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News July 23, 2018 Issue

Trump Gives SEC and Other Agencies More Leeway in Choosing ALJs

President Donald Trump on July 10 allowed the SEC and other agencies that employ administrative law judges greater leeway in just how they find and hire those ALJs. Some industry observers are welcoming the move as an important step to streamline the hiring process, while others are questioning whether politically appointed agency heads will now be able to appoint ALJs that meet their political points of view.

The Executive Order comes on the heels of the Supreme Court’s decision involving ALJs in the Lucia case (ACA Insight, 6/25/18). That ruling found the high court siding with an aggrieved defendant, investment adviser Raymond Lucia, who argued that an ALJ’s and a lower court’s ruling against him were not proper because the Constitution requires ALJs to be appointed by an agency head or the President, and SEC ALJs were not. The Supreme Court agreed.

Before the Executive Order, the hiring of ALJs was governed by an Office of Personnel Management selection process which involved a number of criteria, such as written examinations, for those positions considered to be within what is called the "Competitive Service." The Presidential Order moves ALJs from the Competitive Service to the "Excepted Service," under a new "Schedule E," which allows agency and department heads to hire them based to a greater degree on their own criteria.


"This is an interesting development," said Willkie Farr partner and former SEC deputy chief of staff James Burns. "It certainly sets up the possibility that such appointments could become much more political and that the types of individuals who take these kinds of jobs could vary quite significantly depending on the department head who appoints them."

"One could imagine over time seeing instances where the same facts and circumstances presented by a matter leading to quite disparate adjudicated outcomes depending on the particular ALJ overseeing a case," he said. "Perhaps this won’t be the result given the standards of review are established by the rules of practice and precedent, but we could see more than marginal distinctions develop between ALJs over time."

"It might be premature to say whether the change in the selection process will result in erosion in the independence or quality of ALJs, especially for agencies like the SEC, which has only a small number of ALJs and is therefore unlikely to have significant turnover," said Morgan Lewis partner and former agency Director of Enforcement associate director Steve Korotash.

He noted that while preliminary commentary on the Executive Order has criticized it for "making a law license the only qualification necessary" to be an ALJ, the order "expressly characterizes that criterion as a ‘minimum’ requirement and anticipates that agencies utilizing ALJs will establish additional qualification requirements. It is possible, and I would say likely, that many agencies with ALJs will continue using some of the standards currently enforced through the Competitive Service process."

He further noted that, "to my knowledge, written examinations to qualify judges are not a universal practice. Federal judges, for example, are not required to pass an examination, and I know of no state that imposes such a requirement as a condition for election or appointment. And although it is always possible that an agency or an administration might view the Lucia decision as a license to overly politicize ALJ appointments or to appoint individuals lacking appropriate qualifications, many agency decisions are reviewed in federal court. So agencies run the risk of eventually losing in Court – and thus hurting their institutional reputations – should their appointees prove incompetent. Finally, ALJ decisions remain subject to agency review even before the judicial process, so to the extent there could be a heightened ‘political appointee’ component to ALJ decisionmaking in the future, that issue already exists with the current review process due to its structure."

Advisers and ALJs

The SEC’s increased use of administrative proceedings in recent years has been a sore point with some defense attorneys and advisers, as well as others. Most of these concerns centered on questions of due process, with critics arguing that defense attorneys are not given the same rights during hearings as prosecutors are, particularly on issues pertaining to preparation time and the taking of depositions. In addition, others have noted that since ALJs are employed by the SEC, there is an inherent conflict of interest in having them decide cases in which the agency is a party.

The SEC, which took steps to address some of these concerns in July 2016 (ACA Insight, 7/18/16), has also noted that any decisions by ALJs must be approved by the Commission before they are final, and that ALJ decisions can also be challenged in federal court.

With this background, it is little wonder that President Trump’s Executive Order to allow agency heads to hire ALJs while bypassing traditional Office of Personnel Management criteria has raised concerns.

The Executive Order

"The Executive Order allows agency heads to directly hire ALJs without going through the complex Office of Personnel Management selection process by creating a new Excepted Service ‘Schedule E’ for them," the White House said in making the announcement. "The process gives agency heads greater flexibility and responsibility for ALJ appointments. Agencies will be free to select from the best candidates who embody the appropriate temperament, legal acumen, impartiality and judgment required of an ALJ, and who meet the other needs of the agencies."

The White House also noted that the new process is "very similar" to the process agencies currently use to hire attorneys throughout the executive branch.

It is not clear from the Supreme Court’s ruling in the Lucia case whether it applied to all ALJs or just the five that are employed by the SEC. President Trump, in his executive order, however, did not limit the new hiring criteria to ALJs in a specific agency, but addressed "agency heads" in the plural, which would appear to make it applicable to all agencies.