Recent Supreme Court administrative law rulings change the power dynamic between the executive and the judiciary in critical areas of statutory interpretation, enforcement, and immunity from legal challenge.
The 2023-2024 US Supreme Court session has concluded the term with a series of blockbuster opinions in the areas of administrative law and executive power, with consequential decisions overturning longstanding precedent and poised to reconfigure the balance of power between the executive and the judiciary. A trio of decisions (all decided 6-3) will reverberate for years to come and have important potential implications for the fintech and digital asset industries:
- On June 27, 2024, the Supreme Court handed down its decision in Securities and Exchange Commission v. Jarkesy, holding that the Seventh Amendment right to trial by jury applies whenever the Securities and Exchange Commission (SEC) seeks civil penalties against a defendant for securities fraud. This decision effectively eliminates the SEC’s ability to seek such civil penalties through its own in-house administrative proceedings,1 and may have ramifications for other federal agencies that impose similar financial penalties using administrative law judges.2
- On June 28, 2024, the Supreme Court handed down its decision in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce. The Court overruled the longstanding Chevron3 doctrine, which required courts to defer to the interpretations of administrative agencies when resolving the meaning of ambiguous statutes, and held that courts must exercise their independent judgment in resolving questions of statutory interpretation and in deciding whether an agency has acted within its statutory authority (for more information, see this Latham Client Alert).
- On July 1, 2024, the Supreme Court ruled in Corner Post, Inc. v. Board of Governors of the Federal Reserve System that a claim under the Administrative Procedure Act (APA) challenging the statutory authority for agency action accrues for purposes of the six-year statute of limitations under 28 USC §2401(a) when the relevant plaintiff is injured by final agency action and has the right to assert a claim in court, and not upon publication of the relevant rulemaking.
We discuss each decision and the potential implications for the fintech and digital asset industries in more detail below.
Jarkesy
The majority in Jarkesy held that the Seventh Amendment right to trial by jury applies when the SEC seeks civil penalties against a defendant for securities fraud. As a result, such claims must be brought and resolved before a jury in an Article III court. That is, the SEC may not resolve such matters by using the SEC’s administrative law judges, which is a non-Article III administrative fora. In so ruling, the majority recognized the existence of the so-called “public rights” exception to the Seventh Amendment, which permits Congress to assign certain matters to an agency for decision without a jury. However, the majority determined that the act of the SEC seeking civil penalties for securities fraud was akin to bringing action against an individual under common law fraud, and thus constituted a matter of private and not public rights.
While characterized by the majority as a straightforward application of established separation-of-powers doctrine and existing Supreme Court precedent on the Seventh Amendment, the majority decision in Jarkesy drew a vociferous dissent. Justice Sonia Sotomayor called the majority’s ruling “momentous,” “earthshattering,” and “a seismic shift in [the] Court’s jurisprudence,” lamenting that “the constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress.”
As a legal matter, the immediate implications of Jarkesy for participants in regulated markets or engaging in regulated activities are obvious: the SEC (as well as the CFTC and possibly other federal administrative agencies), must pursue civil penalties in an Article III court before a jury and cannot rely on in-house, administrative adjudications to secure such penalties. The actual implications as a practical matter may vary or take longer to be felt. For example, even prior to Jarkesy, the SEC pursued certain securities fraud cases in federal court anyway. Indeed, as SEC Director of Enforcement Gurbir Grewal noted in a statement post-Jarkesy, the SEC has during the last several years successfully litigated violations of the federal securities laws in federal court, obtaining favorable jury verdicts and dispositive motion rulings in highly contested matters with industrywide implications. However, Director Grewal did confirm that the SEC is reviewing the decision’s ramifications, affirming that “[t]he SEC will continue to protect investors and enforce the federal securities laws, including by filing actions in federal court.”
Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham issued a statement in support of the decision. She reiterated her prior criticisms that in-house, administrative adjudications are at odds with the separation of powers and due process and lauded Jarkesy as “reinforcing the law of the land.” Commissioner Pham pledged that, in light of Jarkesy, she would “continue pushing to bring greater accountability and transparency to [the CFTC’s] administrative proceedings so that our stakeholders have the utmost confidence in the CFTC’s actions to promote safe and fair markets.”
Loper Bright/Relentless
As noted in Latham’s Client Alert, the Loper Bright/Relentless decision is a landmark holding of administrative law that recalibrates the balance of power between agencies and courts. In particular, the majority held that courts “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and “may not defer to an agency interpretation of the law simply because a statute is ambiguous.” As questions of statutory interpretation will now be subject to de novo review by judges and without Chevron deference, agencies may now be more disciplined in their approach to statutory interpretation knowing that courts will closely scrutinize their interpretations and the reasoning behind them. This may ensure that agencies will be careful to provide compelling interpretive justifications for their rulemakings and provide consistency of interpretation even when the heads of the administrative agency changes with an election cycle, as agencies may now be more hesitant to stretch statutory interpretation.
Corner Post
In Corner Post, the central question was when a claim for review of final agency action under the APA “accrues” for purposes of the statute of limitations in 28 U.S.C. § 2401(a), which provides that such claims shall be barred unless filed within six years after the right of action first accrues. The majority in Corner Post held that an APA claim does not accrue for purposes of §2401(a)’s six-year statute of limitations until the relevant individual plaintiff is injured by the final agency action. In so holding, the majority rejected the view that “facial” challenges to the validity of a regulation (as opposed to challenges to a regulation “as applied” to a particular party) become time-barred six years from the date of publication. (That period may well have elapsed before an individual plaintiff was ever impacted by the rule.)
Predictions and Potential Implications for Fintech and Digital Assets
The SEC, the CFTC, the Consumer Financial Protection Bureau (CFPB), and other US regulators have invested considerable time and resources over the past decade grappling with the application of their statutory authority and regulatory frameworks to the fintech and digital assets industries. All three Supreme Court rulings discussed here have important potential implications in this regard.
The SEC under Chair Gary Gensler has embarked upon an aggressive rulemaking agenda in recent years, with a number of recent proposed and final rulemakings of significant consequence to fintechs, digital asset platforms, and other emerging technologies. For example, as we have discussed in this Latham blog post and this post, the SEC’s recent final rule (re)defining a “dealer” and 2023 proposed rule on the definition of an “exchange” for purposes of the Exchange Act have attracted significant concern from the digital asset sector as an attack on the viability of offering decentralized finance protocols in the United States. Some recent SEC rulemakings have failed judicial scrutiny even pre-Loper Bright/Relentless;the SEC’s private funds rule, which was vacated by the US Court of Appeals for the Fifth Circuit on June 5, 2024, is a notable example. However, plaintiffs may now have more latitude or be further emboldened to challenge the validity of SEC rulemakings that adversely implicate fintechs, digital asset platforms, and other emerging technologies.
These decisions may also have implications in pending agency litigation. For example, the CFTC is currently defending litigation challenging its disapproval of the listing of congressional control event contracts by a CFTC-regulated designated contract market. While the CFTC’s briefing in this case clearly sought to prepare for the overturning of Chevron (arguing the agency’s interpretation is correct with or without Chevron deference), the publication of the Loper Bright/Relentless decision was immediately seized upon by the plaintiff designated contract market. In a letter filed with the presiding judge on the same day the Supreme Court issued its decision, the plaintiff argued that matters of statutory interpretation must now be resolved de novo, without deferring to the agency’s interpretation.
The effect of these rulings on the SEC’s interpretation and application of the test for an “investment contract” under SEC v. Howey Co.4 to digital assets is likely to be far less significant, as the Howey test is a judicial construction. But, in cases where the SEC is seeking to enforce its rulemaking (such as with Rule 3b-16, which informs the definition of an “exchange”), the rulings could have considerable impact.
In the longer term, these rulings could spur Congress to legislate with greater clarity and specificity, or potentially even provide further impetus for Congress to finally enact comprehensive statutory reforms to the regulation of the digital asset industry in the United States. Whether this is a realistic possibility given the current realities of congressional politics may be questioned and remains to be seen. In addition, since it is unlikely that any legislation will be so comprehensive as to not require any implementing regulation, the removal of the Chevron deference could mean a great deal of litigation before the digital asset industry has final regulations upon which it can rely.
Conclusion
These decisions will be scrutinized and debated for years to come, as they dramatically change the calculus under which both regulators and the regulated now operate. In the short term, the decisions could create a climate of uncertainty for market participants, although only time will tell whether the predicted tidal wave of APA challenges will materialize. In the long term, however, the potential implications of these Supreme Court decisions may include encouraging Congress to act more expeditiously and more clearly in implementing its policy objectives in statutes; impose greater judicial discipline on and reduce potential agency overreach in statutory interpretation and rule promulgation; and level the enforcement playing field by eliminating administrative courts and requiring agencies to establish their case before a jury.
