On Oct. 30, 2020, the Fifth Circuit agreed to rehear en banc a case challenging the constitutionality of Securities and Exchange Commission (SEC) administrative proceedings on the ground that the agency “is violating separation-of-powers principles” because the agency’s administrative law judges are “insulated from control by the President by multiple layers of for-cause removal restrictions.”[1] The case, Cochran v. SEC et al., brought by Michelle Cochran, an accountant, in response to charges by the SEC that she and her former firm violated Public Company Accounting Oversight Board standards by improperly conducting numerous annual audits and quarterly reviews, alleges that the removal restrictions render the SEC administrative proceeding against her unconstitutional.
Ms. Cochran’s challenge follows the 2018 Supreme Court decision in Lucia v. SEC, in which the Court held that the manner in which the SEC had appointed its administrative law judges (ALJs) was unconstitutional.[2] Reasoning that ALJs exercise significant discretion in the course of deciding adversarial proceedings, under Supreme Court precedent, they are “inferior officers” whose appointment must be made by the president, “Courts of Law” or “Heads of Departments” to comport with the Constitution’s appointments clause, rather than through civil service hiring channels. Notably, although the government urged the Court to also address the constitutionality of the statutory removal protections at that time, the Supreme Court in Lucia declined because no lower court had yet addressed the issue.[3]
The Fifth Circuit’s rehearing grant vacates an August 2020 decision by a panel dismissing Cochran’s suit against the SEC on jurisdictional grounds. Cochran again had argued that protections in place to prevent the removal of the SEC’s administrative law judges are unconstitutional and that a federal court should decide that question in advance of a resolution of her administrative hearing. But in a 2-1 split, the panel sided with the SEC and held that under Fifth Circuit precedent, Cochran first must present those constitutional removal arguments to the ALJ and then to the SEC in the course of her administrative proceeding and only after a final decision and order there, assuming it was unfavorable, could she raise the issue on appeal to a court of appeals.[4]
The Fifth Circuit majority held that the text and structure of the statutory scheme for judicial review of SEC administrative decisions set forth in 15 U.S.C. § 78y evidences Congress’ intent to limit federal courts’ subject matter jurisdiction of Cochran’s claims. The agency process therefore is the exclusive path for initial adjudication of Cochran’s constitutional challenge and in the absence of a final agency decision, that process may not be circumvented to present a challenge directly to a federal district court. The majority noted that five other courts of appeal that have been presented with similar challenges to SEC proceedings, in the context of various constitutional challenges to the agency’s ALJs, have reached the same conclusion.[5] But as Cochran notes in her en banc petition, certain district courts have held that federal subject matter jurisdiction exists over challenges to SEC proceedings, including Gupta v. SEC[6] and Duka v. SEC.[7]
The panel majority looked principally to the Supreme Court decision in Thunder Basin Coal Co. v. Reich.[8] The majority concluded that none of the factors set out in Thunder Basin warranted excepting Cochran’s claim from the agency process. In particular, the panel held that (1) the administrative proceeding would not foreclose meaningful judicial review of...
