Thursday, October 08, 2015

SEC Allows Briefing on Constitutional Challenge to ALJ Appointment

By Anne Sherry, J.D.

The SEC is allowing a pair of KPMG accountants to brief whether the administrative law judge who sanctioned them was appointed in violation of the Constitution. The ALJ temporarily barred the respondents from practicing after finding they engaged in improper professional conduct during KPMG’s 2008 audit of the holding company for TierOne Bank. Commissioners Gallagher and Piwowar recently said that the courts, not the agency, should decide this constitutional question (In the Matter of Aesoph, Release No. 34-76097, October 7, 2015).

Background. The initial decision found that, while the auditors correctly identified TierOne’s loan losses as presenting a fraud risk and a significant risk of material misstatement, the actual audit test work was inadequate considering the associated audit risk and materiality. The administrative law judge barred the engagement partner for one year and the senior manager for six months. The engagement partner had raised due process objections, which the ALJ addressed, but did not include a challenge under the Appointments Clause.

Supplemental briefing. The Appointments Clause challenge came on October 6, when the respondents filed a joint motion to submit supplemental briefing addressing the validity of the ALJ’s appointment. The SEC granted that request, allowing the auditors to file briefs limited to the issues of whether the SEC’s administrative law judges are “inferior officers” and whether their manner of appointment violates the Appointments Clause. The respondents’ brief is due October 21; the Enforcement Division has until November 2 to respond.

Question gains momentum. There has long been a perception that administrative proceedings give the SEC a home-field advantage, but the backlash intensified recently with a growing number of respondents fighting the constitutional battle, as described in a recent white paper. Last month, the SEC announced two proposals that would amend its rules of practice to slow down administrative proceedings and modernize procedures.

The release is No. 34-76097.

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