At the end of its most recent term, the U.S. Supreme Court took aim at the Securities and Exchange Commission’s internal enforcement mechanism, heavily curtailing the ability of the SEC to self-enforce violations of our nation’s security laws.1
In Securities and Exchange Commission v. Jarkesy, the 6-3 majority led by Chief Justice Roberts held that the SEC’s enforcement proceedings – which had resulted in $985,000 in civil penalties against an investment advisor and his firm – violated the defendants’ Seventh Amendment rights to a jury trial. However, the ruling has implications well beyond the right to a jury and could signal widespread changes to agencies’ ability to enforce many of the laws they oversee.
Jarkesy’s constitutional inquiry arose from the SEC’s authority to adjudicate in-house enforcement actions involving securities fraud. Under the 2010 Dodd-Frank Act, as well as a variety of securities laws passed during the New Deal Era, the SEC was statutorily permitted to either bring enforcement proceedings before a federal court, or in this case, before its internal tribunals. Notably however, when the SEC adjudicated a matter in-house, the matter would involve no jury. Instead, either the SEC or an Administrative Law Judge (ALJ) would preside over the case and serve as both judge and factfinder while its Division of Enforcement prosecuted the case – effectively permitting the agency to step into the roles of prosecutor, judge, and jury at the same time.
In reviewing the constitutionality of this structure, the text and history of the Seventh Amendment provided the framework for the Supreme Court’s analysis. Due to the “close relationship” between the SEC’s fraud enforcement claims and common law fraud claims, the Supreme Court first considered whether the SEC’s in-house enforcement procedure invoked the right to a jury. This commonality is crucial because the Seventh Amendment guarantees that the right to a jury trial applies to all suits “at common law.” With this link in mind, and after recognizing that the civil penalties imposed by the SEC are punitive rather than remedial (as is characteristic of common law remedies), the Court confirmed that this type of adjudication falls squarely within the Seventh Amendment’s protections.
The Court then turned to the “public rights” exception, which holds that when Congress creates a set of statutory, or “public,” rights, it can assign the enforcement of those rights to an agency, rather than the judiciary. However, because the SEC enforcement replicated the private rights implicated in a common law fraud claim, the majority ruled that this case could not constitutionally be removed from the purview of federal courts.
Following the Jarkesy decision, the immediate result is that defendants to agency proceedings will now be entitled to the procedural protections of a neutral factfinder, rather than face adjudication from the agency charged with enforcement. However, the potential impacts of this case go beyond the SEC’s fraud enforcement proceedings. For one, with the Supreme Court’s decision to reel in the enforcement power of agencies, it is unclear just how far that line will go. And, while the role of the ALJ in executive agencies is far from dead, many federal agencies may see a significant reduction in their ability to enforce common law adjacent statutes, such as securities fraud.
Additionally, the Supreme Court also left unanswered broader questions relating to agency authority. In the proceedings below, the Fifth Circuit took the case a step further by clarifying the extent under which Congress could delegate its own regulatory power to an agency such as the SEC.2 However, the Supreme Court left these questions involving the “non-delegation doctrine” unaddressed, leaving the divided opinion from the Fifth Circuit in place for another day.
Nevertheless, the Jarkesy decision serves as yet another paragon of the Supreme Court’s recent trend toward reinvigorating traditional separation of powers principles. As the Supreme Court continues to refine the scope of agency power, businesses and individuals impacted by federal agency regulation should continue to stay abreast of this ever-changing landscape.
Footnotes
- SEC v. Jarkesy, No. 22-859 (U.S. June 27, 2024). [Back]
- For full analysis of the lower court’s opinion, see https://www.swlaw.com/publications/legal-alerts/a-constitutional-shakeup-in-administrative-law-the-fifth-circuits-new-decision-revisits-the-application-of-the-nondelegation-doctrine. [Back]
