Quick Take: The U.S. Supreme Court recently held in SEC v. Jarkesy that the Seventh Amendment gives defendants the right to a jury trial in federal court in SEC enforcement actions seeking civil penalties for violations of the antifraud provisions of the securities laws. The decision upends the SEC’s ability to adjudicate enforcement actions seeking to impose civil penalties for some violations of the securities laws through administrative proceedings.

In SEC v. Jarkesy, the SEC charged a hedge fund manager with violating securities laws by allegedly misleading investors about two private funds’ investment strategies, inflating the funds’ values to facilitate collecting higher fees, and (along with the defendant’s advisory firm) lying about the identity of the funds’ auditor and prime broker. The SEC’s claims were brought in an administrative proceeding and not in federal court. In 2014, an SEC administrative law judge found that the defendant had committed securities fraud and the SEC ordered the defendant to pay a $300,000 civil penalty, among other things. The defendant and his firm sought judicial review by the Fifth Circuit which vacated the SEC’s order on several constitutional grounds, including that the hedge fund manager was entitled to a jury trial under the Seventh Amendment.

The 6-3 decision focused solely on the Seventh Amendment issue and did not address the Fifth Circuit’s other constitutional findings. The opinion, written by Chief Justice Roberts, explains that civil penalties trigger the Seventh Amendment’s right to a jury trial as they are designed to “punish and deter, not to compensate” and thus are “legal in nature”, which entitles the defendant to have a jury trial. Further, the Court found, because the securities fraud violations alleged by the SEC resemble traditional common law fraud claims, the “public rights” exception to the Seventh Amendment does not apply to the SEC’s claims. Thus, if the SEC seeks civil penalties on a claim that resembles a traditional common-law action, the SEC likely must proceed in federal court.

Although the case focused on the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, the implications of this decision will reverberate across Federal administrative agencies that impose penalties as a means of funding agency activities. This decision addresses recent congressional initiatives, like the Dodd-Frank Act, that expand agency authority in administrative tribunals to impose monetary penalties for non-compliance that do not include a restorative element.

The Court did not address what other types of SEC actions, particularly those that don’t seek civil penalties, could trigger the jury trial requirements of the Seventh Amendment. Justices Sotomayor, Kagan and Jackson dissented, arguing that the SEC’s claims did involve “public rights” and therefore Congress’s authorization for the SEC to initially adjudicate such claims in an administrative proceeding does not violate the Seventh Amendment’s jury trial requirement.

The Supreme Court’s opinion is available here.