Securities Litigation Update: Constitutional Challenges to SEC’s Administrative Courts Gain Momentum

Constitutional attacks against the Securities Exchange Commission’s (the “SEC”) use of administrative proceedings have grown in strength as securities respondents across the country have filed federal complaints contending that, among other things, SEC Administrative Law Judges (“ALJs”) are acting in violation of Article II of the Constitution. Two district judges have found the constitutional challenges meritorious, while other courts have held that federal courts lack jurisdiction to decide the constitutional issues raised in the complaints. The SEC has recently weighed in, rejecting challenges to the constitutionality of its use of ALJs. And last week, after hearing oral argument, the Second Circuit stayed an administrative proceeding while it considers the merits of an appeal raising these issues. If the constitutional challenges ultimately prevail, it could call into question past administrative proceedings against securities respondents and also have implications for other federal agencies’ use of administrative proceedings.