28 June 2018

Lucia v. SEC: Implications for FERC ALJs

In Lucia v. Securities and Exchange Commission, the Supreme Court held 7-2 that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “officers of the United States” subject to the Constitution’s appointments clause, rather than employees.  The June 21, 2018 opinion for the Court was by Justice Kagan, and has implications for ALJs at the Federal Energy Regulatory Commission (“FERC”).

In Lucia, the Court noted that to qualify as an officer rather than an employee, an individual must (1) occupy a “continuing” position established by law, and (2) exercise “significant authority” pursuant to the laws of the United States.[1]  The Court looked in particular to Freytag v. Commissioner, in which this framework had been applied to special trial judges of the U.S. Tax Court, and in which the special trial judges had been found to be officers rather than employees.[2]  The Court characterized Freytag as providing “everything necessary to decide” Lucia.  Citing their career appointments to positions created by statute, the Court found that the SEC ALJs held continuing offices.[3]  Regarding the significant authority question, the Court quoted Freytag’s finding that special trial judges “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.”[4]  The Court found that this description also applied to the authority of SEC ALJs.

Although the Court did not mention FERC ALJs, the ALJs at FERC perform similar functions.  The Court gave particular significance to the fact that the SEC often accords deference to the factual findings and credibility determinations of SEC ALJs.[5]  FERC does so as well.  In BP America, FERC found that in considering the evidence presented, the FERC ALJ “is entitled to deference with regard to the credibility of witnesses and evidence, and the amount of weight to be accorded to particular testimony or evidence.”[6]  In particular, “the trier of fact is in the best position to evaluate such elusive factors as motive or intent,” which “hinge[] entirely upon the degree of credibility to be accorded the testimony of interested witnesses.”[7]  In Lucia, the Court quoted similar language from SEC opinions on that issue.[8]

There are, however, differences between the FERC rules and SEC rules as they relate to ALJs.  For example, the SEC rules provide for “discretionary review” of certain initial decisions.[9]  FERC rules do not expressly provide for such discretion.  The SEC rules permit an ALJ to exclude or suspend a person or attorney for discovery violations,[10] while FERC rules only permit the ALJ to request that the Commission exclude a person or attorney.[11]  But such details may be beside the point under the analysis in Lucia, given the Court’s focus on the fact that SEC ALJs are empowered to conduct and manage trials, like FERC ALJs.  Perhaps more significantly, however, FERC ALJs are appointed in a different manner than the SEC ALJs at issue in Lucia.  While the SEC ALJs were appointed by SEC staff,[12] FERC ALJs are appointed by the Chairman of FERC pursuant to federal statute that vests the Chairman with responsibility over executive and administrate operation of the agency, including appointment of ALJs.[13]  Under the Constitution’s appointments clause, officers must be appointed by the President, by the courts of law, or by the heads of departments.  While appointment of an officer by SEC staff clearly fails to satisfy the appointments clause, the constitutionality of appointment by the FERC Chairman—who might be considered as the head of a department—is unsettled.

Lucia provides that a remedy should be available to those who raise a “timely challenge.”[14]  The Court did not address when such a challenge would be timely:  e.g., whether the challenge must be made when a matter is set for hearing before an ALJ, or whether it can be made on exceptions after the ALJ rules, or whether some other time will suffice.


[1] Lucia v. SEC, 585 U.S. __, __ (2018) (slip op., at 5-6) (citing United States v. Germaine, 99 U.S. 508 (1879); Buckley v. Valeo, 424 U.S. 1 (1976)).

[2] Lucia, slip op. at 6-8 (citing Freytag v. Commissioner, 501 U.S. 868 (1991)).

[3] Lucia, slip op. at 8.

[4] Id. at 7 (quoting Freytag, 501 U.S. at 881-882).

[5] Lucia, slip op. at 11.

[6] See BP America, 156 FERC ¶ 61,031 at P 175 (2016) (quoting Entergy Services, Inc., 130 FERC ¶ 61,023, at P 53 n.66 (2010)).

[7] Id. (quoting Williams Natural Gas Co., 41 FERC ¶ 61,037, at 61,095 (1987)).

[8] Lucia, slip op. at 11 (quoting In re Nasdaq Stock Market, LLC, SEC Release No. 57741 (Apr. 30, 2008); In re Clawson, SEC Release No. 48143 (July 9, 2003)).

[9] 17 C.F.R. § 201.411.

[10] 17 C.F.R. § 201.180(a).

[11] 18 C.F.R. § 385.411(a)(1) and (a)(5).

[12] Lucia, slip op. at 3.

[13] 42 U.S.C. § 7171(c).

[14] Lucia, slip op. at 12.

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