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Supreme Court Takes Up Where to Hear SEC Judge Challenges (1)

May 16, 2022, 1:51 PMUpdated: May 16, 2022, 2:15 PM

The US Supreme Court Monday said it will take a look at a decision that allowed a challenge to the constitutionality of the regulator’s in-house judges to move forward in federal court before the agency proceeding concluded.

The Securities and Exchange Commission petitioned the high court regarding a US Court of Appeals for the Fifth Circuit decision allowing Michelle Cochran to pursue a constitutional challenge to the regulator’s administrative law judges in federal district court without first completing an in-house appeal process.

The agency requested that the Supreme Court withhold action on the SEC’s petition until it resolved a similar case it already plans to hear next term involving federal courts’ jurisdiction over constitutional challenges to the Federal Trade Commission’s administrative proceedings. Cochran urged the high court to consider the cases together, but the order didn’t indicate whether they would.

The SEC started an administrative proceeding against Cochran, a CPA, after she allegedly failed to comply with auditing standards under federal securities law. She appealed after an administrative law judge imposed a $22,500 penalty and a five-year bar on practicing before the agency, but her case was reassigned to a different ALJ for a new proceeding following the Supreme Court’s 2018 Lucia v. SEC opinion. The high court in that case held that the SEC’s in-house judges had been unconstitutionally appointed.

Cochran then sued to block the new ALJ proceeding, arguing that the in-house judges’ protection against removal from office is unconstitutional. She twice lost for failing to appeal within the agency before turning to federal courts. The full Fifth Circuit in 2021 gave Cochran a new shot at stopping the administrative proceeding against her after a majority determined federal securities laws don’t actually strip lower courts of jurisdiction to hear constitutional challenges like this one.

The en banc decision created a circuit split, the SEC said. The Second, Fourth, Seventh, Eleventh, and D.C. circuits rejected attempts to bypass the statutory review scheme.

The New Civil Liberties Alliance and Latham & Watkins LLP represent Cochran.

The case is SEC v. Cochran, U.S., No. 21-1239, petition granted 5/16/22.

(Adds additional detail regarding court's order. An earlier version was corrected to clarify the SEC's position in first and second paragraphs.)

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Peggy Aulino at maulino@bloomberglaw.com