Justices are set to consider a case with severe ramifications for the Securities and Exchange Commission. The case in question, Securities and Exchange Commission v. Jarkesy, presents three unique constitutional challenges to varying aspects of the SEC. The case surged onto the agenda after a panel of the U.S. Court of Appeals for the 5th Circuit accepted all three arguments, invalidating three distinct aspects of the SEC’s operations.
The legal hullabaloo started after the SEC brought an in-house enforcement proceeding against hedge fund founder George Jarkesy. The fund manager was eventually declared to have committed securities fraud, landing him a $300,000 fine with a repayment demand of nearly $700,000. The proceedings raise concerns about whether Congress appropriately permitted the SEC to adjudicate administrative proceedings that impose fiscal penalties given that the Seventh Amendment, as a rule, grants defendants in civil cases the right to a jury trial.
Alternatively, the government stands firm that Congress has the authority to create new obligations by statute, which due to their novelty, bestow public rights that Congress can assign to an administrative tribunal without involving a jury. This notion hinges on the difference between the characteristics of securities fraud and 18th-century fraudulent activity.
The SEC’s case selection process has been brought into question too. Is it constitutionally permissible for Congress to delegate to the SEC the power to determine if a case should be pursued as an administrative proceeding or civil action? The government argues yes, positing that Congress’s legislative power grants the authority to decide upon the enforcement mechanisms an agency can use, while the executive branch then chooses between these enforcement options.
Finally, Jarkesy’s case raises the question of whether it is constitutionally acceptable for Congress to grant SEC’s administrative law judges immunity from removal. Jarkesy capitulates little ground here, considering that resultant from the protections, the SEC’s administrative law judges have two tiers protecting against removal. Back in 2010, a Supreme Court ruling in Free Enterprise Fund v. Public Company, established such protections inconsistent with the President’s executive powers. This case is therefore a significant movement in defining further the President’s constitutional ability to ‘take care that the Laws be faithfully executed’.
The verdict in this case could fundamentally reshape administrative law and signal one of the most impactful decisions concerning administrative law in recent times. As such, legal professionals worldwide will be watching closely.