It is time for the Securities and Exchange Commission to catch up with modern times and start appointing its administrative law judges instead of hiring them like any other civil servant.
What might have worked well enough 80 years ago when the SEC's internal court system was mostly limited to reeling in rogue brokers no longer makes practical sense.
In today's environment, particularly since the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, ALJs have expansive authority to fine and penalize even people outside of the financial services industry.
Though the practice of placing ALJs through an ordinary civil servant hiring process has been in place since the founding of the SEC, it has come under scrutiny since Dodd-Frank.
For virtually any case now being brought before the SEC's internal court, one of the first moves for defense attorneys is to challenge, on constitutional grounds, the validity of the judges.
The latest and perhaps most significant support for this argument came on Dec. 27 when the 10th U.S. Circuit Court of Appeals in Denver nullified a 2013 ruling against Colorado businessman David Bandimere, who was found guilty in an SEC court of violating securities laws.
Mr. Bandimere's appeal was won by proving that the hiring process for ALJs is unconstitutional.
The argument, which can oddly sound both trivial and legally intricate at once, could be essentially taken off the table if the SEC agreed to start appointing its judges.
The judge appointments would be made by the commission, which already has the authority to review any ALJ decisions presented to it.
Constitutionally, the difference between an appointment and a hire is accountability for people defined as having significant authority and a connection to a department head or the executive branch.
It is likely that the commission could even appoint the current crop of five administrative law judges, essentially heading off an issue that could ultimately be moving toward the U.S. Supreme Court.
The December ruling by the 10th Circuit conflicts with a June 2016 decision by the D.C. Circuit Court, which sided with the SEC on the same issue of constitutionality. That split decision among the courts might have some legal scholars licking their chops out of pure curiosity, but it should be a wake-up call to the SEC that it is time to rethink the placement of its in-house judges.
The SEC, which is not yet commenting on the latest court ruling, is not blind to the issue. Last summer the commission approved limited reforms to its in-house court system, which included giving parties more time to prepare and take depositions.
Those changes were largely in response to a seeming home-court advantage due to the SEC winning upwards of 90% of the cases presented before ALJs.
The SEC's win-loss record isn't often argued in tandem with the constitutional debate, but it is viewed as a byproduct of the system that doesn't require a level of accountability among its judges.
One potential wrinkle that perhaps all sides are deeply pondering involves the status of past and current ALJ rulings if it is ultimately ruled that the SEC's current court system is unconstitutional.
Any defense attorney worth his or her salt would likely pounce on such a ruling to claim their clients were or are being tried under an unconstitutional system.
It is hard to say how many cases could be affected, but in the last fiscal year, the SEC's ALJs issued 170 initial decisions, held 11 hearings and ordered approximately $12.4 million in disgorgement and approximately $14.5 million in civil penalties.
Weighing the potential reality of a new can of worms coming from an unconstitutional ruling against the actual reality of constant appeals to the constitutionality of ALJs, is the current crossroad faced by the SEC.
The SEC might view it in more nuanced terms, but it should still be able to take the constitutional challenge off the table before the Supreme Court gets involved.