On June 27, 2024, the United States Supreme Court issued a landmark decision in SEC v. Jarkesy, ruling that the Securities and Exchange Commission’s (SEC) use of in-house tribunals for civil penalties in securities fraud cases violates the Seventh Amendment’s guarantee of a trial by jury. The 6-3 decision effectively ends the SEC’s longstanding practice of using Administrative Law Judges (ALJs) to adjudicate such cases, mandating that these cases be heard in federal courts instead.

This ruling, combined with the  , significantly limit the scope and power of federal administrative agencies moving forward.

Background on SEC v. Jarkesy

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the SEC’s authority, allowing it to impose civil penalties through its own in-house adjudications. Shortly thereafter, the SEC initiated an enforcement action against investment adviser George Jarkesy, Jr. and his firm, Patriot28, LLC, for allegedly violating SEC antifraud provisions. The SEC opted to adjudicate the matter in-house, resulting in a finding of liability and the imposition of a $300,000 civil penalty. Jarkesy and Patriot28 challenged the decision and appealed to the Fifth Circuit.

The Fifth Circuit held that the SEC’s in-house tribunal system was unconstitutional on three separate grounds.

• First, it concluded that the in-house process violated the Seventh Amendment’s right to trial by jury.
• Second, it held that Congress violated the nondelegation doctrine by delegating the authority to enforce securities laws to the SEC.
• Third, it held that legal restrictions on the ability of Executive Branch officials to remove ALJs, which only allow a judge to be dismissed “for cause”, violated separation-of-powers principles under Article II of the Constitution.

The Supreme Court affirmed the Fifth Circuit ruling only as to the first conclusion that the SEC’s in-house tribunal system violated the Seventh Amendment.

Seventh Amendment Argument

The Supreme Court’s decision highlights the constitutional right to a jury trial in civil cases where the government seeks punitive damages. Chief Justice Roberts, writing for the majority, emphasized that the nature of the SEC’s enforcement actions—seeking civil penalties for securities fraud—closely mirrors common law fraud, which traditionally entitles defendants to a jury trial. The Court further noted that punitive actions, which serve retributive or deterrent purposes rather than remedial ones, must be tried in a court of law to ensure the defendant’s constitutional rights are preserved.

Public Rights Exception

A critical aspect of the ruling is the Court’s interpretation of the “public rights” doctrine, which allows certain matters to be adjudicated within administrative agencies. Chief Justice Roberts named examples of cases related to the public rights doctrine, such as cases involving Indian tribes, administration of public lands, and granting of public benefits (e.g., payments to veterans, pensions, and patent rights). Chief Justice Roberts clarified that this exception is narrowly tailored and does not extend to cases where the government seeks to impose penalties for violations of federal law. This interpretation restricts the SEC and potentially other federal agencies from using in-house tribunals for punitive actions, reinforcing the necessity of judicial oversight in such cases.

Future Litigation and Unresolved Questions

The Supreme Court’s ruling leaves several critical issues unresolved, which will likely be the subject of future litigation. For instance, courts will need to determine whether the right to a jury trial applies to all punitive enforcement actions or only those resembling common law claims. For example, the SEC can currently bring claims that are available only in an administrative proceeding, such as failure to supervise claims. It is unclear if when those administrative-specific claims involve civil penalties, whether the SEC can still use ALJs to adjudicate them. Even if claims are allowed to be litigated before ALJs, the SEC may end up filing more bifurcated actions, where the SEC brings an action against violators in federal court and a separate action against the secondary violators in administrative proceedings.

Additionally, the decision does not address other constitutional challenges to the SEC’s in-house tribunal system, such as the nondelegation doctrine and the removal protections for ALJs, which were raised by the Fifth Circuit but not resolved by the Supreme Court.

The decision is expected to have wide-ranging implications, not only for the SEC but also for numerous federal agencies that employ ALJs to impose civil penalties.

Justice Sotomayor, in her dissent, warned of the “momentous consequences” of requiring jury trials for punitive actions by agencies. She specifically identified over two dozen agencies that impose civil penalties through administrative proceedings, such as the Consumer Financial Protection Bureau, Environmental Protection Agency, and Federal Trade Commission. These agencies may now need to reconsider their enforcement strategies and the use of internal tribunals, which could lead to significant procedural changes and increased litigation in federal courts. Litigation will surely ensue to determine whether federal agencies beyond the SEC can continue to enforce claims against perpetrators.

Conclusion

The Supreme Court’s decision in SEC v. Jarkesy marks a pivotal shift in the balance of power between federal agencies and the judiciary. By affirming the right to a jury trial in SEC enforcement actions seeking civil penalties, the Court has reinforced constitutional protections and curtailed the reach of administrative adjudications. This ruling will undoubtedly influence the operations of the SEC and other federal agencies, prompting a reevaluation of their enforcement practices and the role of in-house tribunals in administrative agencies.