appeals process appears similar as well. But the parallels between SEC ALJs and SSA ALJs do not end there. Like SEC ALJs, SSA ALJs can hold prehearing conferences, id ; punish contemptuous conduct by excluding a person from a hearing, see Social Security Administration Hearings, Appeals and Litigation

183 64a Law Manual (HALLEX), I (Jan. 15, 2016) 7 ; rule on dispositive and procedural motions, 20 C.F.R (b); rule on sanctions, see HALLEX, I ; and take depositions, see HALLEX, I Like SEC ALJs, an SSA ALJ may, on his or her own initiative or at the request of a party, issue subpoenas for the appearance and testimony of witnesses and for the production of books, records, correspondence, papers, or other documents that are material to an issue at the hearing. 20 C.F.R Like SEC ALJs, though, SSA ALJs cannot enforce or seek enforcement of a subpoena; the SSA itself would have to get an order from a federal district court to compel compliance. See 42 U.S.C. 405(e). This is all to say that SEC ALJs are not unique. I cannot discern a meaningful difference between SEC ALJs and SSA ALJs under the majority s reading of Freytag. Indeed, litigants have already begun drawing this precise comparison between SEC ALJs and SSA ALJs. See, e.g., Manbeck v. Colvin, No. 15 CV 2132 (VB), 2016 WL (S.D.N.Y. Jan. 4, 2016). Insofar as SSA ALJs are not appointed by the president, a court of law, or the head of a department, cf. O Leary v. Office of Pers. Mgmt., No. DA-300A B-1, 2016 WL (M.S.P.B. June 17, 2016), today s decision risks throwing much into confusion. Does every losing party before an ALJ now have grounds to appeal on the basis that the decision entered against him is unconstitutional? Free Enter. Fund, 561 U.S. at 543 (Breyer, J., dissenting). It certainly seems that way. 7 Available at html.

184 65a And what of the ALJs going forward? When understood in conjunction with Free Enterprise Fund, I worry today s opinion will be used to strip ALJs of their dual layer for-cause protection. In Free Enterprise Fund, the Supreme Court held that dual forcause limitations on the removal of some inferior officers is unconstitutional. 561 U.S. at 492. Presently, SEC ALJs (and SSA ALJs) have such dual forcause protection: An SEC ALJ may only be removed by the Merit Systems Protection Board and only for good cause. See 5 U.S.C. 7521(a), (b). The members of the Merit Systems Protection Board are themselves protected from at-will removal. Id. at I appreciate that this issue is not before the court, but today s decision makes it more likely that either ALJs or the Board, or both, will lose this civil service protection. See Free Enter. Fund., 561 U.S. 477, 542, 525 (2010) (Breyer, J., dissenting). 8 I am similarly concerned about what the majority s decision portends for untold rules and regulations. Although almost all rulemaking is today accomplished through informal notice and comment, the APA actually contemplated a much more formal process for most rulemaking. To that end, it provided for elaborate trial-like hearings in which proponents of particular rules would introduce evidence and bear the burden of proof in support of those proposed rules. Perez v. 8 Whether federal ALJs should receive such dual for-cause protections is perhaps a question that could be debated, but Congress has already decided this question in favor of protecting ALJs, and the majority opinion shows little concern for the way its decision will overturn congressional intent and disrupt a system that has been in place for decades.

185 66a Mortg. Bankers Ass n, 135 S. Ct. 1199, 1222 n.5 (2015) (Thomas, J., concurring) (citing 5 U.S.C. 556). Formal rulemaking proceedings must be presided over by an agency official or an ALJ. An ALJ s function in formal rulemaking is nearly identical to its function in formal adjudications. See 5 U.S.C. 556, 557. So, if ALJs are officers for purposes of formal adjudication, as the majority so holds, they must also be officers for formal rulemaking. See also Freytag, 501 U.S. at 882 ( Special trial judges are not inferior officers for purposes of some of their duties under 7443A, but mere employees with respect to other responsibilities.... If a special trial judge is an inferior officer for purposes of subsections (b)(1), (2), and (3), he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed. ). Though formal rulemaking is much rarer today, see Perez 135 S. Ct. at 1222 n.5, this was not always the case. And I worry that rules and regulations that were promulgated via formal rulemaking before an agency ALJ and are still enforced today are now constitutionally suspect. 9 9 Some of these questions could, perhaps, be resolved by an explicit statement that the opinion does not apply retroactively. See e.g., Buckley, 424 U.S. at 142 (holding that the appointment of some Commissioners violated the Appointments Clause, but that the past acts of the Commission are therefore accorded de facto validity, even though [t]he issue [was] not before [the Court]. Id. at 744 (Burger, C.J., concurring in part and dissenting in part)). But see Maj. Op. 36 ( Questions about... retroactivity are not issues on appeal.... we must leave for another day any putative consequences of [our] conclusion. ).

186 67a Today s holding risks throwing much into disarray. Since the Administrative Procedures Act created the position of administrative law judge in 1946, the federal government has employed thousands of ALJs to help with the day-to-day functioning of the administrative state. Freytag, which was decided 25 years ago, has never before been extended by a circuit court to any ALJ. And yet, the majority is resolved to create a circuit split. When there are competing understandings of Supreme Court precedent, I would prefer the outcome that does the least mischief. Furthermore, faced with such uncertainty, we must hesitate to upset the compromises and working arrangements that the elected branches of Government themselves have reached. NLRB v. Noel Canning, 134 S. Ct. 2550, 2560 (2014). Judicial review must fit the occasion. In a close case regarding the application of a constitutional rule in a discrete factual setting, and without much precedent to guide us, deference to Congress seems particularly relevant. I respectfully dissent.

187 68a APPENDIX B UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT No (SEC No ) (Securities & Exchange Commission) DAVID F. BANDIMERE, PETITIONER v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, RESPONDENT IRONRIDGE GLOBAL IV, LTD; IRONRIDGE GLOBAL PARTNERS, LLC, AMICI CURIAE [Filed: Dec. 27, 2016] JUDGMENT Before BRISCOE, MCKAY, and MATHESON, Circuit Judges. This petition for review originated from the United States Securities and Exchange Commission and was argued by counsel. It is the judgment of this Court that the SEC ALJ held his office unconstitutionally when he presided over

188 69a Mr. Bandimere s Hearing. The petition for review is granted and the SEC s opinion is set aside. /s/ Entered for the Court ELISABETH A. SHUMAKER ELISABETH A. SHUMAKER, Clerk

189 70a APPENDIX C SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES ACT OF 1933 Release No / Oct. 29, 2015 SECURITIES EXCHANGE ACT OF 1934 Release No / Oct. 29, 2015 Admin. Proc. File No In the Matter of DAVID F. BANDIMERE OPINION OF THE COMMISSION SECURITIES ACT PROCEEDING EXCHANGE ACT PROCEEDING CEASE-AND-DESIST PROCEEDING Grounds for Remedial Action Unregistered Offer and Sale of Securities Unregistered Broker Fraud An individual, acting as an unregistered broker, offered and sold shares in securities in the form of investment contracts when no registration statement was filed or in effect as to those securities and no exemption from registration was available; in offering and selling those securities, the individual made positive statements about the securities while failing to disclose material information necessary to make his statements not misleading. Held, it is in the public interest to bar

190 71a the respondent from associating with a broker, dealer, investment adviser, municipal securities dealer, or transfer agent; order the respondent to cease and desist from committing or causing any violations or future violations of the provisions violated; order disgorgement of $638,056.33, plus prejudgment interest; and assess a civil money penalty of $390,000. APPEARANCES: David A. Zisser, Jones & Keller, P.C., for David F. Bandimere. Dugan Bliss and Thomas J. Krysa, for the Division of Enforcement. Appeal filed: Oct. 28, 2013 Last brief received: Apr. 3, 2014 David F. Bandimere appeals from the initial decision of an administrative law judge 1 in a proceeding brought pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange Act of and based on allegations that Bandimere violated securities registration, broker registration, and antifraud provisions of the federal securities laws. The ALJ found that Bandimere operated as an unregistered broker and sold securities in the 1 David F. Bandimere, Initial Decision Release No. 507, 2013 WL (Oct. 8, 2013) U.S.C. 77h-1, 78o(b), 78u-3. The proceeding was also brought pursuant to Section 9(b) of the Investment Company Act of 1940, 15 U.S.C. 80a-9(b), and Sections 203(f ) and (k) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(f ), (k). The Division decided not to pursue its alternative theory of liability under the Advisers Act.

191 72a form of investment contracts when no registration statement was filed or in effect as to those investments and no exemption from registration was available. Additionally, the ALJ found that Bandimere presented only a positive view of the investments while failing to disclose potentially negative facts related to the investments, including the fact that he was receiving substantial payments based on the investments he had sold. In so doing, the ALJ found, Bandimere violated antifraud and registration provisions of the federal securities laws. The ALJ found it in the public interest to bar Bandimere from association with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization; to order that Bandimere to disgorge $638, plus prejudgment interest; to impose a civil penalty of $390,000; and to order Bandimere to cease and desist from committing or causing violations of the provisions in question. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. We find, as did the ALJ, that Bandimere violated Sections 5(a), 5(c), and 17(a) of the Securities Act; Sections 10(b) and 15(a) of the Exchange Act; and Exchange Act Rule 10b-5. 3 Additionally, we reject as meritless both Bandimere s claim that the Commission violated his right to equal protection of the law when it brought this matter in an administrative forum, and that the proceeding is constitutionally defective because the presiding ALJ was not appointed in accordance with the Appointments Clause of the 3 15 U.S.C. 77e(a), 77e(c), 77q(a); 78j(b), 78o(a); and 17 C.F.R b-5.

192 73a U.S. Constitution. We also reject Bandimere s challenge to evidentiary rulings by the ALJ and his request for additional discovery. Finally, we find that a bar, cease-and-desist order, disgorgement, and civil penalties are in the public interest, but we modify the bar imposed by the ALJ. I. BACKGROUND The charges in this matter are based on Bandimere s involvement in selling investments in IV Capital LTD ( IVC ) and Universal Consulting Resources LLC ( UCR ). Having received some funds from the sale of a family business, Bandimere mentioned to Richard Dalton, a friend of many years, that he was looking for a place to invest the money and would like to know if Dalton had heard of anything promising. Dalton told Bandimere that he had brought together some investors who were investing with Larry Michael Parrish, a principal of IVC, and that he was getting paid for handling distribution of checks and other tasks for Parrish. In late 2005, Bandimere began investing with Parrish, and by the middle of 2006, he began arranging for others to invest in IVC through his personal account, receiving fees from IVC based on their investments in compensation for his efforts. In 2007, working with an attorney who also had invested in IVC (and later in UCR), Bandimere formed limited liability companies through which people could invest in IVC, continuing to receive fees on a monthly basis based on the amounts they invested. Also in 2007, Dalton set up an investment vehicle of his own, UCR, and Bandimere began arranging for people to invest in it, also through the LLCs. As was the case with IVC, Bandimere received payments from UCR on a monthly basis

193 74a based on the amounts people invested in UCR through him. Although the OIP did not allege that Bandimere knew so at the time of his alleged misconduct, both IVC and UCR turned out to be Ponzi schemes, run by Parrish and Dalton respectively. Both men were charged with operating a Ponzi scheme and violating securities registration, antifraud, and broker-dealer registration provisions of the securities laws, and judgment was ultimately entered against both men in separate actions in federal district court. In those proceedings, Parrish and Dalton were permanently enjoined and ordered to disgorge millions of dollars in ill-gotten gains and to pay an equal amount in civil penalties. 4 But this case is not about whether Bandimere was the perpetrator of a Ponzi scheme, nor does it turn on whether Bandimere had actual knowledge that IVC and UCR were Ponzi schemes. This case is about whether Bandimere (1) sold securities for which no registration statement was in effect (and no exemption 4 SEC v. Parrish, No. 11-cv WJM-MJW, 2012 WL (D. Colo. Sept. 25, 2012) (order granting plaintiff s motion for default judgment); SEC v. Universal Consulting Res. LLC, No. 10-cv REB-KLM, 2011 WL (D. Colo. Dec. 1, 2011) (order granting motion for default judgment against Richard Dalton and permanent injunction); SEC v. Universal Consulting Res. LLC, No. 10-cv REB-KLM, 2011 WL (D. Colo. Dec. 1, 2011) (order granting motion for default judgment against Universal Consulting Resources LLC and permanent injunction). In a subsequent criminal action based on Dalton s involvement with UCR, Dalton plead guilty to one count of money laundering and was sentenced to a prison term of 120 months, to be followed by three years of supervised release. United States v. Dalton, 11-cr CMA-01 (D. Colo. June 30, 2013) (entry of amended judgment).

194 75a from registration applied), (2) operated as an unregistered broker, and (3) fraudulently omitted from the representations he made to investors material information about IVC and UCR that he, in fact, did know regardless of the fact that they were Ponzi schemes. For the reasons explained below, we find that Bandimere violated Section 5 of the Securities Act by offering and selling unregistered securities, violated Section 15 of the Exchange Act by acting as unregistered broker, and violated antifraud provisions of the Securities Act and Exchange Act by failing to disclose material information that was necessary to make his representations to investors not misleading. A. Facts II. REGISTRATION AND BROKERAGE VIOLATIONS 1. Bandimere invested his own money in IVC, then arranged for other to invest. Bandimere, a resident of Golden, Colorado, has never been registered with the Commission as a broker, a dealer, or an investment adviser, nor has he been associated with a registered broker, dealer, or investment adviser. In 2005, Dalton, a long-time friend, introduced Bandimere to Parrish. As Bandimere understood it, Dalton was working for Parrish and was getting paid for his efforts to recruit investors to IVC, an off-shore company with operations in Nevis of which Parrish was a principal. Parrish told Bandimere that IVC traded primarily in securities, currencies, and commodities, that he personally had about $22 million invested in IVC, and that those funds were tied into a hundred-million dollar trading block out of Hong Kong.

195 76a Parrish also told Bandimere that funds sent to IVC would be held in escrow and used as collateral for a loan, with the loan proceeds, rather than the escrowed funds, being used for trading. Bandimere understood and later told investors that IVC would be using pooled investor funds for trading, that the efforts of IVC s traders would determine whether IVC was profitable or generated any returns for investors, and that investors would have no role in determining the trades that IVC made. Additionally, Parrish told Bandimere that IVC would earn at least a 5% return each month, which would be evenly divided between IVC and its investors. Bandimere made an initial investment of $100,000 with IVC in November 2005, and then invested an additional $100,000 in Bandimere told some friends and family members about his IVC investments, and in 2006, he helped some of them invest in IVC under his name. IVC sent the purported returns to Bandimere, and Bandimere distributed them to the investors who had invested through him. Parrish and Bandimere agreed that Parrish would compensate Bandimere for his involvement with IVC. Compensation was set at a rate of 10% of the monthly returns to investors. In addition to signing up investors for IVC, Bandimere (1) answered their questions about the investment and explained how it worked, (2) asked investors to fill out paperwork, (3) sent investor funds to IVC, (4) calculated returns due to investors, 5 (5) received checks from IVC ostensibly 5 Bandimere calculated returns for each investor based on the amount invested. The formula was generally 2% or 2.5% per month

196 77a representing IVC s returns, and (6) distributed those returns to investors. He also provided information about how to invest retirement funds in IVC. Rather than continuing to facilitate investment in IVC under his own name, Bandimere worked with attorney Cameron Syke in early 2007 to form two LLCs, Exito Capital LLC 6 and Victoria Capital LLC, which he began using to solicit investments in IVC. Bandimere was a comanaging member, together with Syke, of Exito, 7 and was the managing member of Victoria. Bandimere subsequently formed a third LLC, Ministry Minded Investors LLC. Bandimere served as the managing member of Ministry Minded. Investors wrote their checks to one of Bandimere s LLCs, but the LLCs were merely means to get their investments into IVC. 8 By the time the IVC scheme collapsed, the LLCs had collected over $5.6 million in investor funds for IVC (excluding Bandimere s investment). for IVC investors. The purported returns were calculated with reference to the amount invested rather than on any alleged profits. 6 Syke testified that he intended to limit membership in Exito to a small group of investors with a specified level of wealth. Syke understood that interests in the LLCs were securities, and he hoped that by structuring Exito this way he could avoid potential issues involving the unregistered sale of securities. 7 Syke testified that his role with respect to Exito primarily involved settling up the LLC, addressing legal matters, and overseeing tax treatment, and that Bandimere and Bandimere s wife managed the day-to-day operations, including interacting with Parrish and Dalton, receiving and depositing investor funds, and distributing investor returns. Syke and Bandimere split the fees Parrish paid for their efforts with respect to Exito. 8 None of the three LLCs was registered with the Commission as a broker, dealer, or investment adviser.

197 78a Bandimere introduced IVC to potential investors at social gatherings, such as church retreats, breakfasts, and club meetings. He also hosted several meetings for potential investors in his home. 2. Bandimere invested in, then helped others invest in, UCR. In early 2008, Bandimere began investing in UCR and encouraging others to do so. UCR was a New Mexico limited liability company with its principal place of business at Dalton s home in Golden, Colorado. According to Dalton, UCR engaged in international trading in notes and diamonds. As Bandimere described the trading program to potential investors, it involved using the accumulated funds of multiple investors, which would allow leverage and increase buying power, so as to allow small investors to participate in deals that would otherwise not be available to them. As was the case with respect to IVC, Bandimere understood (and told investors) that UCR would pool investor funds to make investments, that the profitability of UCR depended on the traders efforts, and that investors played no role in determining the investments that UCR made. Initially, Bandimere offered only the opportunity to invest in UCR s trading program, but later he also began offering an opportunity to invest in UCR s diamond program. Bandimere s role in facilitating investments in UCR through the LLCs was essentially the same as his role in facilitating investment in IVC; he signed up investors, answered their questions about the investments and explained how they worked, sent investor funds to UCR, received checks ostensibly representing UCR s returns, distributed those returns

198 79a to investors, and provided information about investing retirement funds in UCR. 9 Dalton agreed to pay Bandimere 2% of the total amount of investor funds each month for his efforts in connection with UCR. Overall, investments in UCR s trading and diamond programs through the LLCs (excluding Bandimere s own investments) were over $3.4 million. B. Analysis 1. Bandimere violated Securities Act Sections 5(a) and (c) by offering and selling investments in securities in interstate commerce when no registration statement was in effect and no exemption from registration applied. We find that Bandimere violated Sections 5(a) and 5(c) of the Securities Act by selling interests in the IVC and UCR programs, which were securities, when no registration statement was in effect for those securities and no exemption from registration applied. 10 The elements necessary to establish a prima facie case against Bandimere for violating Sections 5(a) and (c) are that (1) Bandimere directly or indirectly sold or offered to sell securities; (2) through the use of interstate facilities or the mails; (3) when no registration 9 For UCR investors, Bandimere calculated returns of 4% per month for the UCR trading program. Returns in the UCR diamond program were projected to be higher, 15% of the amount invested or even more, but those returns were to be paid when a transaction was allegedly completed rather than on a monthly basis. As with IVC, the purported returns were calculated with reference to the amount invested. 10 See 15 U.S.C. 77e(a), 77e(c); World Trade Fin. Corp., Exchange Act Release No , 2012 WL 32121, at *7 (Jan. 6, 2012), petition denied, 739 F.3d 1243 (9th Cir. 2014).

199 80a statements was in effect or filed as to those securities. 11 There is no requirement to prove that Bandimere acted with scienter. 12 Once a prima facie case is established, the burden shifts to the respondent to show that an exemption from the registration requirements applies. 13 In this case, Bandimere does not contend that any exemption to registration applies. We must therefore examine whether the elements of a prima facie violation have been established. As discussed below, we find that they have and that Bandimere is thus liable for violating Section 5. a. The IVC and UCR investments were unregistered securities. The interests Bandimere sold in IVC and UCR were investment contracts and thus securities. Both Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act provide that an investment contract is a type of security. 14 Although neither statute defines the term investment contract, the Supreme Court in SEC v. Howey supplied a widely-used test for an investment contract: whether the scheme involves 11 See World Trade Fin. Corp., 2012 WL 32121, at *7; SEC v. Cavanaugh, 445 F.3d 105, 111 n.13 (2d Cir. 2006); SEC v. Calvo, 378 F.3d 1211, (11th Cir. 2004). 12 See Calvo, 378 F.2d at 1215; SEC v. Universal Major Indus. Corp., 546 F.2d 1044, (2d Cir. 1976). 13 See SEC v. Platforms Wireless Int l Corp., 617 F.3d 1072, 1086 (9th Cir. 2010); Cavanaugh, 445 F.3d at 111 n.13 (citing SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953)) U.S.C. 77b(a)(1), 78c(a)(10). The Supreme Court has stated that although the definitions in the two acts use slightly different formulations, they are treated as essentially identical in meaning. SEC v. Edwards, 540 U.S. 389, 393 (2004).

200 81a an investment of money in a common enterprise with profits to come solely from the efforts of others. 15 The Court in Howey explained that an investment contract typically involves a situation in which [t]he investors provide the capital and share in the earnings and profits [while] the promoters manage, control and operate the enterprise. 16 The Howey test embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. 17 The interests in IVC and UCR that Bandimere sold satisfy the Howey test because the investors supplied money to Bandimere first through his personal account and later through the LLCs to purchase investments in IVC and UCR and expected their financial return to come through the business activities of IVC and UCR, not through their own participation U.S. 293, 301 (1946). 16 Id. at Edwards, 540 U.S. at 393 (quoting Howey, 328 U.S. at 299). 18 The investments Bandimere sold in IVC and UCR are, in fact, quite similar to the investment at issue in People v. White, 12 P.2d 1078, 1079 (Cal. Dist. Ct. App. 1932), a case cited in Howey as having correctly interpreted the term investment contract. 328 U.S. at 298 n.4. In White, the promoter used the investor s $5,000 to trade in securities and agreed to pay the investor the return of principal plus 50% annual interest. This is functionally identical to the interests Bandimere sold to investors. No pooling of funds from multiple investors was present in People v. White and we have previously held that a common enterprise often established through pooling of multiple investors funds is not a distinct requirement under Howey. See, e.g., Johnny Clifton, Exchange Act Release No , 2013 WL , at *8 n.55 (July

201 82a Bandimere testified that he sent investor funds first from his personal account and later from the LLCs to a bank account for either IVC or UCR, as directed by investors. 19 Bandimere understood at the time, and told investors that, IVC would use the pooled funds of investors in its trading program. He also told investors that UCR would use pooled investor funds in either its trading operation or its diamond operation. Bandimere also testified that he told investors that the efforts of IVC or UCR (or their traders) would determine whether the entities were profitable or generated any profits for investors; investors would have no role in determining the trades that IVC or UCR made. No investor testified that he or she played any role in the management of IVC or UCR, the entities trading decisions or how profits were earned by either entity. In fact, all the investors who were asked about such involvement testified that they played no such role. For these reasons, we conclude that the interests Bandimere sold in the IVC and UCR programs were investment contracts, and thus securities within the meanings of the Securities Act and the Exchange Act , 2013); Joseph Abbondante, Exchange Act Release No , 2006 WL 42393, at *6 n.40 (Jan. 6, 2006), aff d, 209 F. App x 6 (2d Cir. 2006); Anthony H. Barkate, Exchange Act Release No , 2004 WL , at *3 n.13 (Apr. 8, 2004), aff d, 125 F. App x 892 (9th Cir. 2005). Nonetheless, if a common enterprise were a separate requirement for an investment contract, here pooling of investor funds establishes that a common enterprise was present. See Clifton, 2013 WL , at *8 n IRA funds went first to an intermediary, then to an LLC, then to IVC or UCR. 20 Our finding that the investments in IVC and UCR were securities also applies to our analyses in parts II.B.2 and III below.

202 83a Bandimere does not dispute this conclusion. Furthermore, the parties stipulated that neither the IVC nor the UCR investments were ever registered with the Commission. b. Bandimere used interstate facilities in the offer and sale of the IVC and UCR investments. There is also no dispute that the jurisdictional nexus is satisfied in this case. The required interstate nexus is de minimis and is satisfied by even tangential mailings or intrastate telephone calls. 21 Bandimere wired money to IVC and UCR, sent checks representing investor returns through the mails, and used the telephone, faxes, and to communicate with Parrish and with investors. Accordingly, we find that this 21 SEC v. Softpoint, Inc., 958 F. Supp. 846, 861 (S.D.N.Y. 1997) (finding that defendant s telephone conversations with various brokerage firms and defendant s wire and mail transfers of funds satisfied the Section 5 jurisdictional requirement), aff d, 159 F.3d 1348 (2d Cir. 1998); see also United States v. Wolfson, 405 F.2d 779, 784 (2d Cir. 1968) (finding that the use of the mails to transmit an offer or other sales literature, to transport the securities after sale, to remit the proceeds to the seller, to send confirmation slips to the buyer, and perhaps even more tangential uses of the mails, can all satisfy the jurisdictional requirement of Section 5(a)(1) (quoting United States v. Kane, 243 F. Supp. 746, 750 (S.D.N.Y. 1965))); McDaniel v. United States, 343 F.2d 785, (5th Cir. 1965) (noting that use of the mails to send a confirmation of a sale to a buyer of stock constituted a use of the mails within the meaning of Section 5); SEC v. Reynolds, No. 1:06-CV1801-RWS, 2010 WL , at *3 (N.D. Ga. Oct. 5, 2010) (finding that the jurisdictional requirements of section 5(a) and 5(c) were established where defendant used mail, telephone and internet to sell securities).

203 84a conduct satisfied the Section 5 jurisdictional requirement of use of interstate commerce or of the mails. 22 c. Bandimere acted as a statutory seller in offering and selling the IVC and UCR investments. Bandimere argues that he did not violate Section 5 because he was not a seller of securities for purposes of the Securities Act. Relying on the Supreme Court s decision in Pinter v. Dahl, 23 Bandimere argues that a seller of securities [does] not include someone not motivated to serve the financial interest of either the issuer of the securities or his own financial interest, and that his motivation in informing potential investors about IVC and UCR was to benefit those potential investors rather than serve his own financial ends. This argument is both factually and legally flawed. The 22 Bandimere s use of the phone, mail, fax, and also satisfies the interstate commerce requirement for Sections 15(a), 17(a), 10(b), and Rule 10b-5. See generally T. Hazen, Treatise on the Law of Securities Regulation 17.2 (available on WESTLAW at FEDSECREG) (noting that the jurisdictional requirements of the Securities Act and the Exchange Act are easily satisfied and that [i]t is very difficult to imagine a securities transaction that does not in some respect involve an instrumentality of interstate commerce ). See also, e.g., Softpoint, 958 F. Supp. at 865 (stating that the defendant s use of the mails and facilities of interstate commerce, which satisfied the jurisdictional requirements of Section 5 of the Securities Act, also satisfied the jurisdictional requirements of Sections 17(a), 10(b) and Rule 10b-5); Myzel v. Fields, 386 F.2d 718, (8th Cir. 1967) (finding sufficient evidence of interstate transactions for purposes of Section 10 and Rule 10b-5 through telephone calls and the interstate delivery of checks); Clifton, 2013 WL , at *8 (holding that the jurisdictional requirements of 17(a) are interpreted broadly and may be satisfied by intrastate telephone calls and ancillary mailings ) U.S. 622 (1988).

204 85a record shows that although a desire to help others may have played some part, Bandimere s actions were not motivated solely by a desire to help others. That Bandimere entered into agreements with Parrish and Dalton through which he earned nearly three-quarters of a million dollars by selling and managing IVC and UCR investments demonstrates a strong personal financial motive. 24 More fundamentally, however, Pinter is not controlling here. In Pinter, the Court construed Securities Act Section 12(1), which created a private right of action for violations of Section 5. Section 12(1) makes [a]ny person who... offers or sells a security in violation of Section [5]... liable to the person purchasing such security from him. 25 The Court made clear that its holding on the liability of a seller was limited to the private action created by Section 12(1) and specifically relied on the second clause of 12(1), which provides that only a defendant from whom the plaintiff purchased securities may be liable, [thus] narrow[ing] the field of potential sellers. 26 By contrast, Section 5 lacks the purchasing... from language 24 The Court in Pinter suggested that someone who received a personal financial benefit from the sale would qualify as a seller. 486 U.S. at 654 (emphasis added). The Court also questioned the Respondent s argument that he was motivated entirely by a gratuitous desire to share an attractive investment opportunity with his friends and associates, and directed the court of appeals to examine the issue more closely on remand. Id. at 655. Bandimere here negotiated for and received substantial compensation for facilitating the investments of others in IVC and UCR, and we accordingly find that he was motivated by this financial interest. 25 Id. at 627 (quoting Securities Act Section 12(1), 15 U.S.C. 77l(1)). 26 Id. at 643.

205 86a or any equivalent found in Section 12(1), imposing liability instead on those who directly or indirectly offer or sell securities. The greater reach of Section 5 in this regard makes the interpretation of seller in Pinter inapplicable to Bandimere s situation. As the United States Court of Appeals for the District of Columbia Circuit held in SEC v. Zacharias, [a]s 5 does not include the purchas[e]... from language or any equivalent, Pinter is plainly of no use to an individual charged with a Section 5 violation. 27 Indeed, under both Commission and federal court precedents, Section 5 liability is based on whether a person is a substantial factor or a necessary participant in an offer or sale, 28 and Pinter did nothing to disturb this line of authority. 29 In light of his extensive involvement in the offer and sale of the IVC and UCR investments as set forth above, we find that for the sales at issue in this case Bandimere was a both a substantial factor and a necessary participant for purposes of Section 5. For the above reasons, we find that Bandimere violated Sections 5(a) and (c) of the Securities Act F.3d at See John A. Carley, Securities Exchange Act Release No (Jan. 31, 2008), 2008 WL , at *10; Zacharias v. SEC, 569 F.3d 458, 464 (D.C. Cir. 2009); SEC v. Phan, 500 F.3d 895, 906 (9th Cir. 2007); Calvo, 378 F.3d at 1215; SEC v. Holschuch, 694 F.2d 130, (7th Cir. 1982). 29 See Phan, 500 F.3d 895, 906 n.13 (noting that Section 5 contains no language similar to the from him language of Section 12, and thus Pinter did not overturn that court s necessary participant / substantial factor test for Section 5 liability).

206 87a 2. Bandimere violated Exchange Act Section 15(a) by acting as an unregistered broker. We also find that Bandimere violated Section 15(a) of the Exchange Act 30 by selling and attempting to sell interests in the IVC and UCR programs, which were securities, when he was neither registered nor associated with a registered broker-dealer. Section 15(a)(1) makes it illegal for a broker to use the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (with limited exceptions not applicable here) unless the broker is either registered with the Commission or a natural person associated with a registered broker. 31 Section 3(a)(4)(A) of the Exchange Act generally defines a broker as any person engaged in the business of effecting transactions in securities for the account of others. 32 A finding of violation of Section 15(a) does not require proof of scienter. 33 Bandimere stipulated that he had never been registered with the Commission as a broker, dealer, or investment adviser and had never been associated with a broker, dealer, or investment adviser. Moreover, as we have already found, the investments in IVC and UCR were securities. Thus, whether Bandimere violated Section 15(a) depends on whether he engaged in U.S.C. 78o(a). 31 Id. 78o(a)(1) U.S.C. 78c(a)(4)(A). 33 See, e.g., SEC v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003); SEC v. Interlink Data Network, 1993 WL , at *10 (C.D. Cal. 1993); SEC v. Nat l Exec. Planners, Ltd., 503 F. Supp. 1066, 1073 (M.D.N.C. 1980).

207 88a the business of effecting transactions in the IVC and UCR investments for the accounts of others. As explained below, we find that Bandimere acted as a broker and thus violated Section 15(a). a. Bandimere was engaged in the business of effecting securities transactions for others accounts. In determining whether a person is engaged in the business of effecting transactions for others accounts, the courts and the Commission have considered a number of factors. A primary consideration is whether there has been regular participation in securities transactions at key points in the chain of distribution. 34 The number of customers at issue, 35 the dollar amount 34 SEC v. Bravata, 2009 WL , at *2 (E.D. Mich. July 27, 2009); SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, at *12 (D.D.C. 1998); see also SEC v. Coplan, 2014 WL , at *6 (S.D. Fla. Feb. 24, 2014) (recognizing importance of regularity of participation in Section 15(a)(1) analysis); SEC v. Benger, 697 F. Supp. 2d 932, 944 (N.D. Ill. 2010) (same); SEC v. Martino. 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003) (same); SEC v. Corporate Relations Grp., 2003 WL , at *17 (M.D. Fla. Mar. 28, 2003) (same); SEC v. Interlink Data Network, 1993 WL , at *10 (C.D. Cal. Nov. 15, 1993) (same); SEC v. Margolin, 1992 WL , at *5 (S.D.N.Y. Sept. 30, 1992) (same); SEC v. Nat l Exec. Planners, Ltd., 503 F. Supp. 1066, 1073 (M.D.N.C. 1980) (same); UFITEC v. Carter, 571 P.2d 990, 994 (Ca. 1977) (same); Mass. Fin. Servs., Inc. v. SIPC, 411 F. Supp. 411, 415 (D. Mass) (same), aff d, 545 F.2d 754 (1st Cir. 1976); Wheat, First Sec. Inc., Exchange Act Release No , 2003 WL , at *11 n.49 (Aug. 20, 2003) ( A person effects securities transactions by participating in such transactions at key points in the chain of distribution. (quoting Mass. Fin. Servs., 411 F. Supp. at 415)). 35 See Kenton Capital, 69 F. Supp. 2d at 13 (finding broker status established where those found to be brokers received pledges to in-

208 89a of transactions, 36 and the number of transactions effected 37 have all been recognized as indicia of regularity of participation. Bandimere was responsible for sales to more than 60 customers, involving more than $9,000,000 in numerous transactions over three years. This conduct demonstrates regularity of participation. Consistent with the practice of federal courts, we also consider a variety of additional factors in determining whether a person acted as a broker. Among the factors considered are whether the person actively solicited or recruited investors; advised investors as to the merits of an investment, or opined on its merits; or received commissions, transaction-based compensation, or payment other than a salary for selling the investments. 38 Other factors that have been viewed as relevant include whether the person was an employee of the issuer of the securities; was selling, or had previously sold, the securities of other issuers; or was involved in negotiations between the issuer and the invest from more than forty individuals and actually collected money from twelve investors). 36 See id. (finding that individuals who received pledges to invest totaling $17,450,000 and actually collected $1,745,000 acted as brokers); Nat l Exec. Planners, 503 F. Supp. at 1073 (finding regularity of participation established where sales totaled $4.3 million); UFITEC, 571 P.2d at 994 (finding regularity of participation where sales totaled several million dollars). 37 See SEC v. Margolin, 1992 WL , at *5 (S.D.N.Y. 1992) (regularity of participation found where individual participated in dozens of transactions for various clients ). 38 See SEC v. Hansen, 1984 WL 2413, at *10 (S.D.N.Y. Apr. 6, 1984); Coplan, 2014 WL , at *6; Corporate Relations Grp., 2003 WL , at *17.

209 90a vestor. 39 Whether the individual handled customer funds and securities has also been viewed as important. 40 This is not an exhaustive list of the relevant factors, and no one factor is dispositive. 41 In this matter, Bandimere s conduct is consistent with many of the factors recognized as important in the analysis of broker status. He solicited investors by informing them of the IVC and UCR investments, and talking about their merits, in a variety of contexts. Bandimere advised investors about the merits of the investments by emphasizing the rate and consistency of returns, the safety of principal, and the expertise of Parrish and Dalton, 42 and by providing descriptions as to how the programs supposedly worked. He assisted investors with the paperwork involved in investing and obtained their signatures on documents, 43 and he answered investors questions. He handled both money 39 See Hansen, 1984 WL 2413, at *10 (citation omitted); Benger, 697 F. Supp. 2d at ; Martino, 255 F. Supp. 2d at See SEC v. M&A West, Inc., 2005 WL , at *9 (N.D. Cal. June 20, 2005) (noting fact that no assets were entrusted to individual as factor of particular import in reaching conclusion that individual was not a broker); Margolin, 1992 WL , at *5; Benger, 697 F. Supp. 2d at 945; Martino, 255 F. Supp. 2d at SEC v. Kramer, 778 F. Supp. 2d 1320, (M.D. Fla. 2011); SEC v. Benger, 697 F. Supp. 2d 932, 945 (N.D. Ill. 2010). 42 scf. Coplan, 2014 WL , at *6 (finding that individual who promised investors that their principal would be secure and that they would make guaranteed returns advised investors as to merits of investments). 43 Bandimere asserts in his opening brief that he did not handle investor paperwork or obtain signatures for either IVC or UCR. But Bandimere s testimony at the hearing shows that he handled paperwork necessary for people to invest in IVC and UCR.

210 91a to be invested and returns to be paid to investors, and he helped investors put IRA funds in IVC and UCR. 44 At the hearing, he admitted that from the beginning to the end, [he was] involved in the process of handling investments of [his] investors in [IVC] and UCR. The receipt of transaction-based compensation in connection with the types of activities described above is often an indication that the recipient of that compensation is engaged in the business of effecting transactions in securities. 45 Although it is not required to establish broker status 46 and is not by itself determinative of broker status, we find that, here, Bandimere received transaction-based compensation because his compensation was based on the dollar amount of the original investment transactions (i.e., the amount he collected from investors to purchase interests in IVC and UCR). Bandimere calculated the amount owed to him 44 Bandimere admitted at the hearing that he accepted investors money into the LLCs he managed or co-managed, that he sent money from the LLCs to IVC and UCR, that he sent money from the LLCs to the investors, and that he handled it when investors chose to channel IRA funds to IVC and UCR through another entity. 45 Order Exempting the Federal Reserve Bank of New York, Maiden Lane LLC and the Maiden Lane Commercial Mortgage Backed Securities Trust from Broker-Dealer Registration, Exchange Act Release No , 2010 WL , at *2 (Apr. 9, 2010). 46 Warrior Fund, 2010 WL , at *3 n.8 ( [T]ransactionbased compensation is not a necessary element to determine whether someone is a broker. ); see also, e.g., SEC v. Imperiali, 594 F. App x 957, 961 (11th Cir. 2014) (finding that individual who spoke with investors, acted as the closer for his sales team, and drafted memoranda for potential investors acted as unregistered broker in violation of Section 15(a) without any reference to transaction-based compensation).

211 92a either as a percentage of the transaction itself, or as a percentage of returns. But even where the amount was supposed to be a percentage of returns, since Bandimere had no evidence of any actual returns, he calculated his compensation by reference to the transaction amount, and what he thought the returns should have been based on that amount. In records he kept at the time, Bandimere often referred to the payments he received from IVC and UCR as broker fees or commissions, suggesting that when he was involved with IVC and UCR, he viewed the payments as salesrelated rather than administrative. As he admitted at the hearing, the more investor funds... that [he] brought in, the more that those fee payments would be. Based on our consideration of the relevant factors, we find that Bandimere was engaged in the business of effecting securities transactions for the account of others, and that he therefore acted as a broker within the meaning of Section 3(a)(4)(A). b. Bandimere s arguments against Section 15(a) liability are without merit. Bandimere makes several arguments against finding that he was acting as a broker. We find none of them convincing. He argues first that a number of the factors relevant to broker status do not apply to him. But courts have recognized that not all of the factors that have been identified as relevant need be present in order for us to find that someone acted as a broker. 47 The underlying facts vary widely from case to case, and 47 See, e.g., Corporate Relations Grp., 2003 WL , at *18 (recognizing seven factors that may be relevant, but basing finding on only three).

212 93a there is no requirement that all the factors that have been recognized as relevant be present in any given case. In addition, because the analysis requires looking at all the circumstances, the factors considered in reaching a determination as to broker status in a particular case do not purport to be an exclusive list. 48 Indeed, the court in SEC v. Benger, on which Bandimere relies, rejected the argument that there is a binding and definitive set of factors needed to support a finding that a person acted as a broker. Rather, the court found that the Commission had sufficiently alleged broker status on facts similar to the facts we find in this matter: the individual collected investors funds, received and processed documents related to the sale of the securities, communicated with the issuer about the receipt of funds and documents, and provided materials to the investors. 49 Bandimere also argues that deciding broker status on a case-by-case basis without any analytical structure that provides predictability would be arbitrary and capricious. But the standard we use to determine broker status provides the requisite analytical structure. Although that standard includes the consideration of a non-exhaustive list of relevant factors, none of which is determinative, this does not render a decision based on that standard arbitrary. Unlike Chekosky v. SEC, See Kramer, 778 F. Supp. 2d at 1334; Benger, 697 F. Supp. 2d at F. Supp. 2d at 945. The Commission had also alleged that the person found to have acted as a broker in Benger received transaction-based compensation. See id F.3d 452 at 482 (D.C. Cir. 1994) (rejecting Commission s reliance on a negligence standard articulated in a Commission audi-

213 94a cited by Bandimere, the standard we apply here is one of long-standing in our opinions as well as those of federal courts. We also reject Bandimere s argument that sanctioning him for violations of Section 15(a) would deny him due process because uncertainty as to what activities require registration as a broker creates a lack of notice of what the law requires. As noted, our determination that Bandimere acted as a broker is grounded on wellstablished criteria. Moreover, Bandimere s references to payments he received from IVC and UCR as broker fees suggest that he thought of himself as a broker. Bandimere further argues that he did not receive transaction-based compensation but was paid for performing recordkeeping or other administrative functions. Bandimere s compensation was not related to any of the recordkeeping functions he performed but to the amount of the investments. Bandimere insists that if he was compensated simply for finding investors, there would have been no reason for him to spend the time and incur expenses performing administrative functions for no compensation. Even if Bandimere was compensated for administrative as well as sales activities, the amount of the compensation was transactionbased, and raised the investor protection concerns inherent in such compensation. 51 tor disciplinary opinion on the basis that the opinion relied on was not published or publically available). 51 See Order Exempting the Federal Reserve Bank of New York, Maiden Lane LLC and the Maiden Lane Commercial Mortgage Backed Securities Trust from Broker-Dealer Registration, 2010 WL , at *2 & n.13 ( Compensation based on transactions in securities can induce high pressure sales tactics and other

214 95a For all of the above reasons, we find that Bandimere violated Section 15(a) of the Exchange Act. III. FRAUD VIOLATIONS Bandimere is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Section 17(a)(2) makes it unlawful for any person in the offer or sale of any securities... directly or indirectly... to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 52 Section 10(b) makes it unlawful for any person, directly or indirectly,... to use or employ, in connection with the purchase or sale of any security... any manipulative or deceptive device or contrivance in contravention of Commission rules. 53 And Rule 10b-5(b) makes it unlawful, in connection with the purchase or sale of any security, to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 54 A problems of investor protection which require application of brokerdealer regulation under the [Exchange] Act. (quoting Persons Deemed Not To Be Brokers, Exchange Act Release No , 1985 WL , at *4 (June 27, 1985))) U.S.C. 77q(a) U.S.C. 78j(b) U.S.C. 78( j), 17 C.F.R b-5. Before the ALJ, the Division pursued liability under Section 17(a)(2) and Rule 10b-5(b), and not under Sections 17(a)(1) or (3) or Rule 10b-5(a) or (c). We limit our discussion here to the theories of liability pursued by the

215 96a violation of these provisions also requires the use of means or instrumentalities of interstate commerce. We have already found that the investments in IVC and UCR at issue were securities, and that Bandimere used instrumentalities of interstate commerce to offer and sell them. 55 Bandimere does not deny that his statements about the IVC and UCR investments were made in connection with offers and sales of these investments. Moreover, he made the statements at issue directly to people who purchased, or who were offered the opportunity to purchase, those investments. This satisfies the in connection with requirement. 56 Accordingly, to find a violation of Section 17(a)(2) we must find that Bandimere obtain[ed] money or property by means of a material misrepresentation or omission and acted with at least negligence. 57 And to find a violation of Division in this case. In addition, although the OIP also charged violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, which prohibit fraudulent conduct by an investment adviser to a pooled investment vehicle, 15 U.S.C. 80b-6(4), 17 C.F.R. 275,206(4)-8, the Division stated in its posthearing brief that it was not pursuing liability under the Advisers Act. 55 See supra Sections II.B.1.a & b. 56 See, e.g., SEC v. Jabukowski, 150 F.3d 675, 680 (9th Cir. 1998) (statement made to induce acceptance of securities transaction satisfies in connection with requirement). See also SEC v. Zandford, 535 U.S. 813, (2002) (finding that Commission has consistently adopted a broad reading of in connection with language in Section 10(b) and reiterating that Section 10(b) should be construed flexibly to effectuate its remedial purposes. (quoting Affiliated Ute Citizens of the United States, 406 U.S. 128, 151 (1972))). 57 See, e.g., Thomas C. Bridge, Exchange Act Release No , 2009 WL , at *13 n.59 (Sept. 29, 2009) ( There is no scienter

216 97a Section 10(b) and Rule 10b-5(b) we must find that Bandimere made a material misrepresentation or omission and acted with scienter. 58 We find by a preponderance of the evidence that these elements are satisfied. A. Bandimere made materially misleading statements to investors. As noted, Sections 17(a) and 10(b) and Rule 10b-5 may be violated by making untrue statements of material fact or by omitting a material fact necessary to make statements that are made, in light of the circumstances under which they were made, not misleading. 59 An omission is material if there is a substantial likelihood that a reasonable investor would have considered the omitted information important in deciding whether or not to invest and if disclosure of the omitted fact would have significantly altered the total mix of information available to the investor. 60 One who elects to disclose material facts must speak fully and truthfully, and provide complete and non-misleading information requirement for violations of Securities Act Sections 17(a)(2) or (3); negligence is sufficient. ). 58 See id. at * U.S.C. 77q(a)(2), 78j(b); 17 C.F.R b-5(b). Bandimere contends that the ALJ failed to identify either material facts that caused particular statements to be misleading or positive information that was rendered misleading by omissions. Once we granted Bandimere s petition for review, the initial decision, including the factual findings made there, ceased to have any force or effect. Richard J. Adams, Exchange Act Release No , 1998 WL 52044, at *1 n.1 (Feb. 11, 1998). The findings set forth below are made as part of our de novo review. 60 Basic Inc. v. Levinson, 485 U.S. 224, , 240 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992).

217 98a with respect to the subjects on which he undertakes to speak, 61 and incomplete disclosures implicate a duty to disclose whatever additional information is necessary to rectify the misleading statements. 62 In addition, we have consistently recognized that making predictions and representations in connection with the offer or sale of a security, whether couched in terms of opinion or fact, which are without reasonable basis, violates the antifraud provisions of the securities laws. 63 Indeed, the Supreme Court recently recognized that a state- 61 SEC v. Curshen, 372 F. App x 872, 880 (10th Cir. 2010); see also Meyer v. JinkoSolar Holdings Co., 761 F.3d 245, (2d Cir. 2014). 62 Schlifke v. Seafirst Corp., 866 F.2d 935, 944 (7th Cir. 1989). 63 See Robert G. Weeks, 2004 WL 828, at *8-11 (baseless valuation of mining properties and mineral assets, baseless claims of revenue earned by smelter, and baseless representations that mines contained commercial values of ore all violated Section 17(a) and Section 10(b) and Rule 10b-5); M.V. Gray Invs., Inc., Exchange Act Release No. 9180, 1971 WL , at *3 (May 20, 1971) (president and principal shareholder of registered broker-dealer violated antifraud provisions when he made optimistic representations and predictions to customers without a reasonable basis, and knew, but did not tell customers to whom he recommended the stock, that the issuer had been losing money); see also United States v. Ware, 577 F.3d 442, (2d Cir. 2009) (finding that issuance of press releases containing false and baseless statements supported findings of violation of Section 10(b) and Rule 10b-5); SEC v. USA Real Estate Fund 1, Inc., 30 F. Supp. 3d 1026, 1035 (E.D. Wash. 2014) (finding that violations of Section 17(a), Section 10(b), and Rule 10b-5 were established by evidence that individual repeatedly made material statements to investors that had no basis in reality and which he knew lacked any support ); SEC v. Gebben, 225 F. Supp. 2d 921, (C.D. Ill. 2002) (finding that internet poster violated Section 10(b) and Rule 10b-5 by writing glowingly and authoritatively about a stock while having no independent basis for his opinions, but merely reciting what he was paid to say).

218 99a ment of opinion may be understood by a reasonable investor to convey facts about how the speaker has formed the opinion or, otherwise put, about the speaker s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience Bandimere omitted material facts with respect to the IVC and UCR investments and obtained money by means of these omissions. Bandimere made representations to investors about the investments in IVC and UCR that were materially misleading because he omitted facts that reasonable investors would have wanted to know when making the decision to invest. His positive representations about IVC included that Parrish was an expert trader with a professional and sophisticated trading organization, that the IVC investment principal would be deposited in a bank account and would be borrowed against, but not at risk, that Bandimere had investigated IVC and was confident in the investment, and that investors could expect to receive returns of 2% to 2.5% per month. For UCR, Bandimere made similar representations: he told investors that the UCR programs involved professional organizations including an experienced secret Singapore trader and a skilled diamond trader and that UCR took care to safeguard investors money. He also made representations about UCR s future returns, telling investors that their UCR trading program investment would yield 4% per month and that 64 Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1328 (2015).

219 100a the UCR diamond program would have a 25% return within a few months. All of these statements were materially misleading in light of the context in which they were made because Bandimere failed to disclose specific material facts in his possession about the investments that would have cast doubt on his positive representations. Significantly, Bandimere failed to disclose that he was getting compensated by IVC and UCR at the respective monthly rates of 10% of ostensible investor returns and 2% of funds invested. 65 Bandimere s statements to potential investors that he was confident in the success of the investments and that they could expect to receive returns of 2% to 2.5% per month through IVC and 4% per month through UCR s trading program (as well as even greater returns through UCR s diamond program) were rendered materially misleading by his failure to disclose his own significant compensation, which was directly tied to the amount they invested. As we have noted, [c]ourts have recognized that economic conflicts of interest, such as undisclosed compensation, are material facts that must be disclosed Although the operating agreements for the Exito and Victoria LLCs contained a boilerplate provision that the managers of the LLCs would receive reasonable compensation for their services based on the excess of investor returns, Bandimere failed to tell investors that through explicit arrangements with Parrish and Dalton he was receiving significant payments directly from IVC and UCR over three-quarters of a million dollars altogether based on the amount of investments that he brought in. 66 IMS/CPAs & Assocs., Exchange Act Release No , 2001 WL , at *8 (Nov. 5, 2001) (citing additional authority); see

220 101a The disclosure in the LLC agreements was inadequate because it falsely suggested that Bandimere would be paid by the LLCs based on excess returns, not directly from IVC and UCR based on a pre-arranged percentage. It also failed to disclose the significant percentage Bandimere would receive of investors purported returns and investments. This failure is a material omission because investors would have wanted to know, in order to properly assess Bandimere s positive representations about the investments anticipated monthly returns, that Bandimere was being paid by IVC (10% of investor returns per month) and UCR (2% of total investments per month) for steering investors their way. Bandimere s positive representations about the investments in IVC and UCR were also materially misleading because Bandimere failed to disclose negative facts which he knew about IVC, Parrish, UCR, and Dalton. Bandimere failed to tell investors specific negative information about Parrish. For example, Bandimere knew that Parrish had been sued by the Commission and failed to tell investors. 67 This made Bandialso Curshen, 372 F. App x at 881 (finding that where statements posted on the internet appeared to be relaying information about a security, disclosure of the fact that the person making the postings was compensated as a promoter of the stock would be necessary to make the statements not misleading). 67 Bandimere admitted only to knowing that Parrish had an unspecified regulatory issue in 2004 or 2005 and testified that he was unclear as to whether the Commission was involved. But the ALJ found that Bandimere knew the Commission had brought suit against Parrish. Based our review of the evidence in the record, we agree with this finding

221 102a mere s statements about Parrish s trading acumen that he was an expert trader and a wizard at investing and that he ran a professional trading organization materially misleading. A reasonable investor would likely have found it significant that the federal regulatory agency charged with overseeing the securities industry found sufficient reason to charge the expert trader with violations of the federal securities laws and could have used the information to discover that Parrish had been charged with engaging in a fraudulent investment scheme, which in turn would have affected a reasonable investor s decision whether to invest in IVC. In its action against Parrish, brought in federal district court in 2005, the Commission alleged that he and others engaged in a fraudulent prime bank investment scheme that raised $8.2 million from investors. See generally SEC v. Parrish, Litigation Release No , 2007 WL (May 17, 2007) (describing litigation against Parrish). In May 2005, well before Bandimere had started investing with him or introducing other investors to UCR, Parrish had consented to a preliminary injunction and an asset freeze related to the prime bank scheme. See SEC v. Z-Par Holdings, Inc., 05-CV-1031-JFM (D. Md. May 4, 2005) (preliminary injunction order); SEC v. Z-Par Holdings, Inc., 05-CV-1031-JFM (D. Md. May 3, 2005) (notice of filing of agreed upon order). In April 2007, the court entered a final judgment against Parrish, imposing a permanent injunction by consent. SEC v. Z-Par Holdings, Inc., 05-CV-1031-JFM (D. Md. Apr. 26, 2007) (final judgment as to defendant Larry Michael Parrish). In May 2007, Parrish settled an administrative proceeding brought against him based on his involvement in the same fraudulent scheme by consenting to the imposition of an order barring him from association with any broker or dealer, with a right to apply after at least five years. Parrish, 2007 WL

222 103a Bandimere s representations about IVC as a professional trading organization were similarly misleading because he failed to qualify those representations with disclosures about IVC s failure to provide documents even after Bandimere asked for them and instances in which IVC sent less money than was due to the LLCs. 68 These omissions also rendered Bandimere s statements about the returns investors could expect to receive from IVC misleading in part because IVC s failure to provide documents, or the right amount of money, 69 raised questions as to whether the alleged trades were taking place at all, much less yielding returns at the expected levels. Despite Parrish s failure to provide Bandimere with basic documentation about IVC s operations, Bandimere told at least one investor that he had done some investigation into IVC and that he was confident in the investment. This statement was materially mislead- 68 IVC did not provide account statements documenting investments made through the LLCs or purported monthly earnings of the LLCs. Even when Bandimere asked for documents confirming trading, IVC s traders, or other aspects of the investments, Parrish did not provide them. Yet Bandimere did not tell investors about these gaps in documentation, or Parrish s refusal to provide the information Bandimere requested. 69 Bandimere contends that the Division presented only a single instance of Parrish sending insufficient funds, but there is evidence in the record, including Bandimere s own testimony, that Parrish repeatedly wired funds that were insufficient to cover both investor returns and Bandimere s expected commissions. Even if Parrish subsequently corrected the shortages, as Bandimere claims, the sloppiness of Parrish s operation exemplified by these repeated mistakes which were never disclosed to investors significantly undermines Bandimere s contrary representations about the professionalism and sophistication of IVC.

223 104a ing because Bandimere failed to disclose that his soalled investigation was uncritically relying on unverified anecdotes from Parrish and others and that his confidence was largely baseless. For example, Bandimere testified that he had confidence in Parrish because he gave a lot of credibility to a woman s sixth sense and thus relied on Dalton s wife comfort level with Parrish. A reasonable investor would have wanted to know that Bandimere did almost nothing to investigate IVC and that he not only lacked a reasonable basis for the confidence he expressed but, in fact, knew facts that he did not share that would have seriously undermined that expression of confidence. Bandimere also omitted material facts about UCR and Dalton, including concealing Dalton s identity from investors who knew Dalton personally. Bandimere s statements to Radke and Koch that UCR was headed by experienced and knowledgeable financiers and to Koch that the person in charge of UCR was a person of significant worldwide contacts and stature were materially misleading because he failed to identifying the head of UCR as Dalton someone Bandimere knew they knew personally. Indeed, we find Bandimere s failure to tell Radke and Koch that Dalton was the person behind UCR highly material. Both Koch and Radke testified that they would have had concerns about investing with Dalton given his past, and Koch testified that he felt betrayed and that Bandimere had not been straight with him when he found out that the person behind UCR was Dalton. Bandimere s selective concealment of Dalton s involvement with UCR is itself strong evidence of the materiality of the information Bandimere chose to withhold.

224 105a To those investors who were unfamiliar with Dalton personally Bandimere failed to disclose specific facts he knew about Dalton s long history of unsuccessful business ventures. For example, Bandimere knew that Dalton had been involved in a failed investment venture involving debentures that resulted in investor losses of $2 to $3 million and a loss to Bandimere personally of over $10,000. He also knew that Dalton had been involved in several unsuccessful multilevel marketing businesses, one of which Bandimere believed went bankrupt and from another of which Bandimere assumed Dalton to have been dismissed. These omissions rendered Bandimere s statements to Davis and other investors that UCR was a sophisticated and professional organization and that Dalton had connections with experienced traders materially misleading. Bandimere also misled investors by failing to notify them of the fact that Dalton never showed him any documentation about UCR, that Bandimere himself calculated the so-called investment returns, and that Dalton had to ask Bandimere for the amounts invested in UCR by the LLCs. The facts Bandimere omitted, which demonstrated an obvious lack of professionalism and, at the very least, hinted at possible dishonesty with respect to the UCR programs, were material because a reasonable investor would have considered the questions raised by the omissions significant in deciding whether to invest in those programs. Finally, we find that Bandimere obtained money by means of the omissions described above, as required to find a violation of Section 17(a)(2). 70 As we have ex- 70 See 15 U.S.C. 77q(a)(2).

225 106a plained, Bandimere s statements, which were rendered misleading by his omissions, were material in facilitating investments in IVC and UCR. Indeed, for those investors for whom Bandimere was the sole source of information about the investments, his misleading statements were the entire basis for their investment. Bandimere was compensated handsomely receiving over three-quarters of a million dollars based on the amount of money invested through him. This is more than sufficient to satisfy the requirement that he obtain[ed] money... by means of the omissions. 71 Accordingly, for all of the above reasons, we find that Bandimere s conduct satisfies the requirement for material misrepresentations or omissions under Securities Act Section 17(a)(2) and Exchange Act Section 10(b) and Rule 10b-5(b). 2. Bandimere s arguments that he did not materially mislead investors are without merit. Bandimere argues that the OIP attributed to him only two representations about the IVC and UCR investments that they were low risk and very good investments. He asserts that there is no evidence that he made either statement, and that since the Division did not prove that he made either statement, any violations dependent on those statements must fail. We disagree. The OIP alleges that Bandimere committed fraud because he 71 See Clifton, 2013 WL , at *9 (individual who received override of commissions generated on sale of securities obtained money for purposes of Section 17(a)(2)).

226 107a presented a one-sided view and highlighted only positive material characteristics: a) the consistent rate of return, b) the established track record of performance, c) the experienced and successful traders, d) his personal dealings with Dalton and Parrish which gave him confidence in their abilities, and e) with regard to Dalton, his long-standing personal relationship. Other paragraphs of the OIP provide more details about some of these representations. For example, the OIP alleges that Bandimere told investors that (1) the investment manager of the UCR trading program had been a longtime personal friend, (2) they would earn a guaranteed annual return of 48% on investments in the UCR trading program, (3) the UCR diamond program promised potential returns of 10% per month, and (4) the operating agreements for the LLCs specified annual targeted returns of 24-30%. Thus, contrary to Bandimere s insistence, he was put on notice from the outset as to the types of representations, and many of the specific representations, he was charged with having made. Moreover, as the Division points out in its response, witness testimony supports finding that he characterized the investments as low risk and very good investments, even if he did not use those exact words. 72 In addition, the OIP charged 72 See Tr. 305 (Loebe) ( I don t recall exact words. But the overall tone was that, here was a good investment. ), Tr. 483 (Blackford affirmed that Bandimere told him that the money was supposed to stay in some account, and then it would be borrowed against, but not at risk ), Tr. 537 (Davis) ( [H]e felt that it was a good investment and that he was he was doing well with it. ), Tr. 704 (when Bandimere made the opportunity to known to invest in IVC, he gave the impression to Radke that it was a good investment ),

227 108a Bandimere with having fail[ed] to disclose numerous red flags and potentially negative facts relating to those investments, specifically identifying fifteen instances of alleged failure to disclose. Rule 200(b) of our Rules of Practice requires that the OIP state the nature of the hearing, the legal authority for holding the hearing, a short and plain statement of the matters of fact and law to be considered and determined, and the nature of any relief sought. 73 But the OIP need not allege all of the evidence on which the Division intends to rely. 74 In determining whether a respondent in an administrative proceeding had adequate notices of the charges, the question is whether the respondent understood the Tr. 757 (Bandimere suggested to Syke that for the UCR diamond program there was really no risk, because it was done through the government ) C.F.R (b). 74 See Rita J. McConville, Exchange Act Release No , 2005 WL , at *14 (June 30, 2005) ( The OIP must inform the respondent of the charges in enough detail to allow the respondent to prepare a defense, but it need not disclose to the respondent the evidence upon which the Division intends to rely. ), petition denied, 465 F.3d 780 (7th Cir. 2006); M.J. Reiter Co., Exchange Act Release No. 6108, 1959 WL 59479, at *2 (Nov. 2, 1959) ( [A]ppropriate notice of proceedings is given when the respondent is sufficiently informed of the nature of the charges against him so that he may adequately prepare his defense[;]... he is not entitled to a disclosure of evidence. ); Charles M. Weber, Exchange Act Release No. 4830, 1953 WL 44090, at *2 (Apr. 16, 1953) ( A respondent is not entitled to a disclosure of evidence in the order for hearing. ).

228 109a issue and was afforded full opportunity to justify [his or her] conduct during the course of the proceeding. 75 Here, the OIP satisfied the requirements of Rule 200(b), and Bandimere was provided additional information through the Division s supplemental statement submitted in response to his motion for a more definite statement and throughout the course of the proceeding. 76 At the hearing, the Division introduced ample evidence of specific statements that Bandimere made about IVC and UCR, as discussed above, that created a one-sided positive view of the IVC and UCR investments. Thus, we reject Bandimere s argument that the Division was somehow required to prove that Bandimere made verbatim representations to investors that the IVC and UCR investments were low risk or very good. Bandimere also asserts that the only proven representations that he made about IVC and URC were statements about the investments returns and that [t]he accurate disclosure of historical financial results is not rendered misleading by failing to disclose facts which may raise questions about whether similar results will be achieved. But Bandimere made many statements about returns that were predictive rather than historic, telling investors that going forward they could expect to receive returns of 2% or 2.5% per month 75 Wendy A. McNeeley, C.P.A., Exchange Act Release No , 2012 WL , at *9 (Dec. 13, 2012) (quoting Aloha Airlines v. CAB, 598 F.2d 250, 262 (D.C. Cir. 1979)). 76 In its supplemental statement, the Division identified the individuals it claimed were defrauded, and specified when Bandimere allegedly knew the facts that the Division alleged should have been disclosed.

229 110a through IVC, and 4% per month through UCR. More importantly, there is no evidence that Bandimere disclosed accurate historical results for the investments. As discussed above, Bandimere had no visibility into the actual trading or returns at either IVC or UCR. Finally, Bandimere claims that his omissions could not have been material because the ALJ found that he did not know, nor should he have known that the investments were Ponzi schemes. But this argument rests on a false premise: even if Bandimere was not negligent in failing to identify IVC and UCR specifically as Ponzi schemes, this does not mean that he was not aware of facts (which he failed to disclose) that called into question the legitimacy and quality of the investments. Bandimere was obliged to disclose negative facts that were known to him about the investments, which would have enabled investors to make informed decisions about investing. Therefore, we reject Bandimere s argument and find that his omissions were material. B. Bandimere acted with scienter in offering and selling the IVC and UCR investments. To find that Bandimere violated Exchange Act Section 10(b) and Rule 10b-5, we must find that he acted with scienter. 77 Scienter is a mental state embracing intent to deceive, manipulate, or defraud. 78 Scienter may be established by recklessness, which has been defined as conduct that presents a danger of mislead- 77 See Bridge, 2009 WL , at *13 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976)). 78 Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980) (internal quotation marks omitted).

230 111a ing buyers or sellers that is either known to the [actor] or is so obvious that the actor must have been aware of it. 79 Negligence suffices to establish liability under Securities Act Section 17(a)(2), 80 and a finding of scienter more than satisfies this requirement. 81 We find that Bandimere was reckless in making numerous and repeated statements to investors about IVC and UCR that lacked any reasonable basis and that were rendered materially misleading by his failure to disclose countervailing negative information. Bandimere misled investors by encouraging investment in IVC and UCR, ostensibly as a neutral party, while failing to disclose the generous fees that he was 79 David Henry Disraeli, Advisers Act Release No. 2686, 2007 WL , at *5 (Dec. 21, 2007) (bracketed language in original) (quoting SEC v. Rubera, 350 F.3d 1084, 1094 (9th Cir. 2003), and citing additional authority). Although Bandimere argues that proof of actual intent is required to establish scienter, we have repeatedly held that recklessness is sufficient. See, e.g., Peter Siris, Exchange Act Release No , 2013 WL , at *6 n.37 (Dec. 12, 2013) (citing Clifton, 2013 WL , at *10 n.67), petition denied, 773 F.3d 89, 94 (D.C. Cir. 2014); Tzemach David Netzer Korem, Exchange Act Release No , 2013 WL , at *6 n.47 (July 26, 2013) (citing Disraeli, 2007 WL , at *5). Bandimere asserts that the Supreme Court has not yet accepted that recklessness satisfies the scienter standard, but the absence of a Supreme Court ruling is not an impediment to our deciding the issue. 80 Bridge, 2009 WL , at *13 n.59 (citing Aaron, 446 U.S. at 697, ); Clifton, 2013 WL , at *8. 81 See Clifton, 2013 WL , at *10 n.67 (finding negligence analysis unnecessary for purposes of Section 17(a)(3) which, like Section 17(a)(2), does not require scienter where evidence established scienter).

231 112a being paid. 82 Bandimere took in fees of nearly threequarters of a million dollars, more than half again as much as the $477, he received in earnings on his own investments in IVC and UCR. Since the fees were based on amounts invested (or on returns, which were themselves based on amounts invested), there was an obvious danger that Bandimere s recommendations would be influenced by his personal financial stake. Bandimere falsely telling Loebe that excess profits would go to a Christian charity rather than to pay him is also evidence of intent to deceive. 83 Bandimere promoted IVC and UCR without a reasonable basis for the positive statements he made and while in possession of material negative information that he failed to disclose. This posed a danger of misleading investors that was so obvious that Bandimere must have been aware of it. He praised Parrish s expertise and emphasized the extent of the trad- 82 See Curshen, 372 F. App x at 882 (finding scienter based on the logical conclusion that one who knew he was being compensated for promoting a stock also knew that the failure to disclose this compensation would mislead those reading his internet postings by making his opinions seem objective). See also Gebben, 225 F. Supp. 2d at 927 (internet poster who knew that investors... would wrongly believe that his opinions represented independent research, rather than merely a recitation of what Issuers paid [his employing firm] to say acted with scienter). 83 Bandimere testified that he did not remember making this statement to Loebe, but the ALJ found Loebe s testimony more credible than Bandimere s as to this issue. An ALJ s credibility findings are entitled to considerable weight. Steven Altman, Exchange Act Release No , 2010 WL , at *4 n.10 (Nov. 10, 2010) (citing Anthony Tricarico, Exchange Act Release No , 1993 WL , at *3 (May 24, 1993)), petition denied, 666 F.3d 1322 (D.C. Cir. 2011).

232 113a ing organization he allegedly managed, with more than $20 million under management, a fifteen-year history of trading, a positive track record, and a consistent monthly return. But his positive representations about Parrish were based largely on anecdotal, second-hand information. Bandimere did not do any independent research on Parrish s trading organization and did not see any documents verifying Parrish s trading history. In addition, Bandimere knew that Parrish had been sued by the Commission, and Bandimere had even been warned by Dalton about dealing with Parrish. Similarly, with regard to UCR, Bandimere touted Dalton s alleged high-level connections, talked about mysterious or secret people involved with the UCR programs, and emphasized the alleged safety of the investments. But these statements were based only on what Dalton had told him and were without a reasonable basis in fact. And Bandimere knew that Dalton had a long history of business failures and had reason to believe that Dalton was not keeping track himself of the amount the LLCs had invested in UCR. Bandimere also made many statements to investors that were completely untrue. For example, with regard to UCR, Bandimere s statements to investors that the trading program involved a secret Singapore trader, that investor funds were placed in escrow and used as collateral for trading activities, and that a diamond trading program existed were all untrue statements of material fact. There was no secret trader, no funds in escrow, and no actual diamond trading because, as the court found in holding Dalton liable for his fraud, the sole source of funds for profit payments was funds re-

233 114a ceived from other investors. 84 But Bandimere passed on these false statements without any real effort to verify them and profited handsomely for his efforts. Even if, as Bandimere claims, he did not have actual knowledge of the falsity of such statements, we find that his reckless disregard for their truth is strong evidence of his scienter. We also find that Bandimere s failure to identify Dalton by name to Koch and Radke, while describing UCR s head as a person of significant worldwide contacts and stature, was intentionally deceptive. Bandimere knew that both Koch and Radke knew Dalton. (This is especially true with respect to Radke, since Bandimere, Radke, and Dalton all served on the board of the same local ministry.) Instead of identifying Dalton as the head of UCR, Bandimere gave a description of the unnamed head of UCR that was so at odds with the Dalton known to Koch that Koch felt betrayed and thought that Bandimere had not been straight with him once he found out that the unnamed person was actually Dalton. The record evidence supports the conclusion that Bandimere intentionally concealed Dalton s identity from Koch and Radke out of fear that they otherwise would not invest. As Koch testified, Dalton had never... been successful in anything financial or in employment.... I just didn t see him as a person who was doing well. Radke testified that he was not necessarily comfortable investing with Dalton. Bandimere argues that there is no evidence that he knew or believed that Koch or Radke would have 84 Universal Consulting Res., LLC, 2011 WL , at *2.

234 115a viewed Dalton s involvement negatively. We disagree. We find that Bandimere s own knowledge of Dalton s questionable financial background, and the fact that he stressed his personal relationship with Dalton in his discussions with other investors provides ample circumstantial evidence to support our finding that Bandimere suspected that knowledge of Dalton s involvement in UCR could deter Koch and Radke from investing. 85 Bandimere argues that the undisputed fact that he had thousands of dollars of his own money invested in IVC and UCR when he was discussing those investments with others is evidence that he did not act with fraudulent intent. But by far the biggest part of his income from IVC and UCR was the hundreds of thousands of dollars he earned by getting others to invest. It was at least reckless that Bandimere did not reveal material negative information in his possession while using positive representations in order to solicit investments that directly benefited him financially even if he was ignorant of the fraudulent nature of the investments. Bandimere argues, citing South Cherry Street LLC v. Hennessee Group, 86 that where recklessness is alleged to be failing to recognize the fraud of others, that recklessness must approximate an actual intent to aid 85 Bandimere s reliance on NLRB v. Martin A. Gleason, Inc., 534 F.2d 466, 474 (2d Cir. 1976), is misplaced. That case holds that findings of fact must be based on reasonable inferences, and here it is perfectly reasonable to infer from the evidence in the record that Bandimere believed mentioning Dalton s involvement to Koch and Radke would make them less likely to invest F.3d 98, (2d Cir. 2009).

235 116a in the fraud. But the basis for the charges of fraud against Bandimere was not that he failed to recognize others fraud, but rather that he failed to disclose material negative facts in his possession that would have let investors make informed decisions. Thus, Bandimere s reliance on South Cherry Street is misplaced. Our finding of scienter is entirely consistent with the standard applied by the court in South Cherry Street. 87 Similar to the argument he raised about the OIP providing insufficient notice of his fraudulent statements and omissions, Bandimere contends that he had no notice that the facts found to prove scienter would be at issue. For the same reasons we rejected the earlier argument, we reject this one: there is no requirement for the OIP to allege all of the particular facts upon which an element of a violation may be founded. 88 The requirements of Rule 200(b) are satisfied here and the ALJ did not exceed his authority Compare supra text accompanying note 79 (quoting recklessness standard used in Disraeli, 2007 WL , at *5), with South Cherry Street, 573 F.3d at 109 (quoting standard from In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000)). 88 See supra note 74 and accompanying text. 89 Contrary to Bandimere s insistence, his accepting Pickering s $100,000 investment in the UCR diamond program in March 2010, following a warning from Syke about further investments, is within the scope of the OIP. See OIP 1, 2, 29. Nevertheless, unlike the ALJ, we do not rely on Bandimere s conduct with regard to Pickering s March 2010 diamond program investment in our finding of scienter. In addition, unlike the ALJ, we do not base our finding of scienter on Bandimere s alleged bullying of Koch. There is ample evidence of scienter without relying on these episodes.

236 117a For the above reasons, we find that Bandimere violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. IV. CONSTITUTIONAL CHALLENGES A. Equal-Protection Defense Bandimere argues that he was denied equal protection because the Commission proceeded against him administratively rather than in federal district court. The thrust of his equal-protection argument is that the Commission sues Ponzi schemers in federal courts, but that his case, which he contends alleg[es] he must have known he was getting investors involved in a Ponzi scheme, was brought as an administrative proceeding. He argues that he was singled out and denied the opportunity for a trial by jury, presided over by an Article III judge, and denied discovery under the Federal Rules of Civil Procedure and that this denial impaired his ability to mount a full defense. We reject Bandimere s equal-protection defense for several reasons. First, an equal-protection claim is not legally cognizable in the context of an inherently discretionary governmental decision to bring charges in one forum rather than another. The Supreme Court held in Village of Willowbrook v. Olech that an individual who is not a member of a protected class may in some contexts assert a class-of-one equal-protection claim by establishing that he or she was intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treat-

237 118a ment. 90 But the Supreme Court has subsequently made clear that Olech, which involved a landowner s challenge to a zoning decision, does not apply to every kind of government action. There are, the Court explained, some forms of state action... which by their nature involve discretionary decisionmaking based on a vast array of subjective, individualized assessments. 91 In such contexts, a class-of-one theory of equal protection has no place because allowing a challenge based on the arbitrary singling out of a particular person would undermine the very discretion that such state officials are entrusted to exercise. 92 The Commission s choice to bring an action in an administrative forum is a decision committed to agency discretion U.S. 562, 564 (2000). 91 Engquist v. Oregon Dept. of Ag., 553 U.S. 591, 592, 603 (2008). 92 Id. at See 17 C.F.R (b) ( After investigation or otherwise the Commission may in its discretion take one or more of the following actions: Institution of administrative proceedings looking to the imposition of remedial sanction, initiation of injunctive proceedings in the courts, and, in the case of a willful violation, reference of the matter to the Department of Justice for criminal prosecution. ); Robert Radano, Investment Advisors Act Release No. 2750, 2008 WL , at *8 n. 74 (June 30, 2008) (determination whether to proceed against some rather than others is committed to agency discretion); Eagletech Commc ns, Inc., Exchange Act Release No , 2006 WL , at *4 (July 5, 2006) (same). In the analogous context of federal prosecutors decisions about charging defendants, courts have rejected class-of-one claims based on prosecutorial discretion. See, e.g., United States v. Moore, 543 F.3d 891, 901 (7th Cir. 2008) (holding that the discretion conferred on prosecutors in choosing whom and how to prosecute precludes a class-of-one equal-protection claim in that context); United States v. Green, 654 F.3d 637, 650 (6th Cir. 2011) (rejecting

238 119a Accordingly, Bandimere s class-of-one equal- protection challenge must fail. Second, even if a class-of-one equal-protection claim were cognizable in this context, Bandimere has failed to make the requisite threshold showing that he was treated differently from others similarly situated. 94 Individuals asserting such a claim must show an extremely high degree of similarity between themselves and the persons to whom they compare themselves. 95 But Bandimere has merely pointed to the fact that most alleged Ponzi schemers in recent years have been subject to civil injunctive actions. He has not compared the facts and circumstances of those cases with his own to any degree of detail, much less shown that his case bears such an extremely high degree of similarity to those cases that he must have been singled out. To the contrary, Bandimere acknowledges that a dozen other cases have in fact been brought against Ponzi schemers administratively, as was done here. While conceding this fact, Bandimere attempts to distinguish the administrative proceedings brought against Ponzi schemers, asserting that they were settled, involved licensed securities professionals, or did not ala class-of-one claim premised on government s decision to prosecute [the defendant] under MEJA in the civilian justice system while prosecuting his coconspirators under UCMJ in the military justice system ). 94 Olech, 528 U.S. at Clubside, Inc. v. Valentin, 468 F.3d 144, 159 (2d Cir. 2006); see also Cordi-Allen v. Conlon, 494 F.3d 245, (1st Cir. 2007) (explaining that the requirement of establishing a extremely high degree of similarity includes demonstrating the absence of any distinguishing or mitigating circumstances as would render the comparison inutile ).

239 120a lege that the respondents knowingly involved investors in a fraudulent scheme. But the fact that some of these cases may differ in some respects does not establish that Bandimere has been singled out. Bandimere has failed to identify and relate specific instances where persons situated similarly in all relevant aspects were treated differently from him. 96 Moreover, Bandimere was not charged with perpetrating a Ponzi scheme in the first place, so the idea that he was singled out from a group he does not belong to makes no sense. For these reasons, his equal-protection claim must fail. Finally, contrary to Bandimere s contention, there was a benign reason to proceed against Mr. Bandimere administratively. Thus, he has also failed to establish that there is no rational basis for the [alleged] difference in treatment, even if any such difference exists. 97 Bandimere was alleged to have been, and we have found that he was, acting as an unregistered broker. This provided a jurisdictional basis for the remedy the Division sought, and that we have imposed, of an associational bar for the protection of investors in the public interest a statutory remedy that Congress made available to the Commission in administrative proceedings. That Bandimere was acting as a broker without being a licensed securities professional in no way diminishes the appropriateness of seeking such a 96 Cordi-Allen, 494 F.3d at 251 (emphasis added). 97 Olech, 528 U.S. at 564; cf. Campbell v. Rainbow City, 434 F.3d 1306, 1314 n.6 (11th Cir. 2006) (requiring plaintiff asserting rationalbasis challenge to negativ[e] every conceivable basis which might support the government action ) (quotation marks omitted).

240 121a remedy. The statute does not distinguish, nor should it, between registered and non-registered brokers. 98 For all of the above reasons, we reject Bandimere s equal-protection defense. B. Appointments Clause Challenge Bandimere argues that ALJ Cameron Elliot who presided over this matter and issued the Initial Decision was not appointed in a manner consistent with the Appointments Clause of the Constitution. We find that the appointment of Commission ALJs is not subject to the requirements of the Appointments Clause. Under the Appointments Clause, certain high-level government officials must be appointed in particular ways: Principal officers must be appointed by the President (and confirmed by the Senate), while inferior officers must be appointed either by the President, the heads of departments, or the courts of law. 99 The great majority of government personnel are neither principal nor inferior officers, but rather mere employees whose appointments are not restricted by the Appointments Clause. 100 It is undisputed that ALJ Elliot was not appointed by the President, the head of a 98 See infra note 156 and accompanying text. 99 The Clause provides that the President by and with the advice and consent of the Senate, shall appoint... officers of the United States... 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. U.S. Const. art. II, 2, cl Landry v. FDIC, 204 F.3d 1125, 1134 (D.C. Cir. 2000) (quoting Freytag v. Commissioner, 501 U.S. 868, 882 (1991)); Buckley v. Valeo, 424 U.S. 1, 126 (1976).

241 122a department, or a court of law. 101 Bandimere therefore contends that his appointment violates the Appointments Clause because, in his view, ALJ Elliot should be deemed an inferior officer. The Division counters that he is an employee and thus there was no violation of the Appointments Clause. As we have recently explained, 102 the D.C. Circuit s decision in Landry v. FDIC generally controls our resolution of this question. 103 Landry held that, for purposes of the Appointments Clause, ALJs at the Federal Deposit Insurance Corporation ( FDIC ), who oversee administrative proceedings to remove bank executives, are employees rather than inferior officers. Landry explained that the touchstone for determining whether adjudicators are inferior officers is the extent to which they have the power to issue final decisions. 104 Although ALJs at the FDIC take testimony, conduct trial-like hearings, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders, they can never render the decision of the FDIC. 105 Instead, they issue only recommended decisions which the FDIC Board of Directors reviews de novo, and [f]inal decisions are issued 101 The Commission constitutes the head of a department when its commissioners act collectively. See Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, (2010). 102 In the Matter of Raymond J. Lucia Companies, Exchange Act Release No , 2015 WL , at *21-23 (Sept. 3, 2015); In the Matter of Timbervest, LLC, Investment Advisers Act Release No. 4197, 2015 WL , at *23-*26 (Sept. 17, 2015) F.3d 1125 (D.C. Cir. 2000). 104 Id. at Id. at 1133.

242 123a only by the FDIC Board. 106 The FDIC ALJs thus function as aides who assist the Board in its duties, not officers who exercise significant authority independent of the Board s supervision. Because ALJs at the FDIC have no such powers of final decision, the D.C. Circuit conclude[d] that they are not inferior officers. 107 The mix of duties and powers of the Commission s ALJs are very similar to those of the ALJs at the FDIC. Like the FDIC s ALJs, the Commission s ALJs conduct hearings, take testimony, rule on admissibility of evidence, and issue subpoenas. And like the FDIC s ALJs, the Commission s ALJs do not issue the final decisions that result from such proceedings. Just as the FDIC s ALJs issue only recommended decisions that are not final, the Commission s ALJs issue initial decisions that are likewise not final. 108 Respondents may petition the Commission for review of an ALJ s initial decision, 109 and it is our longstanding practice [to] grant[] virtually all petitions for review. 110 In- 106 Id. 107 Id. at See 17 CFR (a)(1) & (d) CFR (b). 110 Exchange Act Release No , 1995 WL , at *80-81 (June 9, 1995); see also Exchange Act Release No , 1993 WL , at *55-59 (Nov. 5, 1993) (explaining that we are unaware of any case in which the Commission has declined to grant a petition for review ). We reiterated this policy in the context of amendments to our Rules of Practice in 2004 that eliminated the filing of oppositions to petitions for review. We deemed such oppositions pointless, given that the Commission has long had a policy of granting petitions for review, believing that there is a benefit to Commission review when a party takes exception to a decision.

243 124a deed, we are unaware of any case in which the Commission has not granted a petition for review. Absent a petition, we may also choose to review a decision on our own initiative. 111 In either case, our rules expressly provide that the initial decision [of an ALJ] shall not become final. 112 Even where an aggrieved person fails to file a timely petition for review of an initial decision and we do not order review on our own initiative, our rules provide that the Commission will issue an order that the decision has become final, and it becomes final only upon issuance of the order by the Commission. 113 Moreover, as does the FDIC, the Commission reviews our ALJs decisions de novo. 114 Exchange Act Release No , 2003 WL , at *13 (Nov. 23, 2003) CFR (c); see also 15 U.S.C. 78d-1(b) (providing that the Commission shall retain a discretionary right to review the action of any... administrative law judge... upon its own initiative or upon petition ) CFR (d)(1) CFR (d)(2) (emphasis added). An initial decision does not become final simply on the lapse of time for seeking review. Exchange Act Release No , 2004 WL , at *12 (Mar. 12, 2004). 114 We do not view the fact that we accord Commission ALJs deference in the context of demeanor-based credibility determinations to afford our ALJs with the type of authority that would qualify them as inferior officers. First, as we have repeatedly made clear, we do not accept such findings blindly, and we will disregard explicit determinations of credibility when our de novo review of the record as a whole convinces us that a witness s testimony is credible (or not) or that the weight of the evidence warrants a different finding as to the ultimate facts at issue. Id. at *10; accord Francis V. Lorenzo, Exchange Act Release No , 2015 WL , at *10 n.32 (Apr. 29, 2015); Irfan Mohammed Amanat, Exchange Act Release No , 2006 WL , at *8 n.46

244 125a Upon review, we may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, any initial decision. 115 And any procedural errors made by an ALJ in conducting the hearing are cured by our thorough, de novo review of the record. 116 We may expand the record by hear[ing] additional evidence ourselves or remanding for further proceedings before the ALJ, and may make any findings or conclusions that in [our] judgment are proper and on the basis of the record. 117 Bandimere suggests that our ALJs enjoy as much discretion as Article III trial judges. But that is not the case. A trial judge s factual findings are afforded significant deference by reviewing courts, while findings made by our ALJs are not. And although ALJs (Nov. 3, 2006); see also Kay v. FCC, 396 F.3d 1184, 1189 (D.C. Cir. 2005) ( The law is settled that an agency is not required to adopt the credibility determinations of an administrative law judge. ). Second, our practice in this regard is no different from the FDIC s and so does not warrant a departure from Landry. Compare [Redacted] Insured State Nonmember Bank, FDIC-82-73a, 1984 WL , at *5 (June 18, 1984) (stating, as a general rule, that the assessment of the credibility of witnesses by the ALJ is given deference by the FDIC) with Ramon M. Candelaria, FDIC e, 1997 WL , at *3-4 (Mar. 11, 1997) (noting that the FDIC ALJ found respondent to be entirely credible but rejecting respondent s testimony in light of the entire record ) CFR (a); see also 5 U.S.C. 557(b) ( On appeal from or review of the initial decision, the agency has all the powers which it would have in making the initial decision.... ). 116 Heath v. SEC, 586 F.3d 122, 142 (2d Cir. 2009); see also, e.g., Anthony Fields, Exchange Act Release No , 2015 WL , at *20 (Feb. 20, 2015) ( [O]ur de novo review cures any evidentiary error that the law judge may have made. ) CFR (a); 17 CFR

245 126a may oversee the taking and hearing of evidence, we have made clear that we have plenary authority over the course of [our] administrative proceedings and the rulings of [our] law judges both before and after the issuance of the initial decision and irrespective of whether any party has sought relief. 118 This includes authority over all evidentiary and discovery-related rulings. We are not limited by the record that comes to us. As explained above, we may expand the record. The fact that our ALJs may rule on evidentiary matters and discovery issues (subject to our de novo review) does not distinguish them from the FDIC s ALJs in Landry who have the same authority. Bandimere also objects to the Landry court s reading of a Supreme Court decision, Freytag v. Commissioner, 119 which held that a special trial judge of the Tax Court was an inferior officer. Bandimere suggests that Landry was wrong to distinguish Freytag. But we agree with Landry s analysis and the distinctions it identifies between ALJs and the special trial judges at issue in Freytag. As Landry recognized, ALJs are different from the special trial judges at issue in Freytag. 120 The greater role and powers of the special trial judges relative to Commission ALJs, in our view, makes Freytag inapposite here. First, unlike the ALJs whose decisions are reviewed de novo, the special trial judges made factual findings to which the Tax Court 118 Michael Lee Mendenhall, Release No (March 19, 2015), 2015 WL , at * U.S. 868 (1991). 120 Landry, 204 F.3d at 1133 (explaining that the special trial judges at issue in Freytag exercised authority... not matched by the ALJs ).

246 127a was required to defer, unless clearly erroneous. 121 Second, the special trial judges were authorized by statute to render the [final] decisions of the Tax Court in significant, fully-litigated proceedings involving declaratory judgments and amounts in controversy below $10, As discussed above, our ALJs issue initial decisions that are not final unless the Commission takes some further action. Third, the Tax Court (and by extension the court s special tax judges) exercised a portion of the judicial power of the United States, including the authority to punish contempts by fine or imprisonment. 123 Commission ALJs, by contrast, do not possess such authority. 124 And while Commission ALJs may issue subpoenas to compel noncompliance, they are powerless to enforce their subpoenas; the 121 See id. 122 Freytag, 501 U.S. at Id. at See 17 CFR The Commission s rules provide ALJs with authority to punish contemptuous conduct only in the following ways. If a person engages in contemptuous conduct before the ALJ during any proceeding, the ALJ may exclude that person from such hearing or conference, or any portion thereof, or summarily suspend that person from representing others in the proceeding in which such conduct occurred for the duration, or any portion, of the proceeding. Id (a). If there are deficiencies in a filing, a Commission ALJ may reject, in whole or in part, the filing, such filing shall not be part of the record, and the ALJ may direct a party to cure any deficiencies. Id (b). Finally, if a party fails to make a required filing or to cure a deficiency with a filing, then a Commission ALJ may enter a default, dismiss the case, decide the particular matter at issue against the person, or prohibit the introduction of evidence or exclude testimony concerning that matter. Id (c). Any such ruling would, of course, be subject to de novo Commission review.

247 128a Commission itself would need to seek an order from a federal district court to compel compliance. 125 In this respect, too, our ALJs are akin to the FDIC s ALJs that Landry found to be mere employees. 126 Based on the foregoing, we conclude that the mix of duties and powers of our ALJs is similar in all material respects to the duties and role of the FDIC s ALJs in Landry. 127 Accordingly, we follow Landry, and we conclude that our ALJs are not inferior officers under the Appointments Clause See 15 U.S.C. 78u(c). 126 See 12 CFR (h), (c), (c) (providing that an aggrieved party must apply to a federal district court for enforcement of a subpoena issued by a FDIC ALJ). 127 We do not find any relevance in the fact that the federal securities laws and our regulations at times refer to ALJs as officers or hearing officers. There is no indication that Congress intended officers or hearing officers to be synonymous with Officers of the United States, U.S. Const. art. II, 2, cl. 2, and the word officer in our regulations has no such meaning. We also note in this regard that the Administrative Procedure Act consistently uses the term officer or the term officer, employee, or agent to refer to [agency] staff members. Kenneth Culp Davis, Separation of Functions in Administrative Agencies, 61 HARV. L. REV. 612, 615 & n.11 (1948). Cf. 5 U.S.C. 556, 557 (referring to official who presides over evidentiary hearing as the presiding employee ). 128 Beyond Landry, we believe that our ALJs are properly deemed employees (rather than inferior officers) because this is how Congress has chosen to classify them, and that decision is entitled to considerable deference. See Burnap v. United States, 252 U.S. 512, 516 (1920). For example, as we discussed above, Congress created and placed ALJ positions within the competitive service system, just like most other federal employees. Like such other employees, an ALJ who believes that his employing agency

248 129a V. EVIDENTIARY ISSUES Before the hearing in this matter, Bandimere asked the ALJ to issue a subpoena directed to the Commission for the production of various documents: (1) items related to a prior investigation and enforcement action against Parrish; 129 (2) parts of documents that had been withheld as attorney work product, including interview notes and memoranda; (3) training materials used by the Commission relating to facts or circumstances that may indicate the existence of a Ponzi scheme; and (4) portions of documents relating to the decision to institute an administrative proceeding rather than a civil enforcement action against Bandimere. The Division opposed Bandimere s request, and the ALJ denied it. Bandimere challenges the ALJ s decision as arbitrary and capricious. 130 Under Rule 232(b) of our Rules of Practice, the person to whom a request for a subpoena is directed may refuse to issue the subpoena if the subpoena or any of its terms is unreasonable, oppressive, excessive in scope, or unduly burdensome. 131 has engaged in a prohibited personnel practice can seek redress either through the Office of Special Counsel or the Merit Systems Protection Board. See 5 U.S.C. 1204, 1212, 1214, 1215, And ALJs like other employees are subject to reductions-inforce. See id. 7521(b). 129 See supra note 67 (providing background about SEC v. Z-Par Holdings, Inc.). 130 The parties and the ALJ refer to the ALJ s action as quashing the subpoena, but since the subpoena was not issued, there was nothing to quash. Bandimere also requested documents the Division had received from other federal agencies; he does not seek review of this aspect of the ALJ s denial C.F.R (b).

249 130a We agree with the ALJ s denial, pursuant to Rule 232, of Bandimere s request. 132 First, Bandimere failed to show that any of the documents he requested in relation to Parrish s prior involvement with a Ponzi scheme other than IVC had any relevance to Bandimere s alleged violations in this case. Bandimere s request was thus excessive in scope, and requiring the Division to produce those documents would have been unreasonable. Second, Bandimere s request for factual portions of documents withheld as attorney work product was excessive in scope. Rule 230(b) permits the Division to withhold internal memoranda, notes, or writings prepared by Commission employees as well as attorney work product. The privilege protecting factual portions of work product may be overcome on a showing that the person seeking the materials has a substantial need for them and no way of obtaining their substantial equivalent without undue hardship. 133 Bandimere has 132 Bandimere argues, citing an order issued by the ALJ in Hector Gallardo, Administrative Proceedings Rulings Release No. 667 (Feb ), available at that a party seeking to quash a subpoena cannot show that the subpoena is unreasonable, oppressive, or unduly burdensome within the meaning of Rule of Practice 232(e)(2) merely by contending that the subpoena seeks information that is not relevant, nor reasonably likely to lead to the discovery of relevant evidence. In this case the Division made particularized arguments as to why the ALJ should not require it to produce the documents Bandimere requested. Because the ALJ acted in accordance with Rule 232 in refusing to issue the subpoena, we find no basis to disturb his decision. 133 See United States ex rel. Stone v. Rockwell Int l Corp., 144 F.R.D. 396, 401 (D. Colo. 1992) ( [F]actual work product...

250 131a not made such a showing, but instead asserts that materials withheld by the Division might be the only source of information with respect to certain issues. In addition to turning over the contents of its investigative file, 134 the Division, pursuant to Rule 230(b), gave Bandimere a list of possible material exculpatory evidence from withheld documents. This list contained summaries of statements made by investors, including two of the investors who testified at the hearing, Hunter and Moravec. The Division also submitted a declaration by its trial counsel in this matter describing the Division s review of documents in its withheld document list and representing that all identified possible material exculpatory evidence was included in the list it provided. Under these circumstances, we find no error in the ALJ s decision to refuse to issue the subpoena for the factual portions of the work product documents. 135 Bandimere argues that the ALJ s order in Thomas R. Delaney II 136 supports his argument that the Division did not adequately establish that certain documents were protected by the work product privilege. is discoverable upon a showing that (a) the party seeking discovery has substantial need of the materials in the preparation of his case; and (b) he is unable without undue hardship to obtain the substantial equivalent of the materials by other means. (citation omitted)). 134 The Division represented that it turned over nearly 3 GB of data, encompassing over 11,000 files. 135 See, e.g., optionsxpress, Inc., Exchange Act Release No , 2013 WL , at * 6-8 (Oct. 16, 2013) (refusing to order Division to turn over internal work product where Division had already provided extensive discovery and had explicitly represented that it had turned over all Brady material). 136 Administrative Proceedings Rulings Release No (July 25, 2014), available at

251 132a The ALJ in Delaney found that correspondence between the Division and the respondent did not establish that the work product privilege protected certain documents, and she ordered the Division to submit a more detailed privilege log for her review. In contrast, before making his decision on the subpoena in this proceeding the ALJ had already received a withheld document list from the Division; he found the list generally acceptable, and asked for a more detailed log only with respect to one category of documents. 137 The ALJ s decision in Delaney requiring more detailed substantiation does not establish that the ALJ in this proceeding should have acted differently. 138 Third, Bandimere s request for training materials related to Ponzi schemes was also appropriately denied. Bandimere was not charged with having failed to recognize that IVC and UCR were Ponzi schemes. He was charged with failing to disclose material facts that reasonable investors would have wanted to consider in making investment decisions. Thus, the training materials were irrelevant to the issue with respect to which Bandimere sought them. 137 The Division subsequently turned over the documents originally withheld in this category to Bandimere, thus mooting the need to submit a detailed log. 138 ALJs rulings are not precedential and are not binding on the Commission or on other ALJs. See, e.g., Sands Bros. Asset Mgmt., Advisers Act Release No. 4083, 2015 WL , at *4 (May 13, 2015); John Thomas Capital Mgmt. Group LLC, Exchange Act Release No , 2015 WL , at *3 & n.20 (Feb. 20, 2015); Absolute Potential, Inc., Exchange Act Release No , 2014 WL , at *8 n.48 (Apr. 4, 2014).

252 133a Finally, Bandimere was not entitled to the factual portions of documents related to the Commission s decision to proceed against him administratively, and we also deny his motion filed during the pendency of this appeal for a copy of the action memorandum submitted to the Commission before we issued the OIP in this matter. Before the ALJ and again before us, he argues that his interest in these materials extends only as far as it may be relevant to his [equal protection] defense, i.e., that the Commission improperly singled him out by differentiating him from other respondents alleged to have engaged in Ponzi schemes by proceeding against him administratively. As we have previously stated, Bandimere s assertion that he was treated differently from other respondents is incorrect on several levels. 139 Thus, Bandimere has not shown that the action memorandum is relevant to the issue with regard to which he seeks it establishing the equalprotection defense he asserts. Moreover, as the Division has consistently maintained, the action memo is protected from disclosure by multiple evidentiary privileges. 140 Bandimere argues that the Division waived any applicable privilege related to the action memorandum by citing, in its response to Bandimere s opening brief, the ALJ s state- 139 See supra Section IV.A. 140 Documents considered by the Commission in deciding whether and how to proceed against Bandimere are protected by the deliberative process privilege. See Fox News Network LLC v. U.S. Dep t of the Treasury, 739 F. Supp. 2d 515, 541 (S.D.N.Y. 2010) (stating that the deliberative process privilege applies to materials that are part and parcel of the process of internal agency decision making (citing NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 150 (1975)).

253 134a ment that he had determined after in camera review that the contents of the memorandum were not helpful to Bandimere. Bandimere raised essentially the same argument before the ALJ contending that the Division s citation in in its post-hearing brief to the ALJ s statement effected a waiver of privilege. We reject Bandimere s waiver argument. The Division did not waive its claim that the action memorandum was privileged when it referred to the ALJ s statement. The Division neither cited the action memorandum nor offered it as evidence. Merely alluding to the ALJ s statement did not waive the privilege with respect to the underlying document. 141 Accordingly, we deny Bandimere s request for the action memorandum to be turned over to him. 142 VI. SANCTIONS The ALJ barred Bandimere from association with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; ordered Bandimere to cease and desist from committing or causing violations of Securities Act Section 5(a), 5(c), and 17(a), Exchange Act Sections 10(b) and 15(a), and Exchange Act Rule 10b-5; ordered Bandimere to disgorge $638, plus prejudgment interest; and imposed a third-tier civil penalty of $390,000. As dis- 141 We note that the ALJ s statement played no role in our analysis of Bandimere s equal-protection defense, which we have rejected for the reasons set forth above. 142 Because we do not order that Bandimere be given a copy of the action memorandum, we deny his motions that it be made part of the record and that he be permitted to file a supplemental brief based on its contents.

254 135a cussed below, based on our consideration of the relevant factors, we impose the same sanctions as the ALJ, except that we will not bar Bandimere from association with a municipal advisor or a nationally recognized statistical rating organization. 143 A. Bar Exchange Act Section 15(b)(6)(A) authorizes us to bar any person who, at the time of the misconduct, was associated with a broker or dealer, from being associated with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization if we find on the record after notice and opportunity for a hearing that the person willfully violated the securities laws and the sanction is in the public interest. 144 In imposing an industry-wide bar, the ALJ included bars from associating with any nationally recognized statistical rating organization or municipal advisor based on the expanded relief authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ). Because the conduct at issue here occurred before Dodd-Frank authorized complete industry bars, consistent with the D.C. Circuit s recent decision in Koch v. SEC, 145 we conclude that it is appropriate to modify the bar imposed by the ALJ to the extent that it bars Bandimere from associ- 143 Pursuant to Rule of Practice 411(d), 17 C.F.R (d), we determined on our own initiative to review what sanctions, if any, are appropriate in this matter U.S.C. 78o(b)(6)(A) F.3d 147, (D.C. Cir. 2015) (holding that municipal advisor and rating organization bars were retroactively applied to respondent for pre Dodd-Frank conduct).

255 136a ating with any nationally recognized statistical rating organization or municipal advisor but to maintain it in all other respects. Accordingly, we have determined to bar Bandimere from associating with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent. 1. Barring Bandimere is statutorily authorized. Bandimere argues that Section 15(b) does not apply to him because he was neither a registered broker or dealer nor associated with a registered broker or dealer. But Section 15(b) does not limit us to proceeding administratively against registered brokers or dealers and their associated persons. 146 We have previously determined that we have authority under Section 15(b)(6) to discipline associated persons of unregistered brokerdealers, 147 and we have used that authority to impose a bar on an associated person of an unregistered broker. 148 Bandimere s status as an unregistered broker is therefore no impediment to our action here. Bandimere further argues that, by its terms, Section 15(b)(6) applies only to a person associated with a 146 See First Jersey Securities, Inc., Exchange Act Release No , 1996 WL , at *2 n.7 (May 30, 1996); John Kilpatrick, Exchange Act Release No , 1986 WL , at *4-5 (May 19, 1986); see also text accompanying note 156 infra (noting that Section 15(b) does not distinguish between registered and nonregistered brokers and dealers). 147 See Victor Teicher, Exchange Act Release No , 1998 WL , at *3 (May 20, 1998), affirmed in part and reversed in part, 177 F.3d 1016 (D.C. Cir. 1999). 148 See Vladislav Steven Zubkis, Exchange Act Release No , 2005 WL (Dec. 2, 2005), reconsideration denied, Exchange Act Release No , 2006 WL (Apr. 13, 2006).

256 137a broker or dealer, or who was seeking to become associated, or who was participating in a penny stock offering. He asserts that there was no allegation, nor any evidence, that he fit within any of these categories, and that therefore Section 15(b)(6) provides no authority to sanction him. Bandimere misconstrues the statutory requirement. Under Section 3(a)(18) of the Exchange Act, person associated with a broker or dealer is broadly defined to include any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer. 149 As discussed previously, we have found that Bandimere himself meets the definition of a broker under the Exchange Act. 150 We also find that he qualifies as a person associated with a broker and comes within the reach of Section 15(b)(6) because he directly controls his own actions as a broker. To hold otherwise would prevent the Commission from barring natural persons who themselves meet the definition of a broker but who are not otherwise associated with a broker something that would be inconsistent with the Exchange Act s purpose of protecting investors. We therefore con U.S.C. 78c(a)(18). Persons associated with a broker or dealer whose functions are solely clerical or ministerial are generally not included in the meaning of the term person associated with a broker or dealer for purposes of Exchange Act Section 15, but they, too, are subject to Section 15(b)(6). Id. 150 See supra Section II.B.2.a.

257 138a clude that Bandimere may be barred under Section 15(b)(6). 2. Bandimere s violations of the securities laws were willful. As noted, Exchange Act Section 15(b) authorizes us to bar individuals for willful violations of the securities laws. In this context, willfulness is shown where a person intends to commit an act that constitutes a violation; there is no requirement that the actor also be aware that he is violating any statutes or regulations. 151 Bandimere does not contend that he did not know that he was committing the acts involved in offering and selling the interests in IVC and UCR. On the record before us, we find that he acted willfully. Bandimere argues that the standard the ALJ used to determine willfulness whether the person charged knows what he or she was doing was not the proper standard and that under a proper standard the Division has failed to prove that his violations of Securities Act Section 5 and Exchange Act Section 15(a) were willful. But the standard the ALJ applied has been firmly established in our cases, as well as in federal court decisions, for half a century. In its 2000 opinion in Wonsover v. SEC, the United States Court of Appeals for the District of Columbia Circuit called it our traditional formulation of willfulness for the purpose of [Exchange Act Section] 15(b). 152 The court quoted its 151 Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000). 152 Id. at 415. Bandimere contends that Wonsover did not confirm the meaning of willful, or endorse the standard used by the ALJ in this proceeding, but rather held that the meaning of willful was unresolved. This is a misreading of the case. Although

258 139a 1965 statement in Gearhart & Otis, Inc. v. SEC, [I]t has been uniformly held that willfully in this context means intentionally committing the act which constitutes the violation. 153 Gearhart & Otis, in turn, cited Tager v. SEC, a 1965 opinion of the United States Court of Appeals for the Second Circuit, as the source of the quoted language. 154 Thus, as early as 1965, two different federal courts of appeals identified this interpretation of willful for purposes of Section 15(b) as uniformly held. Bandimere has not identified any other standard used to determine willfulness in proceedings brought under Exchange Act Section 15(b). Although Bandimere argues that Congress must have intended a qualitative distinction between violations that are willful and those that are not, he points to no authority supporting his argument that willfulness, as applied to a violation under Section 15(b), means more than the standard articulated in Wonsover, and there is abundant authority to the contrary. 155 the court held that Wonsover s violations were willful under either the court s traditional formulation or even under the subjective recklessness standard that Wonsover pressed, there is nothing in the court s decision to support Bandimere s contention that the court regarded the question as unresolved, and it did nothing to back away from what it recognized was the uniformly held standard. See id. at Id. at 414 (quoting Gearhart & Otis, 348 F.2d 798, 803 (D.C. Cir. 1965). 154 Gearhart & Otis, 348 F.2d at 803 (quoting Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965)). 155 See, e.g., Mathis v. SEC, 671 F.3d 210, (2d Cir. 2012) (reaffirming Tager s standard for willfulness that willfully means intentionally committing the act which constitutes the violation in the context of Exchange Act Section 15(b) and a related statu-

259 140a Bandimere further argues that unlike Wonsover he is not a licensed professional and that with respect to an unlicensed person willfulness requires at least negligence. But Section 15(b) speaks of willful conduct by persons associated with any broker or dealer, making no distinction between registered and non-registered brokers and dealers. 156 And Congress s decision to make no such distinction makes sense: the effect of a broker s conduct on the investing public is the same whether he is registered or not, and allowing greater tory provision); Nees v. SEC, 414 F.2d 211, 221 (9th Cir. 1969) (holding that willfulness in the context of Section 15(b) means only that the act was a conscious, intentional action and that the petitioner s conduct in violation of Securities Act Section 5 [c]learly... fall[s] within this definition of willfulness ); Capital Funds, Inc. v. SEC, 348 F.2d 582, 588 (8th Cir. 1965) (holding in the context of Section 15(b) willfulness means only the intentional commission of the act, no intention to violate the law is necessary ); SEC v. Martino, 255 F. Supp. 2d 268, 285 (S.D.N.Y. 2003) ( The term willful in the federal securities laws signifies merely that the defendant intended to commit the act which constitutes the violation. ). Bandimere points to our decision in International Shareholders Serv. Corp., Exchange Act Release No , 1976 WL (Apr. 29, 1976), as support for his contention that he did not act willfully because he was unaware that his conduct violated the law. International Shareholders dealt with an exemption to the Section 5 registration requirements. The actions of the respondents in that case were consistent with the requirements of the exemption, but the exemption was rendered inapplicable (without the respondents knowing it) by the acts of a third party. Under those very limited circumstances, we found that the respondents did not act willfully. Id. at *3-4. Here, Bandimere does not assert that any exemption applies, nor were his actions rendered illegal due to the actions of a third party. Thus, International Shareholders is inapposite U.S.C. 78o(b)(4) (emphasis added).

260 141a latitude for the misconduct of an unregistered broker would only encourage persons to forego the mandate of registration. In any event, we have applied the Wonsover standard in other contexts, 157 including for violations that had no scienter or negligence requirement. 158 Bandimere contends that [t]he Commission need not articulate a precise standard of culpability for a willful violation because he was not culpable at all. We disagree. Bandimere s testimony that he tried to be very careful to let [investors] know that [IVC and UCR] were not registered securities, shows his awareness that registration was an important consideration, thus undercutting his contentions that he lacked any awareness of possible wrongdoing. We also reject Bandimere s argument that he acted reasonably and was not culpable with respect to either the Section 5 or 157 See, e.g., Robert G. Weeks, Exchange Act Release No , 2004 WL 828, at *12-13, *16 (Oct. 23, 2003) (Wonsover standard applied against former de facto officer and director of mining company). 158 See Maria T. Giesige, Exchange Act Release No , 2009 WL , at *6 n.10 (May 29, 2009) (applying Wonsover standard to find willfulness with regard to Securities Act Section 5 violations); Weeks, 2004 WL 828, at *12-13, *16 (same); John D. Audifferen, Exchange Act Release No , 2008 WL , at *4-7 (July 25, 2008) (finding that the respondent was aware of what he was doing and was not coerced, and thus acted willfully, when he violated several statutory provisions by taking actions that were permitted only upon a showing of compliance with Regulation T promulgated by the Governors of the Federal Reserve System; and further finding that although the evidence showed that the respondent knew or should have known that certain conduct would not comply with Regulation T, no such showing was required to establish that respondent acted willfully).

261 142a the Section 15(a) violations charged because he discussed the legality of his activities with Syke, an attorney, who testified that he failed to see that these activities raised possible issues involving the sale of investment contracts or acting as a broker. The discussions on which Bandimere relies happened early in Bandimere s involvement with IVC and UCR, so Syke s understanding of Bandimere s involvement was not based on Syke s knowledge of the full scope of activities in which Bandimere ultimately took part. And, although Syke had advised Bandimere that it was important to consider whether offers and sales of the IVC and UCR investments complied with federal securities laws, the record does not show that Bandimere sought Syke s advice with respect to this issue as he became more involved. To the contrary, Syke testified that he did not advise Bandimere whether he would be acting as an unregistered broker when he offered IVC and UCR investments to investors, and that he did not advise Bandimere that the offerings through Exito were in compliance with Section 5. Bandimere argues that the onus is not on the client to disclose everything the lawyer must know to give advice on which a client may rely. He also argues, citing Howard v. SEC, 159 that compliance with the securities laws is sufficiently difficult that laymen have no real choice but to rely on counsel. But here, Bandimere s discussions with Syke alerted him to possible securities laws implications of Bandimere s involvement with selling IVC and UCR, and Bandimere chose not to pursue the assistance of counsel. This demonstrates that his conduct was unreasonable, rather than F.3d 1136, 1148 n.20 (D.C. Cir. 2004).

262 143a otherwise. In any event, whether Bandimere acted reasonably is irrelevant to the issue of willfulness because, as discussed above, there is no negligence requirement for a finding of willfulness. Finally, even if we accepted Bandimere s arguments that his violations of Securities Act Section 5 and Exchange Act Section 15(a) were not willful (which we do not), our finding that Bandimere acted with scienter in violating the antifraud fraud provisions demonstrates willful violations sufficient to support our imposition of sanctions. 3. Barring Bandimere is in the public interest. In determining the need for sanctions in the public interest, we consider, among other things, (i) the egregiousness of the respondent s actions; (ii) the degree of scienter involved; (iii) the isolated or recurrent nature of the infraction; (iv) the respondent s recognition of the wrongful nature of his or her conduct; (v) the sincerity of any assurances against future violations; and (vi) the likelihood that the respondent s occupation will present opportunities for future violations. 160 We also consider whether the sanctions will have a deter- 160 Donald L. Koch, Exchange Act Release No , 2014 WL , at *20 (May 16, 2014) (citing Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff d on other grounds, 450 U.S. 91 (1981)), aff d in relevant part, 793 F.3d 147 (D.C. Cir. 2015).

263 144a rent effect. 161 Our inquiry is flexible, and no single factor is dispositive. 162 On the record before us, these factors support the imposition of a bar. Bandimere s conduct involved serious wrongdoing, at least a reckless degree of scienter, and was recurrent. Bandimere acted as an unregistered broker, selling unregistered securities, in numerous transactions over more than three years. By the time IVC and UCR stopped paying returns, the LLCs that Bandimere managed or co-managed had collected more than $9 million in investor funds, not including funds invested by Bandimere. Many of the investors who testified at the hearing stated that they lost most, if not all, of their investments in the two schemes, and that they were devastated by the outcome. 163 Bandimere shows virtually no recognition of the wrongfulness of his conduct. In his brief, he calls his violations of Sections 5 and 15(a) inadvertent if they occurred, refers to the requirements of Sections 5 and 15(a) as technical, and says that he was trying to be cautious. By referring to himself as a victim, he 161 See Toby G. Scammell, Investment Advisers Act Release No. 3961, 2014 WL , at *5 (Oct. 29, 2014) (citing additional authority). 162 See KPMG Peat Marwick, LLP, Exchange Act Release No , 2001 WL 47245, at *26 (Jan. 19, 2001), petition denied, 289 F.3d 109 (D.C. Cir. 2002). 163 Although Bandimere argues that he also lost money because he had invested $1,145,419 in IVC and UCR programs, he in fact gained money as a result of his involvement because he received $477, paid out to him as earnings or profits on those investments, and an additional $734, in transaction-related compensation. We discuss Bandimere s gains and losses in more detail below.

264 145a disavows the part he played in causing losses to the investors he recruited to IVC and UCR. Although Bandimere has never been involved in the securities industry as a licensed professional, he is just as well positioned as he was before to pitch investments to his network of friends and acquaintances, which shows a possibility that there will be opportunities for future misconduct. Bandimere argues against the use of the public interest factors articulated in Steadman, and insists that the D.C. Circuit rejected the Steadman factors as a basis for determining sanctions in PAZ Securities v. SEC. 164 But the court in PAZ a case involving the review of sanctions imposed by the NASD did not hold that consideration of the Steadman factors was in any way inappropriate. To the contrary, it found that those factors will often be relevant. 165 The court held that the Commission was not constrained in explaining itself by reference to any mechanical formula, including Steadman. 166 Since deciding PAZ, the D.C. Circuit has denied petitions for review in which the Commission applied the Steadman factors in proceedings before ALJs, without indicating any disapproval of our use of those factors. 167 Bandimere s attack on our use of the Steadman factors is thus without merit F.3d 1172, 1175 (D.C. Cir. 2009). 165 Id. 166 Id. 167 See, e.g., Peter Siris v. SEC, 773 F.3d 89, 94, 97 (D.C. Cir. 2014) (noting Commission s application of the multifactor test set forth in Steadman and finding that Commission cogently applied Steadman s multifactor test ); Armstrong v. SEC, 476 F. App x 864, 865 (D.C. Cir. 2012) (finding that Steadman sets out factors to con-

265 B. Cease-and-Desist Order 146a Section 8A(a) of the Securities Act and Section 21C(a) of the Exchange Act authorize us to issue a cease-and-desist order against a person who is violating, has violated, or is about to violate those Acts or any rule promulgated thereunder. 169 In determining whether a cease-and-desist order is warranted, we consider not only the public interest factors discussed above, but also whether the violation is recent, the degree of harm to investors or the marketplace resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the same proceedings. 170 We also consider whether there is a reasonable likelihood of future violations, although the required showing of a risk of future violations in the context of a cease-and-desist order is significantly less than that required for an injunction, and in the ordisider when Commission determines whether imposing an associational bar would serve the public interest); Altman v. SEC, 666 F.3d 1322, 1329 (D.C. Cir. 2011) (noting Commission s application of the public interest standards set forth in Steadman ). 168 Bandimere argues that under SEC v. First City Financial Corp., Ltd., 890 F.2d 1215, 1229 (D.C. Cir. 1989), a failure to admit wrongdoing is not a legitimate consideration in determining appropriate relief. But First City Financial also noted that evidence that a defendant did not feel bound by the law was appropriately considered. Here Bandimere has characterized his serious violations as technical and has otherwise dismissed the seriousness of the conduct he admits, which makes us concerned that he is dismissive of the need to follow the law U.S.C. 77h-1(a), 78u-3(a). 170 Koch, 2014 WL , at *21 (citing KPMG Peat Marwick, LLP, 2001 WL 47245, at *24-26).

266 147a nary case, a finding of a past violation is sufficient to demonstrate a risk of future ones. 171 Our inquiry is flexible, and no single factor is dispositive. 172 As we have already discussed, the application of the public interest factors demonstrates that Bandimere s conduct warrants significant sanctions. Turning to the additional factors relevant to cease-and-desist orders, we note that Bandimere s violations are relatively recent. Bandimere s conduct was harmful to investors: the testimony of investors Blackford and Moravec, each of whom lost about $300,000, most vividly demonstrates the harm done to them by their investments in IVC and UCR through Bandimere and his LLCs, 173 but other investors also testified as to losses of tens of thousands, or even hundreds of thousands, of dollars. 174 While Bandimere asserts in his brief that the record does not show that he is likely to involve others with investments after the disastrous consequences he experienced as a result of his involvement with IVC and UCR, he continues to downplay the wrongfulness of his actions. We thus find sufficient risk of future viola- 171 KPMG Peat Marwick, LLP, 2001 WL 47245, at * Id. 173 Blackford testified that the loss represented a high percentage of his retirement savings, and that the loss caused great stress in his marriage and his personal life. Moravec testified that the impact of his losses had been unbearable, to say the least ; that his life had been totally devastated by his losses, and that his life had been turned upside down, because he had gone from anticipating a comfortable retirement to living in a 600-square foot, single-room cabin in which he could only afford to install indoor plumbing within the past year. 174 For example, Davis lost $20,000, and Radke lost $240,000.

267 148a tions to impose a cease-and-desist order in the public interest. C. Disgorgement In a cease-and-desist proceeding such as this one we may enter an order requiring accounting and disgorgement, including reasonable interest. 175 Disgorgement is an equitable remedy that requires the violator to give up wrongfully obtained profits causally related to the wrongdoing at issue. 176 Because disgorgement is designed to return the violator to where he or she would have been absent the violative conduct, 177 disgorgement should include all of the gains that flow from the illegal activity. 178 The Division, in seeking disgorgement, must present a reasonable approximation of profits connected to the violation. 179 Any risk of uncertainty in calculating the disgorgement amount then falls on the wrongdoer, whose misconduct created the need for disgorgement. 180 Bandimere does not take issue with the principle that one may be ordered to disgorge gains that are causally related to violative conduct. But he argues U.S.C. 77h-1(e), 78u-3(e). 176 First City Fin., 890 F.2d at 1230 (citing additional authority). Ordering disgorgement may also deter others from violating the law. Id. 177 Zacharias v. SEC, 569 F.3d at 471 ( [D]isgorgement restores the status quo ante by depriving violators of ill-gotten profits. ). 178 Koch, 2014 WL , at *22 (citing SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, (9th Cir. 2006)). 179 Id. 180 Id. (citing Laurie Jones Canady, Exchange Act Release No , 1999 WL , at *10 n.35 (Apr. 5, 1999), petition denied, 230 F.3d 362 (D.C. Cir. 2000)).

268 149a that he did not realize a gain subject to disgorgement because his involvement with IVC and UCR left him in a position of net financial loss. He claims that he should not be ordered to disgorge the management or brokerage fees he received, because even if he keeps them he will have lost money overall through his involvement with IVC and UCR. Disgorgement, he argues, would not deprive him of gains; it would merely increase his loss. We are unwilling to offset the losses Bandimere incurred through his investments in IVC and UCR against the gains he made when IVC and Dalton paid him for his activities in brokering sales of the IVC and UCR investments. The management fees were paid to Bandimere to compensate him for his illegal activity in acting as an unregistered broker and selling unregistered securities. The fact that he lost funds that he invested in the fraudulent schemes does not persuade us that we should allow him to mitigate those losses by keeping the fees he got for his violative misconduct We are not persuaded by Bandimere s reliance on SEC v. Hately, 8 F.3d 653 (9th Cir. 1993) and SEC v. McCaskey, 2002 WL (S.D.N.Y. Mar. 26, 2002). In Hately, the court held that ordering the petitioners to disgorge all of the commissions received by their firm was inappropriate where they received only 10% of the commissions. 8 F.3d at 654. That is distinguishable from the situation here in which Bandimere alone received the relevant illegal gains from his conduct in the form of management fees but also lost money through his own investments in the schemes. Similarly, McCaskey dealt only with profits and losses in a series of trades, 2002 WL , at *10, and shines no light on the question whether two types of payments, such as the management fees and investment returns at issue here, should be netted against each other in calculating disgorgement.

269 150a In the context of determining the gains that flowed from his violations of the securities laws, it is appropriate to take the fees Bandimere received from his violative conduct as the measure of disgorgement. 182 Bandimere argues that the compensation he received was too attenuated from any violation to be the proper subject of disgorgement because the compensation was for providing administrative services. Providing such services, he argues, was not illegal activity, so the remuneration does not represent ill-gotten gains and is therefore not subject to disgorgement. Bandimere further argues that the Division failed to provide the required reasonable approximation of the amount subject to disgorgement. He argues that the only record evidence regarding the amount of time he spent on such legitimate services as bookkeeping was his testimony that those services accounted for as much as 90% of the time he spent on matters related to IVC and UCR, and that thus at most 10% of the compensation he received should be subject to disgorgement. We have already found that the fees Bandimere received were compensation for brokerage activity, and that Bandimere violated the federal securities laws by acting as an unregistered broker and selling unregistered securities. The administrative services Bandimere performed were in furtherance of his brokerage activity. His bookkeeping activities, for example, were 182 Cf. William J. Murphy, Exchange Act Release No , 2013 WL , at *24 (July 2, 2013) (finding that disgorgement based on total commissions retained by the broker was appropriate even when this amount exceeded the client s net loss in the account), petition denied sub nom., Birkelbach v. SEC, 751 F.3d 472 (7th Cir. 2014).

270 151a integral to his transmission of customer funds to Parrish and Dalton and his calculation of returns to be paid to investors. The record does not show, and Bandimere does not contend, that any of the compensation at issue related to anything other than the IVC and UCR investments. Thus, we find that the disgorgement figure provided by the Division (which was itself furnished by Bandimere, in a summary of the fees he received) was a reasonable approximation of Bandimere s ill-gotten gains. In the exercise of our discretion, we subtract, as did the ALJ, certain payments that Bandimere made to investors, and order disgorgement of $638,056.33, plus prejudgment interest. D. Civil Money Penalties Section 21B(a)(1) of the Exchange Act authorizes the Commission to impose a civil penalty in any proceeding instituted against a person pursuant to Exchange Act Section 15(b)(6) if it finds that the person has willfully violated any provision of the Securities Act or the Exchange Act or any rule thereunder. 183 We have found above that this proceeding was properly brought under Section 15(b)(6) and that Bandimere s violations were willful. 184 Second-tier penalties may be imposed if the violative act or omission involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and third-tier penalties may be imposed if the act or omission also directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the U.S.C. 78u-2(a)(1). 184 See supra Sections VI.A.1 &2.

271 152a person who committed the act or omission. 185 Because Bandimere s conduct involved fraud and his activity resulted in substantial losses to others and substantial pecuniary gain to himself, third-tier penalties are authorized in this case. In considering under Section 21B whether a penalty is in the public interest, we may consider (1) whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; (2) the harm to other persons resulting either directly or indirectly from such act or omission; (3) the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior; (4) whether such person previously has been found by the Commission, another appropriate regulatory agency, or a self-regulatory organization to have violated the Federal securities laws, State securities laws, or the rules of a self-regulatory organization, has been enjoined by a court of competent jurisdiction from violations of such laws or rules, or has been convicted by a court of competent jurisdiction of violations of such laws or of any felony or misdemeanor described in Exchange Act Section 15(b)(4)(B); (5) the need to deter such person and other persons from committing such acts or omissions; and (6) such other matters as justice may require. 186 Over a multi-year period, in dealings with multiple investors, Bandimere made baseless representations about the unregistered securities he was selling while U.S.C. 78u-2(b) U.S.C. 78u-2(c).

272 153a failing to disclose negative factors associated with those investments. Through Bandimere, investors put some $9 million into the fraudulent schemes run by Parrish and Dalton, suffering losses that one investor described as devastating. Bandimere was unjustly enriched by the generous commissions he was paid for his work as an unregistered broker. Although we have determined that the imposition of an associational bar and a ceaseand-desist order, as well as the assessment of disgorgement, are in the public interest, we find that imposing a civil penalty can have an additional deterrent effect beyond that of these other sanctions. 187 Under these circumstances, we find, as the ALJ did, that the imposition of three third-tier civil penalties, one for each of the investment programs at issue (IVC, UCR trading program, and UCR diamond program), is in the public interest. For violations occurring between February 15, 2005 and March 3, 2009, the maximum penalty per violation for a natural person is $130,000 for a third-tier penalty; for violations occurring between March 4, 2009 and March 5, 2013, the maximum penalty for such a violation is $150, While we have identified a number of factors that support a penalty at the high end of the range, we also rec- 187 Bandimere argues that he lost approximately $1 million in the IVC and UCR Ponzi schemes, and that no further deterrence is necessary. Those losses were a result of Bandimere s investment choices. The civil penalties serve the objective of deterrence from engaging in violations of the securities laws. 188 See 17 C.F.R , Table III (setting forth penalties for conduct occurring after February 14, 2005); , Table IV (setting forth penalties for conduct occurring after March 3, 2009); , Table V (setting forth penalties for conduct occurring after March 5, 2013).

273 154a ognize several factors that could justify reducing the penalty: Bandimere made limited repayments to investors (although those sums are small in comparison to the generous commissions he received); he has not been previously found to have violated the laws; and he, together with Syke, brought Parrish s misconduct with respect to IVC to the attention of the Commission. Although Bandimere testified that the imposition of a monetary sanction would change his economic position and probably cause him and his wife to seek employment, the financial impact of a disciplinary proceeding on the respondent is not a mitigating factor. 189 Taking all these factors into account, we find that each of the three third-tier penalties should be in the amount of $130,000, for a total of $390,000. Since Bandimere s violative conduct continued after the permissible maximum penalties were adjusted upwards in March 2009, our use of this figure reflects our consideration of the mitigating factors we have noted. An appropriate order will issue. 190 By the Commission (Chair WHITE and Commissioners AGUILAR, STEIN, and PIWOWAR). Brent J. Fields Secretary 189 Clifton, 2013 WL , at *16 n We have considered all of the parties contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.

274 155a APPENDIX D UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No / Oct. 29, 2015 SECURITIES EXCHANGE ACT OF 1934 Release No / Oct. 29, 2015 Admin. Proc. File No In the Matter of DAVID F. BANDIMERE ORDER IMPOSING REMEDIAL SANCTIONS On the basis of the Commission s opinion issued this day, it is ORDERED that David F. Bandimere be barred from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and it is further ORDERED that Bandimere cease and desist from committing or causing any violations or future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; and it is further ORDERED that Bandimere disgorge $638,056.33, plus prejudgment interest of $128,367.47, such prejudgment interest calculated beginning from February

275 156a 1, 2010, in accordance with Commission Rule of Practice 600; and it is further ORDERED that Bandimere pay a civil money penalty of $390,000. Payment of the amounts to be disgorged and the civil money penalties shall be: (i) made by United States postal money order, certified check, bank cashier s check, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) mailed to Enterprises Services Center, Accounts Receivable Branch, HQ Bldg., Room 181, 6500 South MacArthur Blvd., Oklahoma City, OK 73169; and (iv) submitted under cover letter that identifies the respondent and the file number of this proceeding. By the Commission. Brent J. Fields Secretary

276 157a APPENDIX E UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT No DAVID F. BANDIMERE, PETITIONER v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, RESPONDENT IRONRIDGE GLOBAL IV, LTD; IRONRIDGE GLOBAL PARTNERS, LLC, AMICI CURIAE [Filed: May 3, 2017] ORDER Before TYMKOVICH, Chief Judge, KELLY, BRISCOE, LUCERO, HARTZ, HOLMES, MATHESON, BACHARACH, PHILLIPS, MCHUGH, and MORITZ, Circuit Judges. This matter is before the court on the Security and Exchange Commission s Petition for Rehearing or Rehearing En Banc. We also have a response from the petitioner. Upon consideration, the request for panel rehearing is denied by a majority of the original panel members. The petition and response were also transmitted to all the judges of the court who are in regular active service. Upon that circulation, a poll was called. A

277 158a majority voted to deny en banc reconsideration. See Fed. R. App. P. 35(a). Consequently, the en banc request is likewise denied. Judges Lucero and Moritz voted to grant en banc rehearing. Judge Lucero has written separately in dissent, in which Judge Moritz joins. /s/ Entered for the Court ELISABETH A. SHUMAKER ELISABETH A. SHUMAKER, Clerk

278 159a , Bandimere v. U.S. SEC LUCERO, J., joined by MORITZ, J., dissenting from the denial of rehearing en banc. Because this request for rehearing en banc presents numerous questions of constitutional importance, it is my view that we should rehear the matter. First, the panel majority opinion fails to accord proper deference to the constitutional structure of checks and balances and agency separation of functions that flow from that fundamental construct. Second, the panel decision needlessly and improvidently expands the reach of Freytag v. Commissioner, 501 U.S. 868 (1991), which involved judges on the Tax Court, to the unrelated issue of agency administrative law judges ( ALJs ). In light of the significant consequences of this decision, it is not our office to expand the holding in Freytag, to the contrary, any such expansion should remain in the sole discretion of the Supreme Court. Third, the impact of this opinion will be substantial, and it presents a threat of disruption throughout our government. Finally, the majority opinion fails to respect the carefully crafted procedural protections that are incorporated in the Administrative Procedure Act ( APA ), an essential condition of the congressional delegation of authority to administrative agencies. For each of these reasons, en banc review is not only appropriate, but necessary. That the Supreme Court may ultimately review this case does not relieve us of our independent obligation to rehear it. For the foregoing reasons, I respectfully dissent from the denial of en banc review.

279 160a I As James Madison observed, The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny. The Federalist No. 47, at 324 (James Madison) (J. Cooke ed., 1961). To prevent the tyranny against which Madison admonished, the founders crafted a constitutional division of authority among three co-equal branches of government, controlled by a series of checks and balances. The panel opinion in this case not only veers away from that constitutional structure, it aggregates power in administrative agency officials contrary to this Madisonian principle. In the face of a rapidly growing and largely unregulated body of administrative law during the first half of the twentieth century, and concerns about the commingling of functions within administrative agencies, Congress enacted the APA, which provides governing principles. As observed by Senator Pat McCarran in the foreword to the APA s compiled legislative history, the Act was celebrated as a comprehensive charter of private liberty and a solemn undertaking of official fairness that enunciates and emphasizes the tripartite form of our democracy. Administrative Procedure Act Legislative History, at iii (1946). The need to maintain separation of functions was felt particularly in the area of agency adjudication, and a significant concern motivating the drafters of the APA was the perceived bias of administrative adjudicators. Many complaints were voiced against the actions of the hearing examiners, it being charged that

280 161a they were mere tools of the agency concerned and subservient to the agency heads in making their proposed findings of fact and recommendations. Ramspeck v. Fed. Trial Exam rs Conference, 345 U.S. 128, 131 (1953). 1 Prior to the APA, hearing examiners were employees of an agency, their classification was determined by the ratings given them by the agency, and their compensation and promotion depended upon their classification. Ramspeck, 345 U.S. at 130. Accordingly, [t]he examiners were in a dependent status. Id. As the Supreme Court has long recognized, one who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of independence against the latter s will. Humphrey s Ex r v. United States, 295 U.S. 602, 629 (1935). A 1937 Report of the President s Committee on Administrative Management cogently articulates the concerns: There is a conflict of principle involved in [the agencies ] make-up and functions. They are vested with duties of administration and at the same time they are given important judicial work. The evils resulting from this confusion of principles are insidious and far reaching. Pressures and influences properly enough directed toward officers responsible for formulating and administering policy constitute an unwholesome atmosphere in which to adjudicate private rights. But the mixed duties of the commissions render escape from these subversive influ- 1 ALJs were previously referred to as hearing examiners. See Eifler v. Office of Workers Comp. Programs, 926 F.2d 663, 665 (7th Cir. 1991).

281 162a ences impossible. Furthermore, the same men are obliged to serve both as prosecutors and as judges. This not only undermines judicial fairness; it weakens public confidence in that fairness. Commission decisions affecting private rights and conduct lie under the suspicion of being rationalizations of the preliminary findings with the Commission, in the role of prosecutor, presented to itself. S. Rep. No (1945), as reprinted in Administrative Procedure Act Legislative History 189 (quotation and ellipses omitted). In light of these concerns, the APA authors adopted the view that the commingling of functions of investigation or advocacy with the function of deciding [was] plainly undesirable and should be remedied by isolating those who engage in the activity of adjudication via independent hearing officers. S. Comm. on the Judiciary, 79th Cong., Rep. on Admin. Procedure Act (Comm. Print 1945), as reprinted in Administrative Procedure Act Legislative History 25 (quotation and ellipses omitted). The majority opinion undermines this well-established structure of ALJ independence, and places the legitimacy of our administrative agencies in serious doubt. Whether SEC ALJs exercise the significant authority necessary to constitute inferior officers, Bandimere v. U.S. SEC, 844 F.3d 1168, 1173 (10th Cir. 2016), should be informed not just by their daily duties, but by the independent guardrails of our constitutional structure, to wit, the separation of functions within administrative agencies. The majority opinion notes that the Appointments Clause reflects both separation of powers and checks and balances concerns, and promotes public accountability. Id. at But my respected col-

282 163a leagues in the majority fail to appreciate that these are the very principles embodied in the current structure and process governing selection of ALJs. II In light of the very real and substantial consequences, labeling SEC ALJs inferior officers for the first time in the near-century of their existence should not be done without a clear mandate from the Supreme Court. As demonstrated by the dissenting panel opinion, any such mandate is far from clear. The Supreme Court case at the heart of this dispute involved special trial judges of the Tax Court, an Article I court, and it did not consider administrative agencies or ALJs. Freytag, 501 U.S. at 870. Thus, the majority opinion greatly expands the reach of that decision by equating those Article I judges with ALJs, intermediate hearing officers adjudicating cases for further agency disposition. The many specific bases for distinguishing SEC ALJs from the special trial judges in Freytag are outlined in detail in the dissenting panel opinion. See Bandimere, 844 F.3d at (McKay, J., dissenting). I will not repeat them here, but I emphatically agree with the dissent that it is far from clear Freytag compels a conclusion that SEC ALJs are inferior officers. Countless cases have been decided in the decades since the structure of regulatory agencies and commissions was first established. Many more have been decided since the Supreme Court s decision in Freytag. Each of these cases has been decided in the context of the very constitutional provisions at issue in this case, and none has concluded that Freytag should be ex-

283 164a tended in this manner. As the Supreme Court has advised, long settled and established practice is a consideration of great weight in a proper interpretation of constitutional provisions. N.L.R.B. v. Noel Canning, 134 S. Ct. 2550, 2559 (2014) (alteration omitted). Giving little regard to the longstanding practices implicated in this case, the majority opinion places the legitimacy of our administrative agencies in serious doubt, based on little more than three sentences in a decades-old Supreme Court decision. See Bandimere, 844 F.3d at (majority opinion) (citing Freytag, 501 U.S. at ). I must agree with the dissent that, without a clearer mandate from the Supreme Court, we should prefer the outcome that does the least mischief. Id. at 1201 (McKay, J., dissenting). III In addition to undermining the constitutional foundations and structure of the SEC, the majority opinion risks throwing much into confusion, id. at 1200, and is likely to have a substantial and disruptive impact on the daily functioning of administrative agencies. There are currently over 1,500 ALJs working in at least 28 different federal agencies, presiding over hundreds of thousands of agency adjudications each year. See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, , app. C (2010) (Breyer, J., dissenting); Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797, 799 (2013). Despite the majority s best efforts to cabin its decision to SEC ALJs alone, see Bandimere, 844 F.3d at 1188 (majority opinion), the majority opinion will undoubtedly cause the legitimacy of all federal ALJs to come under attack. Since the issuance of this decision, we have already

284 165a seen one emergency request for relief from an SEC administrative enforcement proceeding. Kon v. SEC, No (10th Cir. Mar. 31, 2017) (unpublished). It is only a matter of time before we see broader challenges to the validity of agency action. Consequently, I share the dissent s concern that the majority opinion will be used to conduct a broader assault on our time-tested administrative system. ALJ insulation from agency control and coercion was a primary goal of the APA. However, a probable consequence of the majority opinion is the loss of ALJ independence and political insulation on multiple levels. In particular, the majority ruling threatens to endanger ALJs double for-cause protection. In Free Enterprise Fund, the Supreme Court determined that dual for-cause limitations on the removal of certain inferior officers is unconstitutional. 561 U.S. at 492. Justice Breyer warned in his dissent that the decision could be extended to ALJs, potentially giving every losing party before an ALJ... grounds to appeal on the basis that the decision entered against him is unconstitutional. Id. at 536, (Breyer, J., dissenting). The Free Enterprise Fund majority responded that ALJs are not necessarily inferior officers, thereby providing courts with a clear path to avoid extending its holding to ALJs. See id. at 507 n.10 (majority opinion). The panel majority opinion eliminates that path and brings us one step closer to realizing Justice Breyer s concern. The panel concurrence suggests other potential avenues that courts might use to avoid making ALJs fully subject to the political pressure of agency heads. See Bandimere, 844 F.3d at 1191 (Briscoe, J., concurring).

285 166a But on a fundamental level, the consequence of this decision providing agency heads with the sole power to appoint ALJs of their choosing threatens the integrity of the ALJ office. Further agency control over ALJs may create an unconstitutional appearance of partiality and implicate serious due process concerns. By pulling on the Appointments Clause thread, the majority opinion threatens to unravel much of our modern regulatory framework. This unraveling is justified on the basis of the discretion enjoyed by ALJs in their day-to-day decisional work. But this fails to recognize that any discretion of the ALJs is subject to final acceptance or review by the agency itself. Any administrative agency discretion exercised by any employee of the agency is always subject to the final decisional discretion vested in the members and heads of agencies. IV As described supra, the APA was thoughtfully constructed to ensure maximum independence for ALJs during their decision-making process, thereby providing an administrative separation of functions that mirrors the constitutional separation of powers. To achieve ALJ impartiality and maintain an intra-agency separation of functions, the APA affirmatively separates the investigative and prosecutorial functions of the agency from its formal adjudicatory functions. It provides that [a]n employee or agent engaged in the performance of investigative or prosecuting functions for an agency in a case may not, in that or a factually related case, participate or advise in the decision, recommended decision, or agency review. 5 U.S.C. 554(d). Further, an ALJ may not be responsible to or subject to the supervision or direction of an employee or agent

286 167a engaged in the performance of investigative or prosecuting functions for an agency. 554(d)(2). To this end, ALJs are hired through a merit-selection process administered by the Office of Personnel Management, 5 U.S.C. 1302; 5 C.F.R , and they may be fired only by the Merit Systems Protection Board for good cause, 5 U.S.C Congress enacted these provisions with the express purpose of render[ing] examiners independent and secure in their tenure and compensation. S. Rep. No (1945), as reprinted in Administrative Procedure Act Legislative History 215. At the same time, the Act vests ultimate decisional authority and discretion in the agencies themselves, thereby promoting public accountability. See 557(b) ( On appeal from or review of the initial decision, the agency has all the powers which it would have in making the initial decision except as it may limit the issues on notice or by rule. ). In the apt words of the panel dissent, it is quite clear where the buck stops. Bandimere, 844 F.3d at 1198 (McKay, J., dissenting). The discretion exercised by the governing head of an agency unquestionably trumps any authority exercised by the ALJs, satisfying the policy concerns that motivated the Appointments Clause. Congress carefully crafted framework thus neatly threads the needle, ensuring integrity in the decision-making process and political accountability as to its outcome. The majority opinion undoes much of this constitutional structure by failing to respect Congress delegation of authority to agencies, as contemplated by the agencies organic acts and the APA, and by scuttling the statutory requirements based on a misreading of Freytag. The APA was a thoughtfully crafted and

287 168a hard-fought compromise. It was under consideration for more than ten years, and no measure of like character has had the painstaking and detailed study and drafting. H.R. Rep. No (1946), as reprinted in Administrative Procedure Act Legislative History 241. Congress considered multiple different and competing proposals before ultimately adopting the procedure now codified in the APA, id., a procedure that has mandated a specific process for the appointment of ALJs for more than seventy years. That procedure is observed by the securities laws governing the operations of the SEC, which provide that final adjudicative power rests exclusively in the five members of the Commission itself. See Bandimere, 844 F.3d at 1197 (summarizing the role of SEC ALJs as mandated by 17 C.F.R (a)(1), (a), & (a)). The role of ALJs within the SEC thus exemplifies the model of administrative adjudication that Congress selected and memorialized in the APA. As discussed supra, Congress made specific and deliberate choices to structure the appointment of ALJs in a constitutionally sound manner. The panel majority pays too little deference to those congressional dictates. V The majority opinion will have an overwhelming impact on the fundamental structure of administrative agencies and the administrative process. A case that grapples with such substantial questions of constitutional law and realigns separation of function principles deserves the consideration of our full court.

288

289 Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by... Page 1 of 5 10/11/2017 About the Blog Become a Blogger Yale Journal on Regulation A Blog from the Yale Journal on Regulation and the ABA Section of Administrative Law & Regulatory Practice An Affiliate of the Law Professor Blogs Network Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by Kent Barnett by Guest Blogger Monday, Jan. 2, 2017 Share As Aaron Nielson discussed last week, the Tenth Circuit held that the SEC s ALJs were inferior officers and, as such, were not appointed correctly under the Constitution s Appointments Clause. The SEC Commissioners improperly delegated the appointment to other SEC officials. The Commissioners, as Heads of Departments, can easily cure the defect by appointing the ALJs themselves and can likely address fallout from other similar pending cases relatively easily. (ALJs appointed by agencies that do not qualify as departments, like FERC, lack an easy remedy.) But if ALJs are inferior officers, as I think they are, more significant constitutional problems concerning presidential supervision and impartiality arise, creating the troubling ALJ quandary. Typical remedies will not help. Instead, creative remediation like the D.C. Circuit s interbranch appointment of ALJs is necessary.

290 Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by... Page 2 of 5 10/11/2017 Stay with me. Aside from being properly appointed, inferior officers must be sufficiently subject to the President s supervision. In Free Enterprise Fund v. PCAOB, the Supreme Court held that cocooning inferior officers within two levels of protection from the President s at-will removal violated the President s constitutional obligation to supervise executive officers. ALJs similar cocooning appears to violate Free Enterprise Fund. As for the first level of protection, their agencies can remove ALJs only for good cause. As for the second, ALJs removal requires the consent of the Merit Systems Protection Board (MSPB), another agency whose members the President cannot remove at will. To be sure, the Court in a footnote suggested an exception for ALJs based on their adjudicatory nature. But, as Justice Breyer argued in dissent, the inferior officers at issue in Free Enterprise Fund also adjudicated matters, rendering any adjudication-based exception difficult to cabin. Likewise, I have argued that Free Enterprise Fund should not present a problem for ALJs based on the decision s reasoning or the particular provisions that protect ALJs. But it s far from clear that the Court would agree. If ALJs protections from at-will removal are unconstitutional, there s no easy fix. In Free Enterprise Fund, the Court cured the defect by severing the provision that directly protected the inferior officers at issue from at-will removal. But applying that remedy to ALJs means that agencies, which are often parties in litigation before ALJs, could remove purported neutral adjudicators. Permitting agencies to do so would only create another constitutional problem: striking impartiality concerns for ALJs under the Due Process Clause. Indeed, Free Enterprise Fund itself recognized that one who holds his office only during the pleasure of another, cannot be depended upon to maintain an attitude of independence against the latter s will. Severing the MSPB s for-cause protection is even more problematic. The President would be able to remove agency officials whose only purpose is to protect the civil service ALJs and hundreds of thousands of rank-and-file agency employees from political firings. That would effectively end civilservice protections. Moreover, other longstanding proposals concerning ALJs, such as creating an ALJ Corps, fail to address one or more of the potential problems: appointment, removal, or impartiality. So what then? In prior work, I advocated an unorthodox but elegant solution: have the D.C. Circuit appoint and remove ALJs. Congress s unexplored power to bestow interbranch appointments where one branch appoints inferior officers in another branch is made for problematic separation-of-powers problems like the ones that ALJs present. Here s the gist of my proposal. First, the D.C. Circuit would appoint ALJs with the help of the Office of Personnel Management, which currently scores and limits the ALJ candidates that agencies can hire. Second, the court could discipline or remove ALJs upon the request of the ALJs agencies or other interested parties.

291 Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by... Page 3 of 5 10/11/2017 This proposal mitigates existing concerns. First, it cures an Appointments Clause problem for ALJs. Congress may permit Heads of Departments, such as the SEC, to appoint inferior officers. But, as mentioned above, not all agencies qualify as departments. The Appointments Clause, however, allows Congress to permit courts of law, such as the D.C. Circuit, to appoint inferior officers. The Court has yet to invalidate any interbranch appointment despite longstanding use and legal challenges. Indeed, Article III courts already regularly make interbranch appointments by appointing Article I bankruptcy judges. Second, transferring the appointment of ALJs to the D.C. Circuit has another significant benefit: the removal power follows the appointment power, according to the Supreme Court. The D.C. Circuit would, by default and properly by congressional assignment, have the power to remove ALJs. This is significant because it gets rid of Free Enterprise Fund s dual-for-cause problem. The removal process (like impeachment) operates outside the executive branch, and only one level of protection from removal exists. Third, limiting agency supervision and increasing judicial oversight improve ALJs appearance of impartiality and mitigate due process concerns. But, you may ask, wouldn t the D.C. Circuit be overwhelmed with ALJ appointments? No. The D.C. Circuit, expert in administrative law, has by far the smallest docket of any circuit. It could appoint ALJs in three-judge panels, reducing the demands of appointing likely 60 or so ALJs each year. These appointments, even if treated like judicial decisions for purposes of measuring judicial business, would still render the D.C. Circuit the least busy circuit in the nation. Wouldn t the executive branch suffer by being completely shut out from appointing or removing ALJs? No, the D.C. Circuit would be required to appoint ALJs and consider disciplining them upon agencies request. And, perhaps more importantly, agencies continue to have the ability to reverse ALJs as to both fact and law, allowing agencies to control all policy matters. Indeed, ALJs improved appearance of impartiality would be an antidote for recent concerns over the fairness of administrative adjudication and help to legitimize executive action. There s much more to my proposal and various considerations in Resolving the ALJ Quandary, 66 Vanderbilt Law Review 797 (2013). With any luck, the Tenth Circuit s decision will lead policymakers, after years of disinterest, to remedy the ALJ quandary and address other problems with administrative adjudication. Kent Barnett is an Associate Professor of Law at the University of Georgia School of Law. Follow him on

292 Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by... Page 4 of 5 10/11/2017 This entry was tagged ALJs. Cite As: Author Name, Title, YALE J. ON REG.: NOTICE & COMMENT (date), URL. One thought on Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by Kent Barnett Jim Kennedy January 3, 2017 at 6:15 am Man I confess I only scanned the Tenth Circuit case and was appalled by its shallow reasoning. It equated a prior case involving Article I judges appointed by the President with ALJs who are appointed under 5 USC The logic escaped me but I haven t tried to do a scholarly analysis. But that case was a comparing cats to dogs. No ALJ I know of ever thought we were Art. I judges. Art. I judges are appointed for a term of years: e.g. Tax Court judges. I spent 35 years as an ALJ with the NLRB, retiring in My independence was guaranteed by the fact that the Agency had no power to discharge me for my decisions or otherwise influence me; it could only fire me for good cause. Otherwise the appointment was to last long as I didn t offend the good behavior provision. I, and all of my fellow ALJs, were appointed after passing a civil service examination and selected by the agency heads, sitting as as a body and taking an oath of office. This article suggests that the SEC ALJs were not appointed by the Agency sitting as a body, but had somehow delegated those appointments to a lesser official (the Chief ALJ?). I am unaware of that practice. In any event, so long as OPM has certified the judge prior to the appointment and he takes the oath, I m not sure what the real issue is insofar as constitutionality is concerned. If the SEC improperly hired certified judges, how is that a constitutional question? Isn t simply an APA issue? The Agency can cure the appointments by ratifying those appointments and they can do so nunc pro tunc. Plus, the Agency can revisit their decisions. The NLRB did that after Noel Canning held that certain Board members themselves had been appointed in violation of the recess appointments clause. The properly appointed members later took the cases from scratch, and I don t think they changed the outcome or the reasoning of any. The real resolution is to place the SEC case into an en banc rehearing where the silly analogy between Article I judges and APA ALJs drawn by the split panel can be exposed. The Tenth Circuit panel reached for a constitutional question to decide when it only needed to look at the appropriate statutes and Noel Canning. Clearly contrary to decisional principles.

293 Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, by... Page 5 of 5 10/11/2017 Your remedy giving the DC Circuit power to appoint is an overreach and entirely unnecessary. I think you know that ( Bear with me, I think you said). Of more concern is the danger to the civil service system if ALJs become subject to the whims of the Executive. I still can t fathom how that court concluded that ALJs are (the same as) Article I judges. OPM doesn t think so, nor does the Supreme Court. It is true that ALJs, like their agencies and departments, are part of the Executive Branch, but with carefully carved out duties and protections. The Supreme Court in Butz v. Economou, though saying ALJs are judges, does not suggest that they are Article I judges.

294

295 CONSTITUTIONALLY CONFORMING AGENCY ADJUDICATION Jennifer L. Mascott, Antonin Scalia Law School, George Mason University Loyola Journal of Regulatory Compliance, Forthcoming George Mason University Legal Studies Research Paper Series LS This paper is available on the Social Science Research Network at

296 Constitutionally Conforming Agency Adjudication Jennifer L. Mascott * In May 2017 the U.S. Court of Appeals for the D.C. Circuit reconsidered en banc 1 a panel holding that administrative law judges ( ALJs ) for the Securities and Exchange Commission ( SEC ) are just employees not Officers of the United States. 2 As employees the ALJs would fall outside the Constitution s Appointments Clause requirements in Article II. 3 But the original D.C. Circuit panel s opinion directly conflicts with a recent Tenth Circuit decision finding the SEC ALJs are officers within the scope of the Article II Clause. 4 In June 2017 the D.C. Circuit issued a judgment indicating the en banc court was equally divided in the ALJ case 5 essentially reaffirming the D.C. Circuit s earlier panel decision, 6 continuing the split with the Tenth Circuit, and making this issue subject to likely consideration by the Supreme Court. The final determination of whether the ALJs are officers with significant authority 7 has far-reaching consequences. 8 The Appointments Clause expressly limits the permissible * Assistant Professor of Law, Antonin Scalia Law School at George Mason University. Earlier drafts of this article were written as an Olin/Searle Fellow in Law affiliated with Georgetown University Law Center and the George Washington University Law School. Thanks to Kent Barnett, Jason Iuliano, Michelle Layser, Alex Lemann, Brian Lipshutz, Aaron Nielson, and Christopher Walker for helpful comments and conversations. 1 Raymond J. Lucia Cos., Inc. v. S.E.C., No , 2017 U.S. App. LEXIS 2732 (D.C. Cir. Feb. 16, 2017), en banc pet n denied by 2017 U.S. App. LEXIS (D.C. Cir. June 26, 2017). 2 Raymond J. Lucia Cos., Inc. v. S.E.C., 832 F.3d 277, 280, (D.C. Cir. 2016), vacated and reh g en banc granted, 2017 U.S. App. LEXIS 2732, at *2 (D.C. Cir. Feb. 16, 2007). 3 U.S. CONST. art. II, 2, cl. 2 ( The President... shall nominate, and by 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. ). 4 Bandimere v. S.E.C., 844 F.3d 1168, 1170 (10th Cir. 2016). 5 Raymond J. Lucia Cos., Inc. v. S.E.C., No , 2017 U.S. App. LEXIS (D.C. Cir. June 26, 2017). 6 See id. (denying the en banc petition for review pursuant to D.C. Cir. Rule 35(d), which provides that when the en banc court divides evenly, a new judgment affirming the decision under review will be issued ). 7 See Buckley v. Valeo, 424 U.S. 1, (1976). 8 See generally Jennifer L. Mascott, Who Are Officers of the United States?, 70 STAN. L. REV. (forthcoming 2018) (draft manuscript, online at (addressing the import of the Appointments Clause). 1

297 methods for selecting officers to appointment by (i) the President with Senate advice and consent, (ii) the Head of a Department, (iii) a court of law, or (iv) the President alone. 9 (Principal officers with no superior other than the President 10 may be appointed only by the President with Senate advice and consent, 11 but the SEC ALJs are being challenged as inferior officers not principal officers. 12 ) If courts determine the SEC ALJs are officers, the process for selecting those ALJs must change. The SEC concedes its ALJs currently are not appointed by a department head or any other Article II-approved entity. 13 That said, a widely cited article by Professor Kent Barnett suggests that one potential significant problem with agency adjudicators coming within Article II s scope is that agency adjudicators hear cases in which the agencies themselves are parties. 14 Perhaps, Barnett suggests, executive branch appointment, supervision, and involvement with the removal of ALJs creates impermissible bias, as the adjudicator would be subject to hiring and possible firing by one of the entities whose case she is deciding. 15 Professor Barnett believes that under Supreme Court precedent such an arrangement may raise due process concerns. 16 This is in addition to the often-acknowledged potential Article III concerns with non-lifetime-tenured adjudicators hearing 9 U.S. CONST. art. II, 2, cl. 2; Kent Barnett, Resolving the ALJ Quandary, 66 VAND. L. REV. 797, 800 (2013). 10 See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 510 (2010) (describing Supreme Court precedent finding that inferior officers are officers whose work is directed and supervised at some level by other officers appointed by the President with the Senate s consent (internal quotation omitted)). 11 See U.S. CONST. art. II, 2, cl See, e.g., Bandimere, 844 F.3d at 1170; Raymond J. Lucia Cos., 832 F.3d at See Raymond J. Lucia Cos., 832 F.3d at 283; see also Barnett, supra note 9, at 800 ( ALJs, however, are selected by heads of agencies, only some of whom qualify as heads of departments. ). 14 See Barnett, supra note 9, at ; see also Kent Barnett, Resolve the ALJ Quandary : Let the D.C. Circuit Appoint and Remove ALJs, YALE J. ON REG.: NOTICE & COMMENT (Jan. 2, 2017), 15 See generally Barnett, supra note 9, at See id. at

298 disputes that appear similar to judicial cases and controversies. 17 To address potential partiality and due process concerns, Professor Barnett recommends that Congress authorize the D.C. Circuit not the President or a department head to appoint, discipline, and remove ALJs upon request from administrative agencies. 18 This essay relies on scholarship by Professors Gary Lawson, 19 Caleb Nelson, 20 Philip Hamburger, 21 Nathan Chapman and Michael McConnell 22 to observe that as a matter of first principles, executive branch appointment of ALJs raises no partiality or due process concerns if adjudicators act only within the proper confines of executive adjudicative power. 23 In particular, Part I of the essay highlights several points from judicial precedent, legal scholarship, 24 and early federal practice suggesting that agency adjudicators may and must be subject to Appointments Clause strictures. And their appointing entity must be one of the executive branch 17 See, e.g., Stern v. Marshall, 564 U.S. 462, (2011); N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 58 76, 87 (1982) (plurality opinion) (addressing non-article III bankruptcy courts); cf. Barnett, supra note 9, at 798 (contending that the function of ALJs closely parallels that of Article III judges ). 18 Barnett, supra note 9, at See generally Gary Lawson, The Rise and Rise of the Administrative State, 107 HARV. L. REV (1994) [hereinafter Lawson, Rise and Rise]; Gary Lawson, Take the Fifth... Please!: The Original Insignificance of the Fifth Amendment s Due Process of Law Clause, forthcoming B.Y.U. L. REV (July 7, 2017 manuscript, online at [hereinafter Lawson, Take the Fifth]. 20 See generally Caleb Nelson, Adjudication in the Political Branches, 107 COLUM. L. REV. 559 (2007). 21 See PHILIP HAMBURGER, IS ADMINISTRATIVE LAW UNLAWFUL? (2014) (chapters 12 13) (demonstrating problems with agencies exercising the judicial power as opposed to engaging in only [l]awful [e]xecutive [a]cts [a]djacent to [a]djudication ). 22 See Nathan S. Chapman & Michael W. McConnell, Due Process as Separation of Powers, 121 YALE L.J. 1672, 1697 (2012) ( Fundamentally, due process meant that the government may not interfere with established rights without legal authorization and according to law, with law meaning the common law as customarily applied by courts and retrospectively declared by Parliament, or as modified prospectively by general acts of Parliament. ). 23 See, e.g., Lawson, Rise and Rise, supra note 19, at ( Much adjudicative activity by executive officials... is execution of the laws by any rational standard.... ); Nelson, supra note 20, at 559 ( [I]n the nineteenth century, whether adjudication required judicial power was thought to depend on the nature of the legal interests that the adjudication would bind. Governmental officials needed judicial power to dispose conclusively of an individual s legal claim to private rights that fit the template of life, physical liberty, or traditional forms of property. But judicial power was not considered necessary for governmental adjudicators to make authoritative determinations adverse to other legal interests, including legal interests held by the public as a whole and legal interests that jurists classified as mere privileges rather than core private rights. ). 24 See Akhil Amar, Intratextualism, 112 HARV. L. REV. 747, (1999) (concluding that lower-level executive officers must be appointed by executive branch actors not by courts of law). 3

299 actors authorized to make appointments under Article II. 25 ALJs should be appointed by a department head or the President (with or without Senate consent) not the interbranch Appointments Clause entity, a court of law. 26 Part II then briefly sketches some of the potential implications of legal scholarship analyzing separation of powers issues related to agency adjudication. Based on that scholarship, this part of the essay suggests: When limited to adjudicating issues properly before the Executive Branch pursuant to law, 27 adjudication by executive-appointed agency officers raises neither due process of law 28 nor Article III concerns. 29 But when agency adjudicators stray outside the proper limits of executive adjudication such as by depriving individuals of vested property rights, 30 they must not serve even as factfinders subject to judicial deference. 31 All cases and controversies subject to the federal judicial power 32 or parts of those cases and controversies must be evaluated and 25 See infra Part I.B (relying heavily on several points from Professor Amar s article Intratextualism as well as on analysis of the Vesting Clause and the drafting history of the Appointments Clause). 26 See Amar, supra note 24, at (1999) (concluding that [w]hen Congress chooses to allow unilateral appointment of an inferior officer, without the special check and safeguard of Senate confirmation, it must vest the power to appoint the inferior in his or her superior. The superior appointing authority must have broad power to direct or to countermand the decisions of the subordinate. ). 27 See infra notes U.S. CONST. amend. V; see also Lawson, Take the Fifth, supra note 19, at 4 (contending that the Fifth Amendment s Due Process of Law Clause would not present a separate constitutional hurdle for agency adjudication in any event, because the clause itself is irrelevant to the Constitution s original interpretative meaning as it adds virtually nothing to, and subtracts nothing from, the meaning of the Constitution of 1788 ). 29 See Lawson, Rise and Rise, supra note 19, at 1246 ( Agency adjudication is therefore constitutionally permissible under Article III as long as the activity in question can fairly fit the definition of executive power.... ). 30 See Chapman & McConnell, supra note 22, at (observing that depriv[ing] specific persons of liberty or vested property rights required the protections of a common law court). 31 See Evan D. Bernick, Is Judicial Deference to Agency Fact-Finding Unlawful?, forthcoming GEO. J. OF L. & PUB. POL Y (May 2017 manuscript, at 2 3, online at Lawson, Rise and Rise, supra note 19, at (positing that judicial deference to agency fact-finding arguably fails to satisfy Article III and thus Article III likely requires de novo review, of both fact and law, of all agency adjudication that is properly classified as judicial activity ); Nelson, supra note 20, at (describing adjudicative facts regarding core private rights that courts historically had to resolve). Cf. N. Pipeline Constr. Co., 458 U.S. at (plurality opinion) (identifying Crowell v. Benson, 285 U.S. 22 (1932), as the first Supreme Court case to uphold [t]he use of administrative agencies as adjuncts engaged in factfinding, similar to the function played by a jury or a special master (internal quotation omitted)). 32 U.S. CONST. art. III, 2. 4

300 determined by Article III judges with salary and lifetime tenure protection. 33 The Constitution s Vesting Clauses 34 and carefully delineated power structures demand it. 35 I. Necessary Appointment by Executive Branch Actors This part of the essay briefly will explain why courts should conclude that the SEC s ALJs are Article II officers. It then will contend that if courts so conclude, the executive branch actors listed in Article II not courts of law 36 should appoint the ALJs. A. Administrative Law Judges Are Officers of the United States. The Supreme Court has held that government officials with significant authority are Officers of the United States subject to the Appointments Clause. 37 According to the Court, several factors indicating significant authority include whether the relevant position, its duties, and salary, are created and specified by statute and thus, established by Law ; whether the duties are important; and whether the official exercises discretion in carrying out those duties. 38 Both circuit courts recently ruling on the officer status of ALJs seem to agree that the SEC s ALJs have duties established by Law that involve some measure of discretion and importance. 39 The core disagreement arises from the D.C. Circuit s view that the Supreme Court s opinion in Freytag v. Commissioner added the power to issue final decisions to the list of 33 Id. 1 (giving lifetime tenure protection to Judges during good Behaviour and establishing that Judges Compensation shall not be diminished during their Continuance in Office ). 34 See U.S. CONST. art. II, 1, cl. 1 ( The executive Power shall be vested in a President of the United States of America. ); id. art. III, 1 ( The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. ); see also U.S. CONST. art. II, 3 ( [H]e shall take Care that the Laws be faithfully executed.... ). 35 See generally Lawson, Rise and Rise, supra note See infra note 66 (Justice Scalia interpreting Courts of Law to mean just Article III courts not Article I courts or any other kind of adjudicative tribunal). 37 Buckley, 424 U.S. at Freytag v. Comm r, 501 U.S. 868, (1991). 39 Bandimere, 844 F.3d at ; Raymond J. Lucia Cos., 832 F.3d at

301 elements required for Article II officer status. 40 Because the original D.C. Circuit panel considering the Lucia case determined that the SEC ALJs lack final decision-making power, the panel concluded they were employees. 41 The Tenth Circuit disagreed, finding that the Supreme Court in Freytag did not require final decision-making authority for officer status 42 and the SEC ALJs thus fall within the scope of Article II. 43 The D.C. Circuit precedent applying Freytag is mistaken based on a fairly straightforward reading of that case. 44 In Freytag, the Court rejected the government s argument that a lack of authority to enter final decisions would have made special trial judges mere employees. The Court believed such an argument ignore[d] the significance of the duties and discretion that special trial judges possess. 45 The Court mentioned finality simply as a possible alternative basis for its holding, clarifying that even if the special trial judges duties had been less significant, the judges nonetheless still would have been officers because they had final decision-making authority in some cases. 46 The D.C. Circuit s conclusion that ALJs are non-officers also is incorrect as a matter of first principles. Evidence suggests the original public meaning of officer in Article II never embodied a final decision-making element or discretion, for that matter. 47 In contrast, the most likely original public meaning of officer encompassed any federal official with ongoing 40 See Raymond J. Lucia Cos., 832 F.3d at (indicating its decision hinged on the determination that the ALJs do not issue final decisions a required element for officer status under precedential D.C. Circuit decisions interpreting Freytag); Landry v. F.D.I.C., 204 F.3d 1125, 1134 (2000). 41 See Raymond J. Lucia Cos., 832 F.3d at Bandimere, 844 F.3d at Id. at See generally Freytag, 501 U.S Id. at 881; see also Bandimere, 844 F.3d at Freytag, 501 U.S ; see also Landry, 204 F.3d at 1142 (Randolph, J., concurring opinion) (explaining that the Court clearly designated this as an alternative holding ). 47 See Mascott, supra note 8 (Introduction). 6

302 responsibility for carrying out a governmental duty of any level of importance. 48 If a statute, for example, authorizes the federal government to complete a particular task or exercise a particular power, the individual who maintains ongoing responsibility for the task is an officer. 49 ALJs in general qualify under such a standard as they carry out adjudicative functions that Congress has assigned via the Administrative Procedure Act 50 (APA). Section 556(b)(3) of Title V of the U.S. Code, within the APA, authorizes ALJs to, among other things, preside over agency hearings, administer oaths, issue subpoenas, take depositions, and rule on evidence. 51 In particular for the SEC, Section 78d-1(a) of Title 15 provides specific authority for the Commission to delegate any of its functions to its ALJs. 52 The SEC, through regulation, has carried out this statutory authority by authorizing its ALJs to conduct hearings and issue initial decisions on its behalf. 53 B. Executive Adjudicative Officers Must Be Appointed by the President or a Department Head Not a Court of Law. If the Supreme Court steps in to address the circuit split and determines that the SEC s ALJs are officers, either the SEC itself or the President would need to appoint the ALJs at least under first principles as set forth in Article II s Appointments Clause. The multimember SEC an Article II Department Head under Supreme Court precedent 54 already has the statutory authority to appoint its ALJs. 55 The Commission just has chosen instead to rely on its Chief ALJ 48 Id. 49 Id. 50 Administrative Procedure Act, Pub. L. No , 60 Stat. 237 (codified as amended in scattered sections of 5 U.S.C.) U.S.C. 556(b)(3) U.S.C. 78d-1(a); see also Bandimere, 844 F.3d at (describing statutory authorization for various ALJ tasks) C.F.R (a). 54 Free Enter. Fund, 561 U.S. at U.S.C. 78d(b)(1). 7

303 to make the ALJ selections. 56 The Commission would need to correct this practice if the ALJs are found to be Article II officers. By the plain text of Article II, inferior Officers the category that encompasses ALJs may be appointed by the President alone (or with Senate consent), department heads, or courts of law. 57 No particular portion of the text expressly purports to restrict Congress on which of these options it may choose for the offices it establishes. 58 Rather, the text seems to empower Congress with a great deal of choice in the matter of how, and even whether, to establish officer positions. This is by design. The Constitution explicitly requires officer positions to be established by Law. The British King s abuse of power by sending hither Swarms of Officers to harrass the colonies was an abuse the Framers wanted to avoid, 59 by cleanly separating the power to appoint officers from the power to create the offices those officers would fill. 60 Further, in addition to the Article II provision authorizing Congress to establish offices by Law, Article II, Section 2 also gives Congress the choice either to require presidential appointment with Senate consent or 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. 61 By its terms, Section 2 gives Congress the discretion to choose between subjecting inferior officers to the principal appointment procedure requiring Senate consent or utilizing an alternative 56 Bandimere, 844 F.3d at U.S. CONST. art. II, 2, cl Id. ( [B]ut 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. (emphasis added)); see also Hanah Metchis Volokh, The Two Appointments Clauses: Statutory Qualifications for Federal Officers, 10 U. PA. J. CONST. L. 745, (2008) (relying on the qualifier, as they think proper, as support for the constitutionality of statutory qualifications on who may fill inferior officer slots). 59 THE DECLARATION OF INDEPENDENCE para. 12 (U.S. 1776). 60 See Volokh, supra note 58, at U.S. CONST. art. II, 2, cl. 2 (emphasis added). 8

304 appointment method. 62 But does it also give Congress the unrestrained discretion to choose from among the three alternative methods whichever alternative it prefers for each office it establishes? 63 There are several significant reasons some set forth in Professor Akhil Amar s article Intratextualism, as well as additional arguments based on the Appointments Clause drafting history and the Vesting Clause to conclude the Constitution s text and structure indicate the answer is no Interbranch Appointment of ALJs by Courts Likely Is Inconsistent with the Constitutional Structure and Text. Professor Barnett in contrast says yes, to a degree at least, Congress has discretion to choose its preferred alternative appointment mode for inferior officers. 65 Barnett contends Congress should use this discretion to address potential concerns about impartiality in agency adjudication by giving the power to appoint ALJs to an Article III Court[] of Law 66 like the 62 See id. ( The President... shall nominate, and by and with the Advice and Consent of the Senate, shall appoint... Officers of the United States,... but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper.... (emphasis added) (apparently giving Congress a choice between sticking with the default Advice and Consent procedure or choosing to vest appointment power in an alternative authority)); Volokh, supra note 58, at 760 (explaining that one possible way to read the phrase as they think proper is as a modification of the verb vest, meaning that Congress has the power, whenever and however it thinks proper, to vest appointment of an inferior officer in the President ). 63 As a textual matter, one might answer yes if one were to read the phrase as they think proper to modify the immediately following list of three alternative inferior appointments modes, rather than the immediately preceding vesting phrase authorizing Congress to create inferior offices free from Senate advice and consent. See, e.g., Morrison v. Olson, 487 U.S. 654, 673 (1988) (relying on this view). But this is not the best reading of the inferior Officers provision, for reasons explained below. See infra Parts I.B.1.a c. 64 See infra notes See Barnett, supra note 9, at Justice Scalia, in his concurring opinion in Freytag, provided strong arguments that the Courts of Law referenced in Article II include only Article III courts vested with [t]he Judicial Power of the United States. 501 U.S. at That said, the majority of the Supreme Court at the time disagreed. Therefore, governing Supreme Court precedent still defines Courts of Law to include any court exercis[ing] the judicial power of the United States which in the Freytag Court s view encompasses non-article III tribunals such as Article I courts. See id. at The Supreme Court has since disavowed one facet of the Freytag opinion the dictum suggesting the phrase Heads of Departments might include only Cabinet secretaries, see Free Enter. Fund, 561 U.S. at , but the Freytag Court s expansive interpretation of Courts of Law remains on the books. 9

305 D.C. Circuit. 67 That way, ALJs will not be biased toward ruling in favor of the agency whose head has appointed them to power and holds at least part of the power to remove them. 68 But there are reasons to think, based on the text in conjunction with the structure of Article II, that the Framers would have intended Article III courts of law to appoint only their own subordinate officers such as court clerks not inferior officers within the Executive Branch. As background, appointment of inferior officers by an entity in a separate branch of government is referred to as an interbranch appointment. 69 Governing precedent imposes little to no restriction on Congress selecting an interbranch appointment mechanism for inferior officers. 70 The Supreme Court in Morrison v. Olson approved the interbranch appointment of the independent counsel by a specially created federal court. 71 And the Court in 1880 suggested interbranch appointments by courts were permissible as long as there was no incongruity between the functions normally performed by the courts and the performance of their duty to appoint Barnett, supra note 9, at Cf. id. at (expressing concerns about bias if the President or principal officers may remove ALJs without tenure protections); see also id. at 807 (explaining how under current law agencies hold at least a circumscribed ability to discipline and remove ALJs ). 69 See, e.g., Morrison, 487 U.S. at See, e.g., id. at (opining that nothing in the recorded debates of the Constitutional Convention indicated the Framers meant to bar Congress from interbranch appointments, but such appointments might be improper if there was some incongruity between the functions normally performed by the courts and the performance of their duty to appoint ); see also Barnett, supra note 9, at (noting that in Ex parte Hennen, 38 U.S. 230 (1839), the Court appeared to condemn interbranch appointments but subsequently has limited the dictum in that case and imposed merely an ambiguous incongruity limitation on interbranch appointments). 71 See Morrison, 487 U.S. at See id. at (describing Ex parte Siebold, 100 U.S. 371 (1879)); see also Barnett, supra note 9, at (noting the Court has affirmatively supported such appointments in the past). But see Amar, supra note 24, at 810 n.242 (observing that Siebold treated the Appointments clause only in passing and laid down no general doctrinal test and that the actual facts in Siebold are consistent with an intrabranch appointments limitation as the case involved judicial appointments of special election supervisors whose duties were somewhat akin to marshals and ministerial clerks ). 10

306 a. Early Practice In contrast, however, as a matter of first principles, Professor Akhil Amar has contended that only intra-branch appointments are constitutional. In his article Intratextualism, Professor Amar observes that both an intratextual and a standard clause-bound interpretation of the Constitution suggest that inferior Officer appointing authorities may select only their own respective subordinates. 73 Professor Amar first makes the intratextual move 74 of comparing the inferior Officer provision with the Constitution s two other uses of the term inferior. 75 The term appears in both the Article III Vesting Clause 76 and Article I, Section 8, 77 each of which indicates that any inferior courts established by Congress are inferior to their superior the Supreme Court. 78 Professor Amar notes that these provisions are symmetrical to the Appointments Clause s reference to inferior Officers, which likewise means inferior to their superior the relevant unilateral appointing authority. 79 Professor Amar then turns to explain that reading the Clause to permit only intrabranch appointments is confirmed by three early historical points. 80 First, early congressional statutes authorized department heads to select and supervise their subordinates. 81 Second, Justice Story s 1833 treatise reported that appointing officials selected only their own subordinates. One 73 Amar, supra note 24, at See id. at 759 (characterizing as an intratextual move the practice of using one provision of the Constitution to help interpret another similarly phrased, but not necessarily adjoining, constitutional provision). 75 See id. at U.S. CONST. art. III, 1 ( The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.... ). 77 Id. art. I, 8, cl. 9 ( The Congress shall have Power... To constitute Tribunals inferior to the supreme Court. ). 78 See Amar, supra note 24, at Id. at Id. at Id. at

307 example was the courts who had only the narrow prerogative of appointing their own clerk, and reporter. 82 Third, the early 19th-century Supreme Court opinion, Ex parte Hennen, concluded that the inferior officer appointing power was no doubt intended to be exercised by the department of the government to which the officer to be appointed most appropriately belonged. 83 b. Appointments Clause Drafting History The drafting history of the Appointments Clause further supports the notion that executive branch appointments should be left up to the President and department heads. Article II, Section 1, begins with a bang 84 providing, The executive Power shall be vested in a President of the United States of America. 85 The Framers apparently understood authority to appoint executive officers to inhere in this executive Power. Specifically, the Virginia Plan that the Framers used as their initial working draft of the Constitution provided only very generally that an executive magistrate should enjoy the Executive rights vested in Congress by the Confederation. 86 That working draft explicitly provided for the National Legislature to select judges, 87 but it made no direct reference to the 82 Id. In the very first Congress, the only officers appointed by the Courts of Law were the courts own clerks. See Judiciary Act of 1789, ch. 20, 7, 1 Stat. 73, 76 (1789). The First Federal Congress also authorized courts to appoint persons to perform tasks such as executing writs and precepts in causes wherein the marshal or his deputy shall be a party. 1 Stat. at 87, 28. But performance of those occasional discrete tasks did not qualify the appointees as Article II officers, see Mascott, supra note 8, at Part III.E, and their tasks were closely related to Article III business in any event. See also, e.g., An Act for the Punishment of Certain Crimes Against the United States, ch. 9, 4, 1 Stat. 112, 113 (1790) (authorizing courts to hire surgeons to dissect and take away the bodies of executed federal criminals). 83 Amar, supra note 24, at (internal quotation omitted). 84 Cf. Lawson, Rise and Rise, supra note 19, at 1251 (using the Big Bang as an analogy to critique one interpretive theory of the Constitution). 85 U.S. CONST. art. II, 1 (emphasis added) THE RECORDS OF THE FEDERAL CONVENTION OF 1787, at 21 (Max Farrand ed., 1937) [hereinafter FARRAND S RECORDS] (Resolution 7) (May 29). 87 Id. at (Resolution 9) (May 29). 12

308 appointment of executive branch officers. 88 The Framers apparently assumed such authority was encompassed within the Executive rights. 89 Fairly early in the drafting process the Committee of the Whole amended the draft Constitution to explicitly assign some appointment authority to the Executive, clarifying that he should receive, among other responsibilities, the power to appoint to offices in cases not otherwise provided for. 90 The author of the amendment, James Madison, questioned whether it was absolutely necessary to explicitly delineate that appoint[ing] authority. 91 He thought the power to appoint executive officers likely already was encompassed within the amendment s reference to the Executive having the power to carry into effect the national laws. 92 Madison did not however see any inconvenience in retaining [the words]. 93 Subsequently an appointments clause was added to the explicit list of the Executive s responsibilities. 94 c. Article II Vesting Clause Also, the Vesting Clause s grant of executive power to the President, 95 along with the duty to take Care that the Laws be faithfully executed, 96 suggests that executive branch actors 88 See id. at (May 29). 89 See ARTICLES OF CONFEDERATION of 1781, art. IX (assigning the Confederation Congress appointments authority); see also 1 FARRAND S RECORDS, supra note 86, at (June 1) (characterizing James Wilson s statements: The only powers he conceived strictly Executive were those of executing the laws, and appointing officers, not appertaining to and appointed by the Legislature. ) FARRAND S RECORDS, supra note 86, at (June 1) (internal quotation omitted). 91 Id. at 63, (June 1). 92 Id. at 67 (June 1). 93 Id. 94 Id. at 67. Professor Amar s article highlights an additional distinct aspect of the Appointments Clause drafting history that supports the conclusion that the inferior Officers provision permits only intrabranch appointments. In particular, Professor Amar notes there was such little debate over the provision that it must have been viewed as a minor housekeeping measure not one that would make the dramatic change of permitting judges to appoint executive branch actors such as diplomats or prosecutors. See Amar, supra note 24, at 808; see also infra notes and accompanying text (noting that the record of the debate on the inferior Officers provision was limited to just one-half of one page in Farrand s Records). 95 See Gary Lawson & Christopher D. Moore, The Executive Power of Constitutional Interpretation, 81 IOWA L. REV. 1267, 1281 (1996) (describing the Article II Vesting Clause). 96 U.S. CONST. art. II, 3; see also Lawson & Moore, supra note 95, at 1280 (describing the take Care duty ). 13

309 must appoint executive branch adjudicators. 97 Whether one adheres to a unitary executive interpretation of the Article II structure 98 or believes the Executive has a more general duty to supervise, 99 the Chief Executive necessarily has some measure of responsibility and accountability for the authority exercised by executive actors. 100 The President s ability to make good on this take Care duty likely hinges in no small part on his ability to direct, at least on some level, decisions made by executive actors even by adjudicators. 101 That does not mean that a President should be permitted to order adjudicators to make crass judgments biased unfairly toward the government or arbitrarily apply the law against parties. 102 Ever. By any means. All executive actors must uphold the Constitution, 103 which most fundamentally preserves and defends Justice and Liberty. 104 But at bottom, accountability for the proper use of federal power by agency adjudicators must reach back to the President. 105 Our system needs to be able to hold an elected President accountable for decisions 97 Cf. Barnett, supra note 9, at 815 (suggesting that the President must have oversight of executive branch actors because of his take Care duty). But see Amar, supra note 24, at (characterizing Justice Scalia s position in Morrison as the view that the Vesting Clause command is satisfied as long as the President retains the basic power to remove an executive officer at will, or otherwise countermand that officer s orders ). 98 See, e.g., Steven G. Calabresi & Kevin H. Rhodes, The Structural Constitution: Unitary Executive, Plural Judiciary, 105 HARV. L. REV. 1153, (1992); Lawson, Rise and Rise, supra note 19, at See Gillian E. Metzger, The Constitutional Duty to Supervise, 124 YALE L.J. 1836, 1842 (2015). 100 Cf. Amar, supra note 24, at 805 (contending that the Appointments Clause s use of the word inferior means [t]he superior appointing authority must have broad power to direct or to countermand the decisions of the subordinate ). 101 See Lawson, Rise and Rise, supra note 19, at (explaining that the Article II Vesting Clause seems to require that [agency officials ] discretionary authority be subject to the President s control ). 102 See infra notes (describing the First Federal Congress s statutory efforts to ensure legality and impartiality in executive action); see also Lawson, Take the Fifth, supra note 19, at 24 25, n.90 (explaining that statutory procedures or executive discretion typically are the only appropriate source of constraints on non-rightsdepriving actions but extreme cases may also implicate constitutional fiduciary principles: Executive agents, as with all federal governmental actors, have a fiduciary duty of care, and that duty limits the extent to which wholly arbitrary or inappropriate procedures can be employed in any tasks. ). 103 U.S. CONST. art. VI, cl U.S. CONST. pmbl. 105 See generally Lawson, Rise and Rise, supra note 19, at (describing how the Article II Vesting Clause gives the President authority to control the exercise of executive power by lower-level officials); see also Dina Mishra, An Executive-Power Non-Delegation Doctrine for the Private Administration of Federal Law, 68 VAND. L. REV. 1509, (2015) (suggesting the President must have enough control over subordinates that he is not divested of his executive Power even under Ms. Mishra s less rigid theory of executive supervision, 14

310 by executive agencies. Otherwise, We the People 106 have no political recourse against abuse. Article II helps ensure liberty by giving the People a say in the selection of the President, who must be held responsible to at least some degree for any and every exercise of federal executive power. 107 We cannot vote out of office agency adjudicators only the President. To ensure there is some direct chain of accountability between adjudicators and the President, 108 no matter how long the chain, an executive actor should have a say in the adjudicators appointment. 109 i. Appointment Statements made during the Founding Era debates suggest, as an initial matter, that one key purpose of the Appointments Clause was to ensure officers were selected on the basis of their excellence and qualifications not due to patronage or favoritism. 110 The Framers concluded that leaving appointments responsibility with one actor, rather than an appointments council, would ensure transparency and accountability. 111 If the appointing authority picked an unqualified officer based on patronage, it would be very clear whom to blame if the appointee later messed up. 112 which incorporates the idea of non-delegation of executive power as an alternative to the unitary executive model). 106 U.S. CONST. pmbl. 107 Cf. Mishra, supra note 105, at 1587 (noting that the popularly elected President[ s] control over exercises of executive power provides a mechanism to align the decision-maker s interest more generally with that of the public ). 108 Cf. id. at (referring to the need for a chain of accountability to the American people via the President but contending implementation of the chain might be flexible and potentially could employ one of a variety of combinations of oversight or control mechanisms including through appointment, removal, or supervision or review of decision-making of varying types, strengths, and directness ). 109 See generally Mascott, supra note 8, at Part IV.B See Amar, supra note 24, at 809 n.240; Mascott, supra note 8, at Part IV.B See Mascott, supra note 8, at Part IV.B See id.; cf. Amar, supra note 24, at 809 (asking, when independent officers mess up, whom can we blame? Who is accountable?... How can there be an inferior without a superior? ). 15

311 To be sure, the Framers debate over councils versus individual actors occurred during the recorded discussion of just the principal Appointments Clause mechanism presidential nomination with Senate advice and consent. 113 (Farrand s Records of the Constitutional Convention includes only one-half page of information about consideration of the inferior Officer[] appointments clause, which was inserted into the Constitution during the final stages of the Convention.) 114 But it seems the Framer s desire to ensure highly qualified officers were selected also would have caused the Framers to want the President or a department head to pick high-quality officers to serve under them, carrying out aspects of the executive power. Would a court of law, within this accountability framework, have as much incentive to pick highly qualified executive officers who are not in any way subject to that court s direction or responsible for helping the judicial branch carry out its duties? 115 ii. Removal and Supervision Further, the Supreme Court and numerous scholars have observed that one key mechanism for ensuring executive control over agency action is the preservation of some ability for the chief executive to effectuate the removal of insubordinate actors. 116 Under longstanding Supreme Court precedent, the power to remove is incident to the power to appoint, unless 113 See, e.g., 1 FARRAND S RECORDS, supra note 86, at 119 (June 5) (Wilson: opposing judicial appointments by the legislature because of the intrigue and partiality associated with numerous bodies ); id. (Madison: also expressing disapproval for the appointment of judges by a numerous body ); see also Free Enter. Fund, 561 U.S. at 513 (observing that the litigants in the case had introduced evidence showing the Framers distaste for collective appointments only with respect to the principal appointments process involving advice and consent not with respect to the inferior officer nominating process) FARRAND S RECORDS, supra note 86, at (Sept. 15). 115 See Amar, supra note 24, at 809 ( [W]hen an appointing authority is picking its own assistant, it obviously has strong incentives to pick well. If the subordinate does a bad job, other government officials and ordinary citizens will and should blame the boss. ). 116 Free Enter. Fund, 561 U.S. at ; Steven G. Calabresi & Saikrishna B. Prakash, The President s Power to Execute the Laws, 104 YALE L.J. 541, 599 (1994) (listing removal as one of the mechanisms that the President needs to maintain adequate control over executive officers); cf. Neomi Rao, Removal: Necessary and Sufficient for Presidential Control, 65 ALA. L. REV. 1205, (2014) (noting the importance of removal at will for principal officers). 16

312 Congress has placed the removal power elsewhere. 117 Professor Barnett has observed that, under this doctrine, assigning ALJ appointment power to the D.C. Circuit presumably would transfer the default removal power to the D.C. Circuit as well. 118 To preserve the chain of accountability 119 for executive adjudicators within the Executive Branch, Congress should decline to submit ALJs to the appointment authority, and concomitant removal authority, of the D.C. Circuit, in the event the courts determine that ALJs are Article II officers. Agency adjudicators should be appointed by either the President or a department head. Perhaps some may contend that keeping ALJ appointment and removal authority within the Executive Branch would subject adjudicators to improperly unrestrained presidential power, particularly since the Supreme Court s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board might be read to subject adjudicators to at-will employment in the event they are officers. 120 Under the apparent bright-line Free Enterprise Fund principle, 121 the removal chain from Article II officers to the President may include at most one layer of tenure protection. 122 Therefore, if the Court were to conclude ALJs are officers and extend Free Enterprise Fund to them, ALJs might lose all tenure protection as a constitutional matter: 123 ALJs appointed by the heads of independent agencies (themselves arguably removable just for 117 See Barnett, supra note 9, at 844, n. 278; see also U.S. v. Perkins, 116 U.S 483, (1886) (making the related point that Congress s power to choose the appointment method for inferior officers carries, incident to it, the power to impose limitations on the removal of those officers). 118 See Barnett, supra note 9, at (contending that if the D.C. Circuit acquires the power to appoint ALJs, the President loses any constitutional power he may have had to remove ALJs ). 119 See Mishra, supra note 105, at See Barnett, supra note 9, at 801, ; see also Free Enter. Fund, 561 U.S. at (Breyer, J., dissenting) (expressing concern about ALJs being subject to the majority s holding). But see id. at 507 n.10 (majority opinion) (expressly declining to decide to extend the scope of the holding to agency adjudicators). 121 Cf. Mishra, supra note 105, at 1569 (observing the possibility that Free Enterprise Fund either adopted no bright-line rule for other cases or adopted a rule for a subset of executive officers based on a functionalist assessment of Article II). 122 See Free Enter. Fund, 561 U.S. at , See Barnett, supra note 9, at

313 cause) 124 presumably would not receive tenure protection. 125 And even ALJs appointed by heads of executive departments subject to at-will removal would see their tenure protections decreased. 126 Under current law the Merit Systems Protection Board (MSPB) its own members ensconced with tenure protection has a say in disciplinary action impacting ALJs. 127 Within this current framework, ALJs in executive departments are subject to two layers of removal protection. 128 ALJs in independent agencies arguably are subject to three. 129 Consequently, the application of Free Enterprise Fund to agency adjudicators may suggest the tenure-protected MSPB should no longer supervise the removal of tenure-protected ALJs. 130 That said, the Court in Free Enterprise Fund indicated its prohibition on double for-cause tenure protection hinged in large measure on the specific facts before the Court, in particular the type of authority exercised by the relevant powerful officers at issue in the case. 131 The Court in fact affirmatively suggested that its holding did not address adjudicative officials like ALJs. 132 Members of the Court seem to have become more focused on structural accountability for the administrative state in recent years, 133 so perhaps the Court would extend the Free Enterprise 124 See Free Enter. Fund, 561 U.S. at 493 (describing Supreme Court precedent that characterized independent agencies as quasi-legislative and quasi-judicial entities that may be subject to good-cause tenure protections (internal quotation omitted)); id. at (Breyer, J., dissenting) (describing the consequences for ALJ removals if the majority opinion s holding were to be extended to them). 125 See Barnett, supra note 9, at See id. 127 See id. at See id. at See id. at See id. at See Free Enter. Fund, 561 U.S. at (referring to the size and variety of the Federal Government, which discourage[s] general pronouncements on particular positions not before the Court). 132 See id. at 507 n See, e.g., Mich. v. E.P.A., 135 S. Ct. 2699, (2015) (Thomas, J., concurring) (questioning the allocation of judicial interpretive authority to agencies in the form of Chevron deference); Dep t. of Transp. v. Amer. Ass n of R.R., 135 S. Ct. 1225, 1234 (2015) (Alito, J., concurring) (noting that [l]iberty requires accountability and the public should take notice when the government tries to pass off regulatory authority to a supposedly private entity); City of Arlington v. F.C.C., 133 S. Ct. 1863, (2013) (Roberts, C.J., dissenting) (noting the potential for tyranny posed by administrative agencies accumulation of undifferentiated executive, legislative, and judicial power). 18

314 Fund principle to ALJs if such a case came before it today. 134 But the language in Free Enterprise Fund expressly reserved for another day the issue of precisely which governmental positions might come within the general scope of the Court s double for-cause removal ban. 135 The Supreme Court s multi-factor approach to evaluating Article II appointment and removal in Morrison v. Olson 136 apparently continues to govern all removal restrictions except any that specifically fall within the scope of Free Enterprise Fund s carve-out for certain double forcause removal bans. 137 Moreover, the balancing test in Morrison v. Olson counterintuitively may suggest that subjecting ALJs to Article II appointments requirements justifies subjecting ALJs to more removal restrictions, not fewer. Language near the conclusion of the Morrison opinion intimates that the extent of the Executive Branch s involvement in appointing an officer may have a bearing on the extent to which Congress may limit the Executive Branch s ability to remove that officer. 138 Specifically, the opinion can to be read to suggest that the more influence the Executive has over inferior officer appointments, the more severely Congress can restrict removal without unconstitutionally encumbering executive supervision at least under 134 See, e.g., Free Enter. Fund, 561 U.S. at (implying that the Court was not revisiting its approval of removal restrictions in Humphrey s Executor v. United States, 295 U.S. 602 (1935), Morrison, and Perkins in part because the parties had not asked the Court to do so); id. at (closing the opinion with strong, broad-based language stating that the President must have the power to remove those who assist him and the restriction of two levels of protection from removal generally is inappropriate for those who exercise significant executive power ). 135 See id. at 506. But see Barnett, supra note 9, at (contending that the majority opinion s explanation for why its holding may not extend to ALJs is unsound as stated ). 136 See Morrison, 487 U.S. at (analyzing numerous factors to determine the constitutionality of the independent counsel removal restrictions as the Court believed there are no rigid categories of... officials who may or may not be removed at will by the President ). 137 See Free Enter. Fund, 561 U.S. at (stating that the issue in Free Enterprise Fund was one of first impression and thus, Morrison was not dispositive to the question before the Court in this case (internal quotation omitted)); see also Mishra, supra note 105, at 1569 (noting that Free Enterprise Fund seems to have left in place the Morrison removal analysis for all government officials other than the set of inferior executive officers before the Court in Free Enterprise Fund). 138 See Mishra, supra note 105, at 1578 (noting that the strength of one executive accountability mechanism might decrease, or increase, the requisite level of intensity of a separate mechanism: For example, in Morrison v. Olson, the Court concluded that the independent counsel could be appointed as an inferior, rather than principal, officer in part because he was statutorily removable by a superior officer. ). 19

315 Morrison s hazy analysis. 139 Neither the President nor the Attorney General had the power to appoint the independent counsel under review in Morrison. 140 Nonetheless, the Court cited the Attorney General s role in determining whether an independent counsel must be hired in the first place as one source of executive power that counterbalanced the limits on Executive Branch removal of the counsel. 141 So even if the Supreme Court eventually weighs in and explicitly holds ALJs are officers and Congress thus requires department heads to appoint them, perhaps the Court would rely on Morrison to conclude the direct accountability link between the chief executive and ALJs reduces the need for executive influence during the removal process. To be clear, this is not the best reading of Morrison in light of Free Enterprise Fund, which indicates the Court has moved to a much stricter view of the need for executive responsibility over administrative actors than the Court provided in Morrison. Nonetheless, the dissenting Justices in Free Enterprise Fund expressed concern about the eventuality that ALJs might one day be labeled officers. The above analysis simply points out that whatever view the Court holds on removal of adjudicators within independent agencies an oxymoron under first principles, incidentally 142 the Court should not let its removal jurisprudence distort its holdings in Appointments Clause cases. Even if the Court is reticent to apply its double for-cause removal ban to independent agency adjudicators, the Court should clean up its Appointments Clause 139 See Morrison, 487 U.S. at (suggesting that the Attorney General s influence in the decision of whether an independent counsel was needed and the Attorney General s control over the submission of facts helping to define the counsel s jurisdiction provided adequate executive control, despite limited executive power to remove the counsel). 140 See id.at See id. at ; cf. Mishra, supra note 105, at (observing that the Court upheld the for-cause restriction on independent counsel removals in part because the President could still control that office somewhat via the Attorney General, a principal officer he could remove at will ). 142 Cf. Amar, supra note 24, at 810 n.241 (noting the disconnect between the concepts of independence and inferior officer status: A truly inferior independent calls to mind a truly square circle. ); Calabresi & Rhodes, supra note 98, at

316 jurisprudence and clearly make a greater swath of officials wielding federal power subject to officer appointments. This would ensure more federal officers are properly subject to democratic accountability, at least on the front end. Lastly, Professor Gary Lawson has contended that the real measure of agency accountability is not whether the President or his subordinates can effectively remove officers, but whether the President can direct the actions of executive branch actors. 143 In other words, if an officer disregards the law, may a department head remove that officer but not undo his action? 144 If so, the President really is not in charge and cannot properly take care that laws are followed. 145 Even under this theory of accountability, it makes more sense for Congress to assign the President or department heads to appoint agency adjudicators rather than giving the appointing authority to a court of law. Presumably an agency adjudicator is more likely to comply with the law in his executive branch duties if he is subject to the direction of the entity who may appoint or remove him. Moreover, any theoretical benefit of impartiality gained by having the D.C. Circuit rather than a department head appoint an ALJ is lost if Article II s grant of executive Power nonetheless permits the President or his department heads to correct an unlawful executive adjudicative action. 143 Lawson, Rise and Rise, supra note 19, at (concluding that the removal debate has relatively little constitutional significance and removal is either constitutionally superfluous or constitutionally inadequate ). 144 See id. at Id. (contending that if an official is removed for exercis[ing] power contrary to the President s directives but the insubordinate act nonetheless remains legally valid, the ex-official will have effectively exercised executive power contrary to the President s wishes, which contravenes the vesting of that power in the President ). 21

317 2. Presidential or Departmental Head Appointment of ALJs Might Still Permissibly Be Subject to a Merit-Based System, Consistent with First Principles. Under current law ALJs are selected utilizing a merit-based system. 146 Similar to the competitive service system in general, a panel scores ALJ candidates. 147 Several top-ranked candidates then are presented to the relevant agency who selects from among them to make the appointment. 148 As Professor Barnett has observed, the primary reason this process may be unconstitutional if ALJs in fact are officers is because some agency heads currently selecting ALJs are not department heads 149 at least not under the Supreme Court s interpretation of that phrase. 150 But the main gist of the merit-based ALJ selection process might be permissible. Based on examination of the text, history, and structure of the Constitution, Professor Hanah Metchis Volokh has presented arguments suggesting that statutory qualifications are consistent with the Constitution s process for vested [or, inferior Officer ] appointments. 151 The earliest evidence of congressional practice suggests such qualifications in fact were quite modest, such as the requirement that an Attorney General be learned in the law. 152 That said, merit-based evaluation of at least some executive branch officials has been occurring since as early as the mid-19th century. 153 And Congress s Article II power to establish[] by Law executive offices may include textual authority to place conditions on who may fill those 146 See Barnett, supra note 9, at ; see also VANESSA K. BURROWS, CONG. RESEARCH SERV., RL34607, ADMINISTRATIVE LAW JUDGES: AN OVERVIEW 2 3 (2010) (explaining that the Office of Personnel Management scores ALJ applicants and places those receiving a passing score on a register listing eligible hires; agencies then select from among the top three candidates). 147 See Barnett, supra note 9, at See id. 149 Id. at See Free Enter. Fund, 561 U.S. at 511 (defining a department as a freestanding component of the Executive Branch, not subordinate to or contained within any other such component ). 151 Volokh, supra note 58, at Id. at 769 (internal quotation omitted); see also Mascott, supra note 8, at Part IV.A.2.b.ii (collecting references to the minimalist statutory qualifications that the First Federal Congress imposed on various governmental positions). 153 See Mascott, supra note 8, at Part IV.B.1. 22

318 offices. 154 If so, merit-based selection requirements may be just another permissible condition of office-holding that Congress imposes on the offices it creates. 155 As long as (i) the final entity selecting from among the meritorious candidates is the President or a department head and (ii) the panelists scoring candidates are themselves properly appointed, 156 merit-based selection of ALJs may very well comport with Article II. 3. Does a Change in the ALJ Appointment Structure Impact the Fairness of Agency Adjudicative Proceedings? Perhaps some may object that raising fairness concerns about the alteration of the ALJ appointment structure really is much ado about nothing. After all, the agency heads already are subject to Appointments Clause requirements. 157 And the APA requires agencies to give such little deference to ALJ decisions 158 that an ALJ s determination has minimal impact on the fairness of the outcome in any given case. How can subjecting ALJs to Article II procedures make agency adjudication any more biased than it already is in light of the potentially nondeferential review of ALJ decisions by politically appointed agency heads? On one level, this is a very good point. Agency heads already have some potential influence over agency adjudicative outcomes. 154 Volokh, supra note 58, at cf. id. at (finding additional support for the idea that Congress may impose qualifications on inferior officers in the distinct Appointments Clause phrase, as they think proper (U.S. CONST. art. II, 2, cl. 2: but the Congress may by Law vest the Appointment of such inferior officers, as they think proper... ). 155 See Mascott, supra note 8, at 66 68; see also Civil-Service Commission, 13 OP. ATT Y GEN. 516, , (1871) (concluding that it would be unconstitutional for merit-based requirements to limit the President to one specific officer candidate but merit-based requirements limiting the President to choosing from a class of candidates may be okay). 156 See Mascott, supra note 8, at Part IV.A.2.b.ii. 157 See, e.g., 15 U.S.C. 78d(a) (subjecting SEC Commissioners to appointment by the President with Senate advice and consent). 158 See 5 U.S.C. 557(b) ( On appeal from or review of the initial decision, the agency has all the powers which it would have in making the initial decision except as it may limit the issues on notice or by rule. ); Barnett, supra note 9, at 799 (observing that agencies can reverse ALJs decisions in toto ). 23

319 But acknowledgement of this role simply further underscores the need to reexamine whether agency adjudication, through and through, might be subject to so much executive influence that certain private rights matters are inappropriate for executive adjudicative resolution altogether. Perhaps such matters instead should be transferred to the jurisdiction of constitutionally impartial Article III courts. 159 Further, first-level agency decision-makers like ALJs enjoy their own substantial federal authority despite the oversight of agency heads. For example, if an ALJ s decision is not challenged, by default under the APA it may become[] the decision of the agency without further proceedings. 160 Even if the agency reviews the ALJ s initial decision, the ALJ s earlier determination is part of the record that the agency must consider during its reevaluation of the case. 161 The initial decision also is part of the record for purposes of potential eventual judicial review. 162 As administrative law expert Professor Michael Asimow has observed, the United States administrative adjudicative system relies most heavily on the individual adjudicator s initial decision. 163 Comparatively [f]ew[] resources are invested in reconsideration or judicial review because it is improbable that the decision will be overturned on the basis of a factual or discretionary error See infra Part II U.S.C. 557(b). That said, the practice of certain agencies may be to require further agency action before an ALJ s decision becomes final agency action, at least for purposes of judicial review. For example, in the D.C. Circuit s Lucia case, the SEC s regulations require the Commission to enter an order of finality as to each party. See 17 C.F.R (b)(1), (d)(1) (2). 161 See 5 U.S.C. 557(c); see also Bandimere, 844 F.3d at (describing numerous ways in which initial consideration by SEC ALJs shapes the outcome of a case even when it is reviewed by the commission on appeal). 162 Compare 5 U.S.C. 706 (providing for judicial review of the records from agency action), with 5 U.S.C. 557(c) ( All decisions, including initial, recommended, and tentative decisions, are a part of the record.... ). 163 Michael Asimow, Five Models of Administrative Adjudication, 63 AM. J. COMP. L. 3, 13 (2015). 164 Id. at

320 Moreover, simply during an ALJ s initial consideration of a case, she exercises substantial governmental power over the regulated party. For example, an ALJ has the power to issue subpoenas, take depositions, and require parties or their representatives to attend conferences. 165 It is important for the democratic accountability and transparency of Article II procedures to apply to these exercises of governmental power. 166 The stakes are high. In the D.C. Circuit s Lucia case, for example, agency adjudication resulted in Mr. Lucia s lifetime bar from his profession. 167 II. Proper Limits on Matters Subject to Agency Adjudication As legal scholarship about agency adjudication lays bare, the preservation of true impartiality of the kind we expect in judicial determinations directly conflicts with the value of maintaining presidential supervision over executive action. 168 Giving the Chief Executive or a department head any role in appointing, or removing, or even directing the general policies of agency officials involved in judicial resolution of contested issues opens up the danger of abuse of power. Regulated parties whose private liberty and property rights are subject to adjudicative deprivation by the political branches are at risk U.S.C. 556(c)(2), (4), (8); see also Bandimere, 844 F.3d at (describing the numerous duties and substantial influence of the SEC s ALJs). 166 See supra notes and accompanying text (discussing the democratic accountability and transparency of Article II procedures). 167 Raymond J. Lucia Cos., 832 F.3d at See, e.g., Barnett, supra note 9, at 825 (arguing that the elimination of tenure protections for purposes of improving presidential supervision would increase the potential for bias); id. at 826 (describing independence as the flipside to supervision and contending that increasing removal power will have an inverse impact on independence and impartiality ). 169 See HAMBURGER, supra note 21, at ( [W]hen government once again relies on extrajudicial adjudications to bind subjects, it clearly violates these constitutional provisions. Indeed, it systematically returns to the extralegal adjudication that constitutional law developed largely in order to prevent. The result is a massive evasion of fundamental constitutional limitations. ). 25

321 So, how are we to resolve the tension between the need for executive supervision over executive adjudication and the potential partiality of executive-appointed officers in resolving private property and liberty deprivations? 170 Happily, there s an Article for that. Article III entrusts judicial resolution of cases and controversies to judges with lifetime tenure and salary protection. 171 The reason that resolution of tension between executive supervision of agency adjudication and impartial due process seems so intractable is because the Constitution was not intended to permit executive agencies to resolve a number of the matters before them today. 172 This tension raises the obvious question, however: what matters should executive agency adjudicators resolve? They clearly have the constitutional authority to resolve certain disputes. 173 From the time of the very first Congress, agency adjudicators have been engaged in the application of legal standards to particular facts 174 to resolve contested issues. But what is the proper line between adjudicative issues that truly are executive matters subject to resolution by the political Article II branch versus judicial matters that, at the federal level, may be resolved only by Article III judges? See Barnett, supra note 9, at ; cf. William Funk, Slip Slidin Away The Erosion of APA Adjudication (draft manuscript, at 2, online at Slidin-Away.pdf) (last accessed June 18, 2017) (attributing ALJs independence in large part to the extensive good cause removal protections that they enjoy (internal quotation omitted)). 171 U.S. CONST. art. III, See Lawson, Rise and Rise, supra note 19, at 1248 ( I do not make this claim with full confidence..., but it seems to me that Article III requires de novo review, of both fact and law, of all agency adjudication that is properly classified as judicial activity. Much of the modern administrative state passes this test, but much of it fails as well. ). See generally HAMBURGER, supra note 21, at (Chapter Thirteen: Return to Extralegal Adjudication ). 173 See, e.g., HAMBURGER, supra note 21, at 191 ( [T]he early federal executive could do much that came close to judicial power. For example, the executive could hold judicial-like hearings and could issue orders directing its own officers. But it could do these things that might seem like judicial power only as long as it did not thereby bind subjects in the manner of actual judicial power. ); Lawson, Rise and Rise, supra note 19, at See Lawson, Rise and Rise, supra note 19, at 1246; see also Freytag, 501 U.S. at 909 (Scalia, J., concurring) (describing the role of the 18th-century Comptroller of the United States and defining adjudication as determin[ing] facts, apply[ing] a rule of law to those facts, and thus arriv[ing] at a decision ). 175 See Lawson, Rise and Rise, supra note 19, at (noting it can be difficult to identify those activities that are strictly judicial in the constitutional sense ); see also HAMBURGER, supra note 21, at

322 Providing an adequate answer to that question requires reliance on extensive historical research and analysis research that several scholars have undertaken in significant measure. 176 Part II of this essay will not revisit this analysis in detail. But Part II will provide a brief sketch of some of the principles set forth in this literature (i) that help to uncover the proper dividing line between executive adjudication and the exercise of judicial power and (ii) that demonstrate how properly limited executive adjudication might assuage many of the partiality concerns raised by contemporary scholars like Professor Barnett. In particular, a starting point for this analysis might be found in the history of the original meaning of the due process protections in the Constitution. Professors Michael McConnell and Nathan Chapman provide a compelling account of the original meaning of due process of law. 177 They explain that due process protections historically applied against all federal government action taken by any of the three branches including the legislature and the executive. 178 They contend that in contrast to modern doctrine, 179 due process [f]undamentally... was about securing the rule of law and only secondarily about notice and the opportunity to be heard. 180 (Professor Gary Lawson recently has drafted an article suggesting the due process of law protections in the Fifth Amendment actually were even narrower, in the sense that they (distinguishing between judicial acts and [l]awful [e]xecutive [a]cts [a]djacent to [a]djudication describing executive adjudication involving non-subjects and executive adjudication regarding not-yet-vested benefits or other privileges as examples of permissible executive actions). 176 See generally, e.g., Chapman & McConnell, supra note 22; Lawson, Take the Fifth, supra note 19; Nelson, supra note See Chapman & McConnell, supra note 22, at 1675 (internal quotation omitted). 178 Id. at 1679, See, e.g., Mathews v. Eldridge, 424 U.S. 319, (1975) (analyzing the type of notice and hearing that must be provided in a given case through a multi-factor lens). 180 Chapman & McConnell, supra note 22, at

323 provide no restraints on federal power beyond those already contained in the text and structure of the Constitution of ) With respect to executive action, Professors Chapman and McConnell s research indicates that due process simply ensured that the executive would not be able unilaterally to deprive persons within the nation of their rights of life, liberty, or property except as provided by common law or statute and as adjudicated by independent judicial bodies. 182 Professors Chapman and McConnell continue on to explain in detail the kinds of individualized acts that legislatures, for example, could take apart from the due process requirement of an independent judicial determination and those they could not, absent a historical, lawful practice to the contrary. 183 This line between permissible legislative acts versus acts requiring independent judicial resolution is a useful analogue for evaluating which types of issues are appropriate for agency adjudicative resolution and which are not. For example, as a historical matter, Professors McConnell and Chapman explain that Congress could enact private statutes not depriv[ing] anyone of life, liberty, or property. 184 In contrast, quasi-judicial acts that generally were impermissible unless subject to judicial resolution included: (i) taking private property from one party and giving it to someone else; (ii) taking land for a public use without proper compensation, (iii) revising land charters or revoking land grants, and (iv) reducing procedural protections for a small class of citizens Lawson, Take the Fifth, supra note 19, at 1. Professor Lawson agrees that notice is a constitutional requirement prior to any federal deprivation of life, liberty, and property. But Lawson concludes the bedrock requirement of notice is such a basic part of American law that it pre-dated the Fifth Amendment s Due Process of Law Clause, is part and parcel of what it means to exercise judicial Power, and did not need articulation in the Fifth Amendment to be effective. Id. at Chapman & McConnell, supra note 22, at See id. at , Id. at 1734 (internal quotation omitted). 185 Id. at

324 Cases involving such deprivations or transfers of life, liberty, or property constitute a core of cases that, when considered at the federal level, must be resolved by Article III courts not executive adjudicators dressed up as courts. 186 Matters, on the other hand, that may in fact be appropriate for resolution by agency adjudicators include governmental grants of privileges or benefits 187 or issues historically adjudicated without the use of traditional common law judicial procedures. 188 Professors McConnell and Chapman highlight, for example, the case of Murray s Lessee v. Hoboken Land & Improvement Co., 189 in which the Supreme Court held that established practice showed the validity of Congress in certain instances authoriz[ing] executive officials to seize private property without judicial warrant or a jury trial. 190 In that particular case, U.S. Treasury officials had tried to secure a lien on property owned by a customs officer. 191 The officials were attempting to acquire repayment of a debt the officer owed for customs duties that he had collected but failed to hand over to the government. 192 Because English history indicated there had always been a summary method for the recovery of debts 186 See id. at , Professor Lawson also has articulated a similar standard based on Professor Philip Hamburger s landmark book Is Administrative Law Unlawful? In a review of the book, Lawson praises Hamburger s observation of the crucial distinction between executive acts that purport to bind subjects and executive acts that purport merely to instruct executive agents or exercise coercion against non-subjects. Gary Lawson, The Return of the King: The Unsavory Origins of Administrative Law, 93 TEX. L. REV. 1521, 1524 (2015). Specifically, Professor Lawson notes, [I]t is only the former kind of executive actions attempts by the executive, with or without statutory authorization, to constrain subjects that raises constitutional problems of adjudication outside of Article III.... Id. 187 See HAMBURGER, supra note 21, at 191 (observing that the core of judicial power historically was reserved exclusively to the courts but did not include decisions about government benefits or privileges, unless they had vested and become rights ). 188 See Chapman & McConnell, supra note 22, at (finding that it is permissible for the executive to adjudicate matters outside the traditional common law judicial process if it is rooted in longstanding British practice that the Constitution and early American practice had not changed); id. at 1804 ( An Article III judge is required in all federal adjudications, unless the text and historical practice of the Constitution expressly or implicitly give Congress the power to authorize them. ) U.S. 272 (1856). See also Lawson, Take the Fifth, supra note 19, at (addressing this case extensively); Nelson, supra note 20, at (same). 190 Chapman & McConnell, supra note 22, at Id. 192 Id. 29

325 due to the crown, the Court held that this executive deprivation of property was permissible without judicial proceedings. 193 As Professor Lawson has pointed out, applying this historical understanding of due process to ALJs and contemporary agency adjudication may counsel for the following arrangement at the federal level: (i) If an issue involves the deprivation of rights, only an Article III court may resolve it. 194 Agency adjudicators should not act even as adjuncts, or assistants, to the courts in such matters. 195 This category of matters that are inappropriate for executive adjudication undisputedly includes criminal judgments, according to multiple scholars. 196 Professor Lawson has suggested this category likely also includes within it the imposition of a civil penalty or fine, which is very hard to distinguish from the imposition of a 193 Id. at (internal quotation omitted). 194 See Lawson, Rise and Rise, supra note 19, at 1247 (observing that the Article III inquiry might merge[] with questions of due process: if the government is depriving a citizen of life, liberty, or property, it generally must do so by judicial process, which in the federal system requires an Article III court; but if it is denying a citizen... a mere privilege, it can do so by purely executive action ). 195 See id. at ( Article III certainly would not be satisfied if Congress provided for judicial review but ordered the courts to affirm the agency no matter what.... There is no reason to think that it is any different if Congress instead simply orders courts to put a thumb (or perhaps two forearms) on the agency s side of the scale. ). In his book examining the first century of U.S. administrative practice, Professor Jerry Mashaw presents several cooperative efforts between the Executive Branch and courts as an early analogue to the role today of administrative law judges. See JERRY L. MASHAW, CREATING THE ADMINISTRATIVE CONSTITUTION (2012) ( The use of courts as administrative tribunals to make initial or recommended decisions seems analogous to the modern role of the administrative law judge. ). For example, Professor Mashaw describes a statute permitting individuals to petition a district judge for remittance of a tax penalty; the judge created a factual record and then forwarded it to the Treasury Secretary for the Secretary s determination whether the penalty had been warranted. Id. at 74. But this and similar examples do not do the work Professor Mashaw requires of them. As an initial matter, as Professor Lawson has observed, the most egregious problems today with agency consolidation of power occur because agencies often both develop the factual record and decide the case, along with the agencies additional prosecutorial and policymaking roles. Lawson, Rise and Rise, supra note 19, at But even more fundamentally, Professor Mashaw s examples involve the adjudication of government-related debts and benefits not the distinct deprivations of private property and liberty that evoke constitutional separation-of-powers concerns. See HAMBURGER, supra note 21, at See, e.g., Lawson, Rise and Rise, supra note 19, at ; Nelson, supra note 20, at 610, n.212. Professor Hamburger goes somewhat further and contends that any binding administrative order or warrant is unauthorized by the Constitution whether it is of a criminal nature or not. See HAMBURGER, supra note 21, at In his view, such inappropriate administrative orders include not just the imposition of penalties or fines but even orders requiring parties to testify under oath or produce their business papers and records for an administrative inquiry. See id. at 228,

326 criminal sentence. 197 Perhaps one more obvious extension of the principle would be to conclude that executive adjudication is an improper forum for imposing sanctions like suspension or a lifetime bar from a professional practice area. 198 (ii) In contrast, executive adjudication may be permissible for matters historically resolved by executive actors like disputes over funds owed to the government 199 or the grant or denial of entitlement benefits 200 resources to which, as a historical matter, citizens had no pre-existing vested private property right. 201 Additional examples of matters listed by Professor Lawson as appropriate for executive adjudicative resolution include (i) notice-giving, (ii) acts involving internal executive administration, and (iii) acts of coercion pursuant to duties imposed by a constitutionally legitimate statute where those acts do not purport[] to add any independent binding authority to the statute. 202 Under this construct distinguishing between lawful and unlawful executive adjudication, one would need to analyze whether a particular type of dispute is analogous to cases that 197 Lawson, Rise and Rise, supra note 19, at See supra note 167 and accompanying text. 199 See supra notes and accompanying text. To some, the existence of this historical practice may seem like a dubious exception to a general principle that the government may not take private property like one s income without judicial process. But one key distinction in the public revenue cases is that it was not the government singling out one property owner for some type of taking, punishment, or fine. Rather, the government had already by law authorized the receipt of certain government funds a principle generally applicable to the public. See Lawson, Take the Fifth, supra note 19, at And the elected branches bore the political accountability of the public knowing they had passed the generally applicable revenue law and therefore could be voted out of office for it. Also, as Professor Lawson has observed, even executive adjudication pursuant to public revenue laws is legal only if Congress acted properly, pursuant to one of its enumerated powers, in enacting the revenue statute another potential check against the unrestrained exercise of federal power. See id. at (analyzing whether the public revenue collection statute at issue in Murray s Lessee was a proper exercise of congressional power under the Necessary and Proper Clause); Lawson, Rise and Rise, supra note 19, at (noting that the Necessary and Proper Clause authorizes only laws that carry[] into Execution other granted powers ). 200 See Lawson, Rise and Rise, supra note 19, at 1246 ( [G]ranting or denying benefits under entitlement statutes is execution of the laws by any rational standard.... ). 201 See supra notes and accompanying text. 202 Lawson, Take the Fifth, supra note 19, at

327 historically were subject to resolution by independent judicial bodies. 203 If so, agency adjudicators should not be authorized today to determine the matter. 204 Although this might sound like a radical claim, Professor Lawson has observed that the matters constitutionally inappropriate for agency adjudications under this construct are a relatively modest subset of present-day executive action. 205 Examples from early practice seem to bear out these principles, 206 showing numerous instances in which the early Executive Branch engaged in adjudication. For example, the First Federal Congress established the position of Auditor responsible for, among other things, receiving public accounts, examining them, and certifying their balance. 207 If any person with an audited account was dissatisfied with the Auditor s examination, that person could appeal to the Comptroller against such settlement. 208 According to Justice Scalia in his concurring opinion in Freytag, the Comptroller s adjudication was not subject to further review by the Treasury Secretary. 209 Both the Auditor and the Comptroller who reviewed the Auditor s adjudicative determinations 210 on appeal were appointed by the President with Senate advice and consent. 211 The First Congress did not specify 203 See generally, e.g., Nelson, supra note 20 (conducting significant historical research to define and explicate the constitutional distinction between core private rights versus privileges or franchises ). 204 See Chapman & McConnell, supra note 22, at (observing that due process of law encompasses the settled usages and modes of proceeding existing in the common and statute law of England, before the emigration of our ancestors, and which are shown not to have been unsuited to their civil and political condition by having been acted on by them after the settlement of this country (internal quotation omitted)). 205 Lawson, Take the Fifth, supra note 19, at See, e.g., Freytag, 501 U.S. at (Scalia, J., concurring) (discussing an early example of executive adjudication within the Treasury Department where the First Federal Congress authorized the Comptroller to give final review to challenges brought against an Auditor s examination and certification of public accounts). 207 MASHAW, supra note 190, at 40 (discussing An Act to Establish the Treasury Department, ch. 12, 5, 1 Stat. 65, (1789)) Stat. at 66 67, 5; MASHAW, supra note 195, at Freytag, 501 U.S. at 909 (Scalia, J., concurring) (observing that the Comptroller was engaged in an exercise of executive power in reaching his determination, which was not subject to further review by the [Treasury] Secretary ). 210 See supra note 169 and accompanying text (observing that adjudication simply amounts to the application of a legal standard to facts). 211 MASHAW, supra note 195, at 40; see also, e.g., 1 S. EXEC. J. 1ST CONG., 1ST SESS. 25 (1789). 32

328 any particular tenure protections for those officials; 212 nonetheless they resolved important issues related to resources owed to the government. 213 In his book analyzing administrative practice during the first 100 years after the ratification of the Constitution, Professor Jerry Mashaw discusses a number of additional examples of early executive branch adjudication. 214 They include a private act by Congress authorizing the President to determine how to best distribute relief funds to U.S. residents who had fled Saint Domingo during an insurrection. 215 In another early private act, Congress authorized the President to determine the most appropriate distribution of funds to individuals suffering property damage as a result of defending the government during the Whiskey Rebellion. 216 From early on, lower-level officials appointed by the President also engaged in adjudicative determinations. Revenue officers collecting duties on distilled whiskey had the authority to determine how large of a bond was required as security for the future payment of duties owed on that whiskey. 217 And when customs collectors suspected importers of fraudulent reporting about the goods on their ships, Congress directed the collectors, in the presence of two 212 See 1 Stat. at 66 67, 1, 3, 5; see also MASHAW, supra note 195, at 42 (noting that presidential appointment and removal were common to all the departments ); cf. id. at 40 and 327 n. 49 (observing that James Madison had supported a term limit for the Comptroller because of his appellate authority but Congress ultimately rejected that proposal). 213 See MASHAW, supra note 195, at 327 n.49 (noting that Congress provided by statute that the Comptroller s decisions would be final and conclusive to all concerned (internal quotation omitted)). 214 See id. at See id. (discussing An Act Providing for the Relief of Such of the Inhabitants of Saint Domingo, Resident within the United States, as May Be Found in Want of Support, ch. 2, 6 Stat. 13 (1794) (authorizing the President to distribute money from the U.S. Treasury to affected persons in the manner that in his opinion is most conducive to the humane purposes of this act (internal quotation omitted))). 216 Id. at 48, 331 n.90; (describing 4 ANNALS OF CONGRESS (1794)). 217 See An Act Repealing, After the Last Day of June Next, the Duties Heretofore Laid Upon Distilled Spirits Imported from Abroad and Laying Others in Their Stead; and Also Upon Spirits Distilled Within the United States, and for Appropriating the Same, ch. 15, 3 5, 1 Stat. 199, (1791). 33

329 or more reputable merchants, to open and examine the suspected packages. 218 Any packages found to have been fraudulently recorded were forfeited based on this examination. 219 In each of these instances, however, the adjudication involved the distribution of government benefits or the recovery of resources owed to the government not a matter involving the deprivation of liberty or private property. 220 Moreover, despite the constitutionality of executive adjudicative resolution of these types of issues without independent judicial consideration, Congress may determine nonetheless that resolution of such matters merits statutory protection to encourage impartiality. 221 As Professor Mashaw has extensively uncovered, from the time of the very First Congress, Congress established numerous far-reaching mechanisms to ensure accountability in executive action. 222 For example, federal officers could face common law suits in state court for wrongdoing in office. 223 And many federal officials had to give bond, with sufficient sureties prior to entering office, with condition for the faithful performance of the duties of [their] 218 An Act to Provide More Effectually for the Collection of the Duties Imposed by Law on Goods, Wares and Merchandise Imported into the United States, and on the Tonnage of Ships or Vessels, ch. 35, 47, 1 Stat. 145, (1790); MASHAW, supra note 195, at See MASHAW, supra note 195, at See supra notes and accompanying text; see also HAMBURGER, supra note 21, at (observing that early administrative precedents discussed by Professor Mashaw concerned executive actions that did not bind subjects and thus are not authoritative precedents for contemporary administrative adjudication ). 221 Cf. Lawson, Take the Fifth, supra note 19, at (observing that under the Constitution standing alone, executive procedures are not even relevant to, the lawfulness of an executive deprivation of life, liberty, or property ; such procedures become relevant to an action s legality only if valid statutes prescribe necessary procedures that must be followed ). 222 See MASHAW, supra note 195 (Chapter 3); see, e.g., id. at 63 (referring to the techniques of oaths, bonds, forfeitures, criminal penalties, and qui tam actions that were imposed by congressional statute as well as internal control efforts via instructions, audits, and inspections ); id. (noting also that the Federalists preserved accountability by leaving all officers subject to removal ). 223 Id. at 36 37; see also, e.g., An Act to Establish the Judicial Courts of the United States, ch. 20, 27 28, 1 Stat. 73, (1789) (describing misfeasance in office as a breach of the bond a marshal was required to pay prior to assuming office). 34

330 office[s]. 224 Official wrongdoing could cause officers to face criminal prosecution, 225 stiff monetary penalties, 226 and removal from office accompanied by a prohibition on holding any future federal office. 227 Certain officials also faced conflict-of-interest prohibitions. 228 Treasury officials, for example, could not be directly or indirectly involved 229 in the business of trade or commerce 230 or be concerned in the purchase or disposal of any public securities. 231 Congress today similarly could provide for many mechanisms to help ensure the fair and lawful execution of federal power by agency adjudicators and other executive branch officials. For example, in a recent draft paper contending for constrained use of informal agency adjudication procedures, Professor William Funk highlighted the beneficial requirement in formal adjudication of stringent separation between agency investigators and prosecutors and agency adjudicators 232 a statutory procedural safeguard currently present in the APA. 233 Professor Asimow also has praised statutory safeguards encouraging impartiality in agency adjudication. He has recommended that protections such as separation of functions and restrictions on ex parte contact be extended beyond just formal adjudication to govern less formal proceedings See, e.g., 1 Stat. at 66, 4 (describing the Treasurer s bond requirement); An Act to Provide More Effectually for the Collection of the Duties Imposed by Law on Goods, Wares and Merchandise Imported Into the United States and on the Tonnage of Ships or Vessels, ch. 35, 52, 1 Stat. 145, 171 (1790) (requiring collectors, naval officers, and surveyors involved in collecting customs duties to give a bond with sureties with condition for the true and faithful discharge of the duties of his office according to law ); MASHAW, supra note 195, at 58, See MASHAW, supra note 195, at 67; see also, e.g., 1 Stat. at 66, 3 (providing for prosecutions for all delinquencies of officers of the revenue ). 226 See MASHAW, supra note 195, at Id.; see also, e.g., 1 Stat. at 67, MASHAW, supra note 195, at Stat. at 67, See MASHAW, supra note 195, at 58 (describing 1 Stat. at 67, 8 (internal quotation omitted)) Stat. at 67, See Funk, supra note 170, at (analyzing a recent Administrative Conference of the United States recommendation to encourage certain best practices for non-apa adjudications (internal quotation omitted)). 233 See 5 U.S.C. 554(d). 234 Michael Asimow, The Spreading Umbrella: Extending the APA s Adjudication Provisions to All Evidentiary Hearings Required by Statute, 56 ADMIN. L. REV. 1003, 1004, (2004). 35

331 All such statutory protections for impartiality nonetheless must remain compatible with the Chief Executive s constitutionally required supervision over agency matters including adjudication. Disputes at the federal level impacting vested private rights 235 should be resolved by Article III courts. In contrast, genuinely executive matters should be resolved by adjudicators subject to the ultimate appointment by, and supervision of, a democratically accountable Chief Executive. These constitutional protections will help ensure democratic liberty and transparency. 236 Conclusion When evaluating ALJs under the Appointments Clause, courts should conclude both under modern doctrine and as a matter of first principles that ALJs are inferior Officers not employees. In changing the selection mechanisms for ALJs to comply with Article II, Congress should subject ALJs to the appointment of either a department head or the President. In many cases where agencies just allocate various governmental benefits or adjudicate governmental debt collection, 237 there likely is no due process or Article III problem with a properly appointed Article II officer following whichever procedural requirements Congress has imposed. 238 But where historical liberty and vested private property interests are at stake, even the impartiality protections available through formal APA adjudication just are not enough See, e.g., Nelson, supra note 20, at (explaining the historical example of the distribution of public lands and observing that executive determinations were adequate to transfer the public s interest in land to a private person but judicial proceedings would have been required to subsequently retract that newly vested private interest). 236 See, e.g., Amar, supra note 24, at 809 (referring to the general liberty-enhancing architecture of separation of powers ); Lawson, Rise and Rise, supra note 19, at 1248 ( The constitutional separation of powers is a means to safeguard the liberty of the people. ). 237 See Chapman & McConnell, supra note 22, at See supra notes and accompanying text. 239 See Chapman & McConnell, supra note 22, at 1804 ( An Article III judge is required in all federal adjudications, unless the text and historical practice of the Constitution expressly or implicitly give Congress the power to authorize them. (internal quotation omitted)). 36

332 The recent Article II cases involving the SEC thus reveal yet another constitutional ground for reconsidering whether agency adjudication is the proper forum to evaluate deprivations of liberty and property interests. If Congress feels restricting agency adjudication would burden Article III courts with untenably broad jurisdiction, perhaps that is an indication that the breadth of issues subject to federal jurisdiction and indeed, federal power of any kind is too broad today See Lawson, Rise and Rise, supra note 19, at ,

333

334 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 1 of 6 10/11/2017 Why the Securities and Exchange Commission s Administrative Law Judges are Unconstitutional by Linda D. Jellum The Securities and Exchange Commission (SEC) faces a constitutional crisis: the Tenth Circuit recently held that SEC administrative law judges (ALJs) are unconstitutionally appointed.[1] And the D.C. Circuit will likely soon follow suit. So far, the SEC is fighting hard to protect thousands of past and pending SEC adjudications; however, the battle may well have been lost. Here s the story of how the SEC s greatest constitutional challenge unfolded. Six years ago, Congress enacted the Dodd-Frank Act, [2] for the first time giving the SEC the power to seek monetary penalties in an 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 choose which forum to use: an adjudication before an SEC ALJ or a civil action before an Article III judge. [3] With its new forum, the SEC soon realized it had a significant home-court advantage. A Wall Street Journal study reported that from October 2010 to March 2015, the SEC s enforcement division prevailed in 86% of the proceedings it brought in-house, while it prevailed in 70% of the cases it brought in federal court. [4] The Wall Street Journal further noted that in fiscal year 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. [5][6] In response, respondents to SEC enforcement actions challenged the SEC s new choice, arguing inter alia that the SEC ALJs were unconstitutionally appointed.[7] Respondents argued that because the SEC ALJs are inferior officers of the United States, 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.

335 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 2 of 6 10/11/2017 In December 2016, the United States Court of Appeals for the Tenth Circuit agreed with respondents in Bandimere v. SEC. [8] Bandimere involved an appeal from an SEC administrative enforcement proceeding presided over by an SEC ALJ. The respondent had argued in the underlying enforcement proceeding that the SEC ALJ was an inferior officer and was unconstitutionally appointed; however, the SEC rejected that argument. [9] On appeal, the SEC conceded that if the SEC ALJ were an inferior officer, he was unconstitutionally appointed. [10] However, the SEC argued that its SEC ALJs are merely employees, not inferior officers. [11] The Tenth Circuit disagreed and held that because the SEC ALJ was an inferior officer who was not appointed as the Constitution required, he held his office unconstitutionally when he presided over Mr. Bandimere s hearing. [12] To reach its holding, the majority relied on the Supreme Court s 1991 opinion in Freytag v. Commissioner. [13] In Freytag, a unanimous Court had held that the Tax Court s special trial judges (STJs) were inferior officers and not employees. [14] The Court identified three factors for courts to consider when determining whether an employee is an inferior officer: First, whether the position was established by law; second, whether the duties, salary, and means of appointment for that office are specified by statute ; and third, and most importantly, whether the employee exercises significant duties and discretion. [15] Applying these factors, the Bandimere majority concluded that the SEC ALJs were inferior officers because the position was established by the Administrative Procedures Act; statutes set forth the SEC ALJs duties, salaries, and hiring process; and the SEC ALJs exercise significant discretion in performing important functions commensurate with the STJs functions described in Freytag. [16] The majority then explicitly rejected the SEC s argument that the Court in Freytag had relied on the STJs ability to make final decisions to hold that the STJs were inferior officers. [17] In doing so, the majority criticized the D.C. Circuit s 2000 decision in Landry v. FDIC, [18] upon which the SEC relied.[19] In Landry, the D.C. Circuit had held that FDIC ALJs were not inferior officers because they did not have final decision-making authority.[20] The Bandimere majority correctly noted that the D.C. Circuit in Landry misinterpreted Freytag. [21]

336 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 3 of 6 10/11/2017 The Tenth Circuit s decision in Bandimere caused a circuit split. Earlier in 2016 in Raymond J. Lucia Co., Inc. v. SEC, a three judge panel of the D.C. Circuit had followed its reasoning in Landry, rather than the Supreme Court s reasoning in Freytag. [22] In Lucia, the D.C. Circuit held that the SEC ALJs were merely employees because they do not have final decision making authority. [23] The circuit split may not last long. The D.C. Circuit recently granted the petitioner s petition for rehearing en banc in Lucia. [24] The parties have been directed to brief two issues: (1) whether the SEC administrative law judge who handled the hearing is an inferior officer rather than an employee, and (2) whether the court should overrule Landry. [25] It thus appears likely that the D.C. Circuit will reverse Lucia and, like the Tenth Circuit, hold that the SEC ALJs are inferior officers who are unconstitutionally appointed. Assuming that the court does so, the SEC should reappoint its ALJs, this time constitutionally. But a question remains: how can the SEC fix the thousands of [invalid] administrative actions the unconstitutional ALJs have issued? [26] I answer these and other questions are in my recent article,[27] explaining why the SEC ALJs appointment violates the United States Constitution and why there is no easy fix. Further, I note that it is not just the SEC ALJs s appointment process that is constitutionally infirm. In addition, the SEC ALJs, indeed all ALJs, are subject to multiple for-cause removal protections. In 2010 in Free Enterprise Fund v. Public Company Accounting Oversight Board, the Supreme Court held that dual for-cause removal provisions violate separation of powers.[28] Possibly, the Supreme Court will refuse to extend its holding in Free Enterprise to ALJs given the potential impact on the administrative state. However, if the Court meant what it said and if the case is to have any relevance beyond the agency involved, then the multiple for-cause removal provisions affecting the SEC ALJs specifically and all ALJs generally will need to be fixed. The constitutional challenges raised in these cases are far from inconsequential. Thousands of ALJs may be subject to unconstitutional appointment and removal provisions. Thus, the shadow of Free Enterprise looms large. Linda D. Jellum is the Ellison C. Palmer Professor of Tax. She teaches Tax Courses, Administrative Law, and Statutory Interpretation. In addition to teaching, Professor

337 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 4 of 6 10/11/2017 Jellum is a prolific scholar and has written extensively in the areas of Tax Law, Administrative Law, and Statutory Interpretation. Disclaimer The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them. [1] F.3d, No , 2016 WL (10th Cir. Dec. 27, 2016). [2] See generally Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat. 1376, (2010) (codified in scattered sections of U.S.C. titles 7, 12, 15, 22, and 42). [3] Dodd-Frank Wall Street Reform and Consumer Protection Act 1055(a)(1). [4] Jean Eaglesham, Fairness of SEC Judges Is in Spotlight, Wall St. J. (Nov. 22, 2015, 9:25 PM), [ [5] See Nate Raymond, U.S. Judge Criticizes SEC Use of In-House Court for Fraud Cases, Reuters (Nov. 5, 2014, 1:37 PM), [ [6] At least one academic believes that the SEC statistics are being used inaccurately and that the SEC is no more likely to prevail before an ALJ than in court. See generally Urska Velikonja, Reporting Agency Performance: Behind the SEC s Enforcement Statistics, 101 Cornell L. Rev. 901 (2016). [7] See, e.g., Duka v. SEC, 124 F. Supp. 3d 287, 289 (S.D.N.Y. 2015).

338 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 5 of 6 10/11/2017 [8] F.3d, No , 2016 WL (10th Cir. Dec. 27, 2016). [9] Id. at *2. [10] Id. at *3 (citing SEC Release No. 9972, 2015 WL , at *19). [11] See id. at *10. [12] Id. at *15. [13] 501 U.S. 868 (1991). [14] Id., at [15] Id. [16] Bandimere, 2016 WL at *8-9. [17] Id. at *10. [18] Landry v. FDIC, 204 F.3d 1225 (2000). [19] Bandimere, 2016 WL at *10. [20] Landry, 204 F.3d at [21] Bandimere, 2016 WL at *10. [22] 832 F.3d 277, 283 (D.C. Cir. 2016) (reh g granted Feb. 16, 2017). [23] Id. at [24] Id. [25] Order docketed, No (D.C. Cir. Feb. 16, 2017).

339 Why the Securities and Exchange Commission s Administrative Law Judges are... Page 6 of 6 10/11/2017 [26] Id., at *25 (McKay, C.J., dissenting). [27] Linda D. Jellum & Moses M. Tincher, The Shadow of Free Enterprise: The Unconstitutionality of the Securities & Exchange Commission s Administrative Law Judges, 70 SMU L. Rev. (forthcoming 2017) available at [28] 561 U.S. 477, (2010). Share this post: Print Share 6 Tweet Share This entry was posted in Enforcement Policy, Securities and Exchange Commission (SEC) and tagged Linda D. Jellum on March 17, 2017 [ by Serina M. Vash.

340

341 Non-ALJ Adjudicators in Federal Agencies Kent Barnett, Associate Professor, University of Georgia School of Law Malia Reddick & Russell Wheeler, Institute for Advancement of the American Legal System

342 Contrasting ALJs and AJs ALJs AJs OPM-Led Appointment May not investigate or prosecute May not report to agency employee who investigates or prosecutes Prohibited from ex parte contacts as to disputed facts Not subject to performance reviews May not receive bonuses from agency Protection from at-will removal

343 Study Design Non-ALJ Hearings One of the parties to the adjudication can by statute, regulation, or other law obtain an oral hearing over which an agency official presides to present evidence, even if most matters are handled through written submissions without an oral hearing the presiding official is not a member or commissioner of the agency, and is not an "Administrative Law Judge"

344 Study Design Purpose Better sense of non-aljs throughout the federal government Update and add to earlier, limited reported data Kinds of proceedings Appointment qualifications Agency supervision and oversight Provide recommendations for non-alj appointment, supervision, and independence

345 Study Design and Data Overview Received 61 Survey Reponses from 53 agencies (or subcomponents) in early had responsive Non-ALJ Hearings Two batteries of questions: one for each kind of Non-ALJ Hearings within agency (47 reported) one for each kind of non-alj type within agency (37 reported) Data as reported unless answer was obviously wrong

346 Number of reported non-aljs 10,831 (including 39 part-time) More than 7850 work for PTO as patent examiners Agencies with more than 100 non-aljs: PTAB (265) DOJ/EIOR (326) IRS (714) VA (630) NLRB (600)

347 Non-ALJs Titles (10 of 23) AAJs 66 AJs 193 APJs 275 Appeals Officers 457 Decision Review Officers 535 Hearing Officers 651 Immigration Judges 310 Patent Examiner 7856 Settlement Officers 257 Veterans Law Judge 95

348 Subject Matter of Hearings (n=47) government benefits disputes between private parties miscellaneous/other government contracts enforcement federal employment disputes licensing

349 Agency a party to Non-ALJ Hearing? (n=47) Percentage % 53% Yes No

350 Minimum qualifications (initial hires)? (n=27) Non-ALJ Types Law Degree Demeanor References Sub.-Matter Expertise Yrs. of Leg. Practice Written Exam/Review Yrs. of Gov't Serv.

351 Minimum qualifications (internal hires)? (n=27) Non-ALJ Types Law Degree Demeanor Sub. Matter Expertise References Written Exam/Review Yrs. of Leg. Practice Yrs. of Gov't Serv. Yes. Of Leg. Prac. In Area Seniority

352 Separation of functions when agency is a party (n=17) Other Limitations, 12% Can only adjud., 18% None, 35% No Invest. Or Prosec., 35%

353 Prohibitions on ex parte communications (n=37) 30% 14% 57% All Prohibited Some Prohibited None Prohibited

354 Sources for disqualification obligation (n=31) Regulation Custom Guidance Other Statute

355 Non-ALJ types subject to performance appraisal (n=37) 9 28 Yes No

356 Non-ALJs subject to performance appraisal (n=10,831) 68 10,763 Subject Not Subject