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The Appointments Clause of the Constitution has created a division among the federal appeals courts about whether the in-house judges used by the Securities and Exchange Commission to hear cases were appointed properly, and is likely headed to the Supreme Court for consideration, the New York Times reported today. This is a matter of considerable interest to the many defendants hauled into administrative proceedings to face securities fraud charges, such as Lynn Tilton, who went before an administrative judge in November. Defense lawyers have protested that the agency gets a “home court” advantage before its own judges, and the question of whether they were constitutionally appointed could have a significant impact far beyond just pending cases. The U.S. Court of Appeals for the 10th Circuit in Denver ruled last week in Bandimere v. SEC that the method for hiring the administrative judges was unconstitutional because they were “inferior officers” who must be selected by the SEC’s commissioners rather than brought in as regular employees of the agency. This is the opposite of the conclusion reached by the federal appeals court in Washington in August in Lucia v. SEC, which held that their appointments did not violate the Constitution because they were only employees who could be hired like anyone else at the agency. The issue revolves largely around how much authority the SEC’s judges have. In Freytag v. Commissioner, a 1991 decision, the Supreme Court found that special judges used by the Tax Court to assist in cases were “inferior officers” because they performed “more than ministerial tasks” and exercised “significant discretion.”

Tuesday’s decision by the U.S. Court of Appeals for the Tenth Circuit declaring that the way the SEC appoints Administrative Law Judges (ALJs) violates the Constitution sets up a clean split among the circuits and may implicate the validity of administrative proceedings in other areas of government, Law.com reported today. In Bandimere v. U.S. Securities and Exchange Commission, 15-9586, a divided court agreed with Colorado businessman David Bandimere that the ALJ who kicked him out of the securities industry and ordered him to pay financial penalties was appointed in violation of the Appointments Clause. Judges Mary Beck Briscoe and Scott Matheson were in the majority, saying that, under Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the ALJ was indeed an “inferior officer,” who must be appointed by the President. Judge Monroe McKay dissented, saying that the “sweeping language” of the majority’s decision made him “worry that it has effectively rendered invalid thousands of administrative actions.” The Bandimere decision is in direct conflict with the D.C. Circuit’s August decision in Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016) which squarely held the appointment of ALJs does not violate the Appointments Clause, as the ALJs aren’t inferior officers because they don’t have the authority to issue a final decision. Only the commission has that power.

The Securities and Exchange Commission questioned how Wells Fargo & Co. valued and accounted for a portfolio of soured loans, but the agency concluded its review without further action, after the bank provided more information, the Wall Street Journal reported today. In a newly released exchange of letters between the SEC and the bank, the commission asked Wells Fargo in September about why the value at which it was carrying its “purchased-credit-impaired,” or PCI, mortgages was declining, as the cash the bank expected to realize from those loans was increasing relative to that value. PCI mortgages are loans of deteriorating credit quality that Wells Fargo assumed when it bought Wachovia Corp. about eight years ago during the financial crisis. Wells Fargo responded in an October letter that the portfolio was affected by the bank’s loan-modification efforts and by stronger economic conditions and rising home prices. That led to lower expected defaults and losses on PCI loans and made it possible for more PCI borrowers to prepay or refinance their mortgages, the bank said.

Sens. Richard Shelby (R-Ala.) and Mike Crapo (R-Idaho) sent a letter on Nov. 30 to Securities and Exchange Commission Chair Mary Jo White, urging her to freeze any unfinished rules related to the Dodd-Frank Act until President-Elect Donald Trump takes office next year, Bloomberg News reported yesterday. “We ask that you delay further action until after the new president is sworn in," Shelby and Crapo said. “The new administration and Congress must have an opportunity to examine each agency’s regulatory agenda and its effect on the economy before additional rules are promulgated or finalized." The SEC has been trying to finalize measures related to how mutual funds monitor and manage derivatives, and regulations related to security-based swaps. The SEC is also working with other agencies to complete sweeping limits on Wall Street pay.

Financial regulators are scrambling to complete a series of unfinished rules designed to rein in Wall Street, dismaying congressional Republicans and some business groups that have urged policy makers not to rush new regulations as President Barack Obama’s term winds down, the Wall Street Journal reported today. The government’s consumer finance watchdog is pushing to finish a contentious measure that could make it harder for financial firms to force consumers into mandatory arbitration. The Federal Reserve and the Securities and Exchange Commission could each wrap up post-crisis measures that would force banks and swaps dealers to add to their books costly new buffers protecting against big losses during periods of market distress. The SEC also wants to limit risky derivatives in mutual funds sold to the public, while a fellow market regulator wants to adopt new curbs on speculation in oil, gold and other commodities.

The U.S. Securities and Exchange Commission yesterday said that it issued a $20 million award in a case involving a tipster who came to the agency early on, enabling it to secure a “near-total recovery” of investor funds in a matter, the Wall Street Journal reported. Citing federal law, the SEC declined to reveal the tipster’s identity. However, the SEC said in a statement that the tipster’s quick reporting prevented the wrongdoers from squandering the money. The reward announced yesterday is the agency’s third largest ever. The SEC’s whistleblower program, developed under the Dodd-Frank Act, gives tipsters 10 percent to 30 percent of a penalty for a securities violation if that penalty exceeds $1 million. Including yesterday’s announcement, the SEC has issued more than $130 million in rewards under the program.

Wall Street regulators began an exodus from Washington, D.C., yesterday as Mary Jo White, the chairwoman of the Securities and Exchange Commission, announced plans to leave the agency, the New York Times reported today. The decision makes White, a former federal prosecutor who has served more than two decades in the federal government, the first major Obama administration appointee to step down after Donald J. Trump’s upset victory last week. Other financial regulators are expected to follow suit in the coming weeks. White was expected to leave no matter the outcome of the election, but many Democrats had hoped that if Hillary Clinton won, she would choose a strong proponent of regulation to succeed White. Trump has vowed to dismantle Dodd-Frank, the financial regulatory overhaul Congress passed in response to the 2008 financial crisis.

U.S. officials are striving to put finishing touches on a slew of banking rules before President Barack Obama leaves office and hands regulatory power to Donald Trump who has vowed to rewrite the existing financial rule book, Reuters reported yesterday. President-elect Trump will take over on Jan. 20 and his fellow Republicans will have control of Congress and government agencies, allowing the new administration to block or roll back many of the last-minute changes. But by completing far-advanced work on some banking standards in the next 10 weeks, Obama officials would raising the chances that some elements of the regulatory framework will survive. Some rules are meant to flesh out the Dodd Frank Act of 2010 designed to prevent the next global financial crisis. Trump campaigned on a pledge to scrap the law but now he says only some provisions must go to lighten the regulatory burden. The Federal Reserve is working on rules to govern matters such as executive pay, market stability and what investments Wall Street may hold. Last month, Securities and Exchange Commission Chair Mary Jo White said her agency would "in the near term" finish a rule on one thorny issue: how mutual funds manage derivatives. The SEC and bank regulators have also for years struggled to finalize a rule that would tie more banker pay to the long-term health of their firms rather than short-term performance of Wall Street firms. With only about 40 working days until the handover, it is not clear which, if any, of those standards will get across the finishing line.