Court Lacks Jurisdiction over Challenge to SEC Administrative Proceeding: Second Circuit | Practical Law

Court Lacks Jurisdiction over Challenge to SEC Administrative Proceeding: Second Circuit | Practical Law

Resolving a split of authority within the Southern District, the US Court of Appeals for the Second Circuit held in Tilton v. SEC that a federal district court does not have subject matter jurisdiction to hear a constitutional challenge to the appointment of an administrative law judge presiding over a parallel Securities and Exchange Commission enforcement proceeding. The respondents in the enforcement proceeding could challenge the appointment on appeal from the final decision of the SEC.

Court Lacks Jurisdiction over Challenge to SEC Administrative Proceeding: Second Circuit

by Practical Law Litigation
Published on 03 Jun 2016 • USA (National/Federal)
Resolving a split of authority within the Southern District, the US Court of Appeals for the Second Circuit held in Tilton v. SEC that a federal district court does not have subject matter jurisdiction to hear a constitutional challenge to the appointment of an administrative law judge presiding over a parallel Securities and Exchange Commission enforcement proceeding. The respondents in the enforcement proceeding could challenge the appointment on appeal from the final decision of the SEC.
On June 1, 2016, in Tilton v. SEC, the US Court of Appeals for the Second Circuit upheld the dismissal of an action brought by the respondents in an ongoing SEC administrative proceeding for lack of subject matter jurisdiction. The respondents brought the action to challenge the appointment of the administrative law judge, arguing that the appointment violated the Appointments Clause of Article II of the US Constitution (No. 15-2103 (2d Cir. 2016)). The court held that the respondents could not challenge the appointment in a separate action, but can raise the constitutional challenge in an appeal after the final decision of the SEC.
The SEC commenced an administrative proceeding against the respondents, alleging violations of the Investment Advisers Act. Two days later, the respondents filed an action in the United States District Court for the Southern District of New York, seeking to enjoin the SEC's administrative proceeding. They argued that the presiding ALJ's appointment violated the Appointments Clause. The SEC moved to dismiss the suit, and the district court granted its motion, finding that the SEC's statutory scheme of administrative and judicial review implicitly precluded the court's jurisdiction over the action.
On appeal, the Second Circuit affirmed and resolved a split of authority within the Southern District. The court first noted that respondents in SEC enforcement actions cannot federal initiate lawsuits to defend against them because the text, structure, and purpose of the securities laws demonstrate that Congress intended for the SEC to use its expertise to enforce securities laws through its scheme of administrative review. The Second Circuit then analyzed whether the Appointments Clause claim is the type of issue that should be reviewed within the statutory structure of the SEC. The court used the framework established by the Supreme Court in Thunder Basin Coal Co. v. Reich and considered:
  • The availability of meaningful judicial review.
  • Whether the issue is wholly collateral to the administrative scheme.
  • The agency's expertise.
(510 U.S. 200 (1994)).
The court found that:
  • The respondents in an SEC administrative proceeding have access to meaningful judicial review because they could appeal the final decision to a federal court of appeals. That the respondents must participate in the administrative proceeding in order the challenge the constitutionality of the ALJ's appointment does not make the post-proceeding judicial review less than meaningful. Participation in the administrative proceeding does not create any additional and irremediable harm beyond the burdens associated with the dispute resolution process.
  • The Appointments Clause issue is not wholly collateral to the administrative proceeding. It arose from the enforcement proceeding and is an affirmative defense to the proceeding.
  • Although a close question, the SEC has expertise in deciding the statutory questions in dispute and a resolution of the statutory questions in the respondents' favor would moot the constitutional question.
With this decision, the Second Circuit agreed with related decisions of the US Courts of Appeal for the District of Columbia and Seventh Circuits.