On Wednesday, the U.S. Supreme Court focused on one part of a nuanced constitutional challenge to federal agency enforcement, indicating it won’t significantly reduce regulators’ power through a ruling focused on SEC in-house judges. Of importance in this argument is an appeals opinion by the U.S. Court of Appeals for the Fifth Circuit that overturned a ruling by the Securities and Exchange Commission (SEC) against hedge fund manager George Jarkesy.
The decision of the appeals court brings into question agency enforcement through administrative proceedings, revealing three separate constitutional issues with the SEC’s authority in determining where to enforce proceedings, judge removal protections within the agency, and the imposition of civil penalties without a jury trial.
It is understandable the legal community has their eyes on this case, as it has the potential to shake many agencies across the federal government if all three parts of the Fifth Circuit’s decision are upheld. If this were to occur, it would likely give rise to an influx of cases overwhelming federal court and could hinder enforcement at agencies that are incapable of going directly to court.
However, many believe that the court’s focus on the Seventh Amendment right to jury trial, specifically regarding securities fraud cases, signals that the ruling could be narrower than originally anticipated. During Wednesday’s hearing, the justices’ primary inquiries were around in-house enforcement actions that might trigger the right to a jury trial.
This shift towards the Seventh Amendment, and its relation to securities fraud, creates a belief among legal experts that the ruling will more narrowly impact the SEC and the enforcement of securities fraud, rather than causing widespread disruptions across all agencies. Other government bodies such as the Federal Trade Commission, the Department of Labor, and the National Labor Relations Board were also noted for utilizing ALJs in a variety of adjudication functions, signaling that their procedures may remain untouched.
The Supreme Court’s questioning, which included points raised by conservative justices like Neil Gorsuch, steered towards the interplay between the right to a jury trial and cases brought in administrative proceedings. The majority of questioning fixated heavily on the Seventh Amendment issue.
What lies ahead is to see how the Supreme Court rules and what impact this could have on the ability of the SEC to conduct in-house proceedings. Despite early fears, the scope of the ruling seems to be leaning more towards affecting securities fraud cases within the SEC, rather than creating a catastrophic effect across agencies. The case is officially recognized as Securities and Exchange Commission v. Jarkesy, U.S., No. 22-859, with the oral argument occurring on 29/11/23.