LexisNexis™ Features Firm Associate Matthew McCann’s Articles on Constitutional Challenges to the SEC’s Administrative Power


Over the last seven years, the home-court advantage that the Securities and Exchange Commission (the “SEC”) has as a party in administrative actions before the SEC has been a hot-button issue among practitioners in the field. Capturing this interest and research, Firm Associate Matthew McCann wrote two articles which were published as part of the LexisNexis™ Emerging Issues Analysis series: in October 2017, “The Constitutionality of the SEC’s Administrative Proceedings: Is the Home-Court Advantage Disappearing?” and, in October 2018, “The Immediate Aftermath of SEC v Lucia on Administrative Law – Impact on Other Administrative Agencies with Similar Appointments Clause Issues and the SEC’s Home-Court Advantage.

A seminal case in this area of the law is the 2011 decision in SEC v. Gupta. Judge Jed Rakoff of the United States District Court, Southern District of New York, allowed the Equal Protection claim of Rajat K. Gupta to proceed against the SEC in federal court. The decision was significant because it permitted Gupta’s claim to proceed, despite the fact that the SEC had elected to proceed against Gupta in its in-house administrative proceedings. The SEC moved to dismiss this action. Judge Rakoff denied the motion, holding that a district court could have jurisdiction over constitutional claims against the SEC and that there is no requirement that a plaintiff exhaust administrative remedies before bringing such a claim.

In 2012, Mr. McCann, then at a small white-collar, securities and complex civil litigation firm in Manhattan, worked intensely on an action, which was brought by the SEC against Egan-Jones Ratings Company (“Egan-Jones”). In addition to defending the SEC action, the team of lawyers he was part of filed a complaint on behalf of Egan-Jones in the United States District Court for the District of Columbia. That complaint sought to have the SEC action removed to the federal court because of inherent biases in the SEC administrative procedure which were at odds with Egan-Jones’ rights to Due Process and Equal Protection.

In the Egan-Jones matter, relying, inter alia, on the Gupta decision, the attorneys argued, inter alia, that the SEC’s Rules of Practice were more narrow than the Federal Rules of Civil Procedure in ways that mattered: To seek documents and depositions that a litigant would be able to request without prior permission as a matter of course in federal action, a respondent in an SEC administrative proceeding needed to request the opportunity to issue subpoenas, which the SEC Administrative Law Judge (“ALJ”) may deny, and which the SEC, as a party, has the ability to avoid or frustrate by motion to quash.1

From 2011 to 2015, litigants continued to challenge the SEC’s home-court advantage as violating the Equal Protection and/or Due Process Clauses. The Seventh Circuit’s 2015 decision in Bebo v SEC highlighted the ongoing debate regarding the SEC’s continued use of administrative enforcement proceedings for securities violations, and also effectively ended Equal Protection and Due Process claims. The Seventh Circuit held that federal courts did not have jurisdiction to hear claims regarding the SEC’s administrative process and forum until all administrative remedies had been exhausted. That decision found that the statutory scheme requiring administrative exhaustion provided adequate protection to an SEC respondent, distinguishing Gupta.

From there, the attack on the legitimacy of the SEC proceeding shifted the focus to questioning whether the ALJs were appointed properly as per the Appointments Clause of the Constitution. There was a circuit split on the issue, which made its way to the United States Supreme Court in Lucia v. SEC. That case was decided earlier this year, in June 2018.

In Lucia, the Supreme Court held that the ALJs are inferior officers within the meaning of the Appointments Clause of the Constitution. The basis for this holding was that ALJs hold “continuing office[s] established by law” and exercise “significant discretion when carrying out … important functions.” The Appointments Clause lays out the permissible methods of appointing “Officers of the United States,” a class of government officials distinct from mere employees. Lucia required the Supreme Court to decide whether ALJs of the SEC qualify as such “Officers.” The Supreme Court held that they do.

The SEC’s interpretation and implementation of Lucia, however, has not resulted in the radical change that the litigants in GuptaEgan-JonesBebo and many other actions sought. The SEC issued an Order on June 21, 2018, the same day as Lucia, staying all pending administrative proceedings. On August 22, 2018, the SEC issued a subsequent Order, lifting the stay and noting that, on November 30, 2017, while Lucia was pending, it ratified the appointments of Chief ALJ Brenda and ALJs and, “[i]n an abundance of caution and for avoidance of doubt,” reiterated “our approval of their appointments as our own under the Constitution.”

The SEC’s treatment of and response to Lucia has been essentially to put the imprimatur required by the Appointments Clause on the ALJs who had already been chosen. The SEC did not terminate the current ALJs and start a new proper process pursuant to the Appointments Clause. Whether this will be viewed as an effective remedy will be seen as cases are heard by the ALJs approved by the procedure in the August 22, 2018 Order and later appealed. In the interim, the impact of the Appointments Clause violations found in Lucia do not appear to have led to the meaningful change in the substance of the review the cases brought before the SEC receive, in contrast to what the consequences likely would have been, had the SEC’s administrative procedures been found in violation of the Due Process and/or Equal Protection Clauses.

1 That case was ultimately withdrawn as a part of a settlement with the SEC, resolving both the district court and SEC action.


Posted by MMcCann