SEC use of administrative judges dealt setback: business of law

By Ellen Rosen

August 13, 2015 at 05:33 AM

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(Bloomberg) — The U.S. Securities and Exchange Commission's use of administrative law judges, greatly expanded following the enactment of the Dodd-Frank law, has received a setback.

U.S. District Judge Richard Berman in Manhattan Wednesday ruled that the agency's method for appointing its in-house judges "is likely unconstitutional."

Berman held that because of the power they wield in overseeing internal cases, administrative judges probably should be appointed by the president or SEC commissioners. They're now named through the agency's normal hiring procedures.

Last week, the judge said the agency could adopt an "easy fix" and change its appointment process. The SEC has so far refused.

Berman's decision, along with two that reached a similar conclusion in Atlanta in June, poses a dilemma for the SEC. The agency's options include routing fewer cases to in-house judges or trying to challenge the ruling on appeal.

The regulator has been holding administrative hearings for decades. Dodd-Frank, enacted in 2010, expanded the agency's jurisdiction beyond brokers and investment advisers and empowered its judges to issue orders and levy fines that previously had been available only in federal court.

But the controversy extends well beyond the SEC. Other government agencies also use administrative law judges for disputes. Because the issue has potentially wide ramifications, the U.S. Justice Department is handling the SEC's appeal in the litigation pending in Georgia.

Kevin Callahan, an SEC spokesman, declined to comment on the decision.

The case is Duka v. SEC, 15-cv-00357, U.S. District Court, Southern District of New York (Manhattan).

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