Federal Court Decision Blocks NCLA’s Disclosure of SEC Misconduct

A group of investors and organizations have filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) challenging the agency’s use of administrative law judges (ALJs) to preside over enforcement actions. The lawsuit alleges that the SEC’s use of ALJs violates the U.S. Constitution by denying defendants their right to a fair trial before an impartial tribunal.

The SEC has been using ALJs to hear enforcement actions since 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act granted the agency the authority to bring cases before these judges. However, critics argue that ALJs lack the independence required to ensure a fair trial, as they are employed by the SEC and do not have the same protections and guarantees as federal judges.

The lawsuit further claims that the SEC’s hiring and appointment process for ALJs is unconstitutional, as these judges are not appointed by the President, a court, or a department head, as required by the Appointments Clause of the Constitution. Instead, ALJs are hired through a competitive examination process by the SEC’s Office of Administrative Law Judges.

The plaintiffs are seeking a declaratory judgment that the SEC’s use of ALJs is unconstitutional and an injunction preventing the agency from continuing to use ALJs in enforcement actions. They argue that defendants in SEC enforcement actions should have the right to have their cases heard before a federal judge or a jury, as guaranteed by the Constitution.

This lawsuit is significant as it raises important questions about the fairness and constitutionality of the SEC’s enforcement practices. It will be interesting to see how the courts decide on this matter and what implications it may have for future SEC enforcement actions.