To guard against any one bloc of the central government gaining too much influence, the founding fathers installed a system of checks and balances into our founding documents. One aspect of this system is the concept of separation of powers, which means that each of the three branches of government – the executive, the judicial, and the legislative – must operate solely within the boundaries delegated to it by the Constitution.
Also inherent in separation of powers is the idea that those who execute the law are directly accountable to the president. However, many government agencies today are effectively disregarding the strictures of the Constitution. They do so by arguing that in order to efficiently serve the needs of modern society, they must employ powers designated to other branches.
Administrative Law Judges and Conflicts of Interest
There are a number of organizations, however, that are fighting against the creep of the administrative state. The Cato Institute is a research foundation that aims to advance the principles of limited government, free markets, and individual liberty in public policy. It recently filed an amicus curiae, or “Friend of the Court,” brief in support of the defendant in a case involving the US Securities and Exchange Commission (SEC), condemning its use of administrative law judges (ALJs).
Essentially, the SEC claimed that in 2006, the investment advisory firm Timbervest and its four owners committed fraud by arranging to sell a client’s land at an extremely low price to another client before purchasing the property itself without notifying the first client. The SEC also alleged that Timbervest received real estate commissions on these transactions that it failed to disclose. The SEC “tried” Timbervest’s owners in its in-house court, which does not rely on a jury to render a decision, but instead leaves rulings in the hands of ALJs, who the agency considers its “employees.”
After the SEC pronounced Timbervest liable, it ordered the firm to pay back all the fees the initial client paid and permanently barred the owners of Timbervest from engaging with any investment advisers. Timbervest appealed to the DC Circuit Court, arguing that it was innocent of the charges and that, regardless, the matter had surpassed the statute of limitations specified by the Investment Advisers Act of 1940.
The Significance of the Appointments Clause
The Cato Institute filed its amicus brief with the DC Circuit Court on May 2, 2016 because it wanted to “address the implications of core separation-of-powers issues along with the democratic accountability of executive officers – issues that no other amicus brief covers.” Cato argued that ALJs are essentially judicial officers of the executive branch, similar to territorial judges.
However, there are three layers of officials between the SEC’s ALJs and the president. As a result, the president cannot remove them like he or she can remove other officers if they abuse their powers. The ALJ system therefore violates the Appointments Clause in Article II of the Constitution, which grants the president control over “inferior officers” of the executive branch, even if these posts are judicial in nature.
Another issue Cato raised was that the process by which the SEC hires ALJs produces inherent bias. After all, if a judge’s employer chooses him or her to try a case that involves the employer, the judge may (whether consciously or unconsciously) side with the entity that supplies his or her paycheck.
The Supreme Court has even stated that bias is nearly inevitable when “a man chooses the judge in his own cause.” As a testament to how widespread the problem has become, a former SEC ALJ named Lillian McEwen recently publicly revealed how the SEC pressured ALJs to favor the agency in rulings.
Article III Courts Ensure Due Process
In addition, the Constitution specifies that cases involving real estate fraud should be heard before an Article III court, not an administrative one. Congress can assign cases to administrative courts for cases involving new public rights, such as Social Security Disability claims. However, it can’t do this for cases, like the Timbervest one, that address common-law matters that have been argued in courts since the birth of our nation.
The government also can’t eliminate a person’s Constitutional rights without the due process provided by a proper judge. By banning Timbervest’s owners from any kind of association with an investment adviser, the ALJ violated the owners’ First Amendment right to free association. To remove this right requires, at the least, a jury trial held in an Article III, or federal, court.
While the Timbervest case still lingers in the appeals process, a number of other organizations have joined The Cato Institute in supporting Timbervest in its struggle against the ALJ system. The Washington Legal Foundation, a public interest law firm that bills itself as “an advocate for freedom and justice,” and the Securities Industry and Financial Markets Association, which promotes efficient and effective capital markets, have also filed amicus briefs supporting Timbervest’s assertion that the SEC’s ALJ system is inherently unconstitutional.