A complaint filed in the Northern District of Georgia on February 19 alleges that the Securities and Exchange Commission brings claims in administrative courts that are unconstitutional. The plaintiffs in the case, Gray Financial Group Inc. and its founder and co-CEO, claim that SEC administrative proceedings violate Article II of the United States Constitution because its judges are separated from presidential supervision and removal by more than one layer of “tenure” protection.

The case arose from an SEC investigation into whether Gray Financial violated federal securities laws by offering to Georgia residents a fund-of-funds product that purportedly did not comply with a Georgia state statute. The SEC issued a Wells Notice and then advised Gray Financial that it intended to pursue its claims in an administrative proceeding rather than in federal court. Gray Financial then sought injunctive relief and a declaratory judgment in federal court.

According to the complaint, an SEC Administrative Law Judge may only be removed for “good cause,” which must be established by the Merit Systems Protection Board (MSPB). SEC commissioners, who exercise the power of removal, may themselves only be removed from office by the President for “inefficiency, neglect of duty, or malfeasance in office.” The MSPB members who effectuate the removal decision can only be removed from office under a similar good cause standard.

Gray Financial alleges that this “attenuated removal scheme” violates Article II, as interpreted by the Supreme Court, because it interferes with the President’s obligation to ensure the faithful execution of the laws. The SEC has not yet responded to the complaint.

Gray Financial Group, Inc. v. S.E.C., C.A. No: 1:15-cv-0492-CAP (N.D. Ga. Feb. 19, 2015)