The Supreme Court Will Determine When Federal Agencies Must Provide For The Right To A Jury Trial In Civil Enforcement Actions

• Published date: 10 August 2023
• Subject Matter: Consumer Protection, Government, Public Sector, Litigation, Mediation & Arbitration, Criminal Law, Constitutional & Administrative Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud, Dodd-Frank, Consumer Protection Act
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Gregory Markel and Gershon Akerman

Introduction

The United States Supreme Court recently granted Certiorari in a closely watched case that could have significant consequences for the Securities and Exchange Commission (SEC) and certain other federal administrative agencies.

In SEC v. Jarkesy, the Supreme Court will determine the constitutionality of the SEC's broad discretion in deciding which cases will be tried to an SEC administrative law judge (ALJ) and which will be tried to a jury in an Article III federal court. It will also consider the constitutionality of Congress' delegation of certain authority to the SEC relating to rules and regulations that the SEC has considered or adopted, and the SEC's discretionary authority to make determinations on policy matters where Congress has not provided sufficient guidance. The Court also will consider the constitutionality of the rules on removal of administrative law judges.

In May of 2022, the Fifth Circuit Court of Appeals, in a 2-to-1 panel opinion, determined that the SEC's current discretionary authority to bring civil fraud claims before its in-house administrative law judges in civil-enforcement proceedings is unconstitutional in three separate ways. First, the appeals court held that the use of administrative tribunals for enforcement of common law claims which are not public claims violates the Seventh Amendment right to a jury trial. Second it found that Congress violated the non-delegation doctrine in giving the SEC broad discretion to determine whether and when to prosecute enforcement proceedings before its own ALJ's as opposed to federal courts. Third, the Fifth Circuit held that the SEC's double layer of for-cause removal protection for administrative law judges was also unconstitutional.

Should the Supreme Court agree with the Fifth Circuit majority, its decision will very likely have a significant impact on the forum in which the SEC prosecutes enforcement actions for violations of federal securities laws by requiring that the SEC prosecute such actions in federal court, where statistics appearing in the media suggest that respondents stand a greater chance of litigation success. The case could also potentially disrupt how the SEC establishes rules and guidelines in other areas. Should the Supreme Court find that Congress is violating the Constitution by delegating overly broad authority to the SEC (and other agencies), it could restrict to a degree the ability of some SEC personnel seeking to promulgate detailed sets of rules and guidelines, even including possibly ESG policies and regulation of cryptocurrencies.

There is also the possibility that the Supreme Court's decision in Jarkesy will implicate not only the SEC but also other federal administrative agencies. An affirmance in Jarkesy could have broad implications and impact the behavior of other federal agencies, particularly those that use their own in-house administrative tribunals to conduct enforcement proceedings or seek to promulgate their own rules and guidelines on policy matters.

It will take some time until Jarkesy is ripe for argument and even longer before the Supreme Court issues a decision. However, even if the Supreme Court ultimately reverses the Fifth Circuit, the recent grant of certiorari alone is likely to increase current uncertainty in how the SEC, and possibly other agencies, should conduct enforcement proceedings and promulgate new rules during the interim period prior to a definitive decision from the Supreme Court. It may also have an effect on the security of administrative law judges in their current positions.

Background

The SEC Administrative Process

Founded in 1934 to regulate securities markets, the SEC was granted authority to appoint administrative law judges to conduct hearings in accordance with the Administrative Procedures Act (APA) of 1946.¹

Under current practice, claims brought by the SEC can be assigned to be heard by administrative law judges employed by the SEC, who act as fact finders and arbiters of the law. Determinations made by an ALJ can be appealed by either party to the Commission - consisting of five SEC Commissioners appointed by the President of the United States (and confirmed by the Senate). A decision by the Commission can then be appealed by petition to the federal court of appeals, which has limited authority to review the Commission's determination.² The federal court can only reverse the Commission's findings of fact where there is "substantial evidence," supporting that outcome and the Commission's determination of the securities laws may be entitled to deference.³

Historically, the SEC's use of, and the remedies it could seek with, administrative proceedings was limited. Prior to 1990, it generally was required to bring securities fraud claims and seek civil penalties in federal court. With the passage of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Congress first authorized the SEC to seek civil monetary penalties in administrative proceedings, but only as to "regulated" entities, i.e., entities...