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First decision on SEC use of in-house judges to be reconsidered

The first U.S. appeals court to weigh in on whether Securities and Exchange Commission administrative judges are constitutional will reconsider a decision favoring the agency, the U.S. Court of Appeals in Washington ruled Thursday.

The appeals court’s granting of a rehearing vacates an Aug. 9 decision by a three-judge panel that upheld the SEC in-house courts on constitutional grounds. A full 10-judge panel will hear the case on May 24.

Former investment adviser Raymond Lucia, who was banned from the industry for life by an SEC administrative law judge in 2013 for alleged misrepresentations in a “buckets of money” retirement wealth management strategy, argued to have the decision vacated because the administrative law judge was an officer as defined by the U.S. Constitution, but not properly appointed under its appointments clause. In its August decision, the Washington appeals court said that SEC administrative judges are not officers because their decision must be approved by SEC commissioners.

The petition to have the full appeals court reconsider its decision said that en banc review is warranted because “the linchpin of the panel’s decision … contravenes Supreme Court precedent and eviscerates a key structural check the framers (of the Constitution) designed to ensure accountability for federal appointments.”

In December, a federal appeals court in Denver ruled in David F. Bandimere vs. U.S. Securities and Exchange Commission that the appointments process was unconstitutional, raising the prospect of the question ultimately being decided by the Supreme Court.