U.S. appeals court to hear cases that could weigh on Wall Street policing

WASHINGTON (Reuters) - A U.S. appeals court will weigh whether certain hiring practices at two of the country’s top financial market regulators violate the Constitution on Wednesday, in a pair of cases that could have major ramifications for the policing of Wall Street.

FILE PHOTO - The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, DC, U.S. on June 24, 2011. REUTERS/Jonathan Ernst/File Photo

In one case, the future structure of the Consumer Financial Protection Bureau, which was created by the 2010 Dodd-Frank Wall Street reform law to protect consumers from predatory lending, hangs in the balance.

A panel of judges at the U.S. District Court of Appeals for the District of Columbia Circuit will reconsider a prior ruling which found that the powers of Richard Cordray, the agency’s director, were unconstitutional because he can only be fired by the president for cause, and not at will.

In the other case, the court will reconsider a prior ruling that the Securities and Exchange Commission did not violate the Constitution when it hired its administrative law judges to preside over its in-house court proceedings.

The two court challenges have already emboldened some financial firms to push back against the CFPB and the SEC when they have accused them of wrongdoing and the outcome of the cases could provide ammunition to critics of both agencies.

Many Republicans have accused the CFPB of overstepping its powers and called for legislation that would make it more accountable to Congress.

Their attacks on the bureau have intensified since the election of Donald Trump as president. Trump’s administration has said it wants the ability to dismiss Cordray for any reason and put its budget under congressional control.

An outcome in either case could take months, and both could eventually land in the U.S. Supreme Court, especially the SEC’s case which has already generated a split between the Washington, D.C. appeals court and the Tenth Circuit Court of Appeals, which ruled that the SEC had violated the Constitution.

The SEC earlier this week suspended all pending in-house cases in which defendants may appeal before the Tenth Circuit, amid the legal limbo surrounding the issue.

The majority of the judges hearing the two cases on Wednesday were appointed by Democratic presidents, a fact that has the potential to tip the balance in favour of the government.


At the crux of Wednesday’s case is whether the CFPB’s director wields too much power without accountability to the president, in violation of the Constitution’s separation of powers provision.

The case was brought by PHH Corporation, a mortgage company that was sued by the CFPB in 2014 with allegations of illegal kickbacks.

The company won a victory in October 2016, when a three-judge panel threw out the CFPB’s $109 million penalty against PHH Corp on the grounds the bureau’s structure was unconstitutional.

The CFPB appealed, and its own attorneys will represent the bureau in Wednesday’s arguments. With the election of Trump in November, the White House has since switched sides and now supports the CFPB’s opponent.

It is unclear what the Trump administration will do if the CFPB prevails in its appeal.


The SEC was given greater powers under the 2010 Dodd-Frank Wall Street reform law to seek penalties against Wall Street defendants in its own administrative court.

But the SEC has faced mounting challenges to the constitutionality of how it appoints in-house judges.

Critics call the in-house court unfair to defendants, because there is limited discovery, the case is fast-tracked and some feel the SEC gets a home court advantage.

At issue is whether administrative law judges are employees or “inferior officers” who wield significant decision-making authority covered by the appointments clause of the Constitution, which aims to keep such powers in check.

The agency argues that administrative law judges are only employees because their decisions are not final and still subject to SEC review. But critics say they are inferior officers because they have the power to impose fines and bar people from the industry.

Currently, the SEC hires its in-house judges through a bureaucratic process and not by its presidentially-appointed commissioners.

Critics say inferior officers must be appointed by the president, the head of an agency or federal courts in order to pass Constitutional muster.

If the SEC loses the case, it is unclear what the impact would be on prior or pending cases in the in-house court. Wednesday’s case was brought by Raymond Lucia, a former radio talk show host known for his “Buckets of Money” investment strategy who was sued by the SEC for fraud in 2012.

SEC Administrative Law Judge Cameron Elliot found him liable the next year, barred him from the industry and ordered him to pay $300,000 - a finding later upheld in a 3-2 vote by the SEC’s presidentially-appointed commissioners.

The cases are Raymond J. Lucia Companies, Inc v. SEC, U.S. Court of Appeals for the District of Columbia Circuit, 15-1345 and PHH Corporation v. CFPB, 15-1177.

Reporting by Sarah N. Lynch; additional reporting by Lisa Lambert; editing by Carmel Crimmins and Grant McCool