SEC administrative proceedings violate Article II of the U.S. Constitution, which states that the “executive Power shall be vested in a President of the United States of America.”
An SEC Administrative Law Judge (“SEC ALJ”) presides over an administrative proceeding. Statutes and regulations make clear that SEC ALJs are executive branch “officers” within the meaning of Article II. The Supreme Court has held that such officers — charged with executing the laws, a power vested by the Constitution solely in the President — may not be separated from Presidential supervision and removal by more than one layer of tenure protection. Free Enterprise Fund v. Pub. Co. Accounting Oversight Ed., 130 S. Ct. 3138, 561 U.S. 477 (2010) (“Free Enterprise“). In particular, if an officer can only be removed from office for good cause, then the decision to remove that officer cannot be vested in another official who, too, enjoys good-cause tenure. Id. Yet SEC ALJs enjoy at least two — and likely more — layers of tenure protection. The SEC administrative proceedings therefore violate Article II and are unconstitutional. The SEC has stated that it intends to initiate imminently an SEC administrative proceeding against Stilwell. Declaratory and injunctive relief is necessary to prevent Stilwell from being compelled to submit to an unconstitutional proceeding and from suffering irreparable reputational and financial harm — all without meaningful judicial review.
Judge Rakoff appeared to question the constitutionality of SEC administrative proceedings in a decision in August (see here), and there is a separate challenge to SEC administrative proceedings, based on due process concerns, pending before Judge Kaplan (see here). The new case is before Judge Forrest.