Appointment of SEC ALJ is Unconstitutional, Rules Federal District Court


A federal district judge in Georgia recently ruled that a Securities and Exchange Commission (SEC) administrative proceeding was “likely unconstitutional” and issued a preliminary injunction against the enforcement action. Prior to the 2010 Dodd-Frank Act, the SEC could only bring administrative enforcement actions – which are adjudicated within the SEC by an Administrative Law Judge (ALJ) – against “regulated” entities; actions seeking civil penalties against non-regulated entities had to be brought in federal court. The Dodd-Frank Act permits the SEC to now bring administrative enforcement actions against both regulated and non-regulated entities; alternatively, the SEC may choose to seek civil penalties against either entity in federal court. In this case, the SEC chose the former course and brought an “Order Instituting Cease-and-Desist Proceedings” against an individual unregulated by the SEC for insider trading in violation of the Securities Exchange Act of 1934. An administrative evidentiary hearing before an ALJ was scheduled, but the plaintiff filed a suit in federal court seeking a declaration that the administrative proceeding was unconstitutional.

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