The Supreme Court on Wednesday will consider the Securities and Exchange Commission‘s powers to enforce securities law through its in-house tribunal system rather than in court, marking the second of three major cases this term that could rock the administrative state.
Arguments in Jarkesy v. SEC come as the 6-3 Republican-appointed majority on the high court have selected a handful of cases this term that have potential to disrupt federal agency authority under President Joe Biden and future administrations to come. Justices on Wednesday will hear the government’s appeal of a 2022 ruling by the U.S. 5th Circuit Court of Appeals in favor of hedge fund manager and conservative radio jockey George Jarkesy, whom the SEC fined and barred from the industry after finding he committed securities fraud.
TEXAS SUPREME COURT TO HEAR CASE CHALLENGING STATE’S ABORTION LAW
The 5th Circuit held that the SEC’s ability to pursue penalties through in-house enforcement proceedings violated the Constitution’s Seventh Amendment right to a jury trial and that it cut through presidential and congressional powers. The Biden administration appealed to the high court, arguing the ruling against the SEC “raises questions of exceptional importance.”
Critics of the commission’s in-house system, which is administered through SEC-appointed administrative law judges, or ALJs, argue it unfairly favors the prosecution to adjudicate cases internally rather than before an impartial jury in federal court.
Attorneys for Jarkesy say that the whole system is effectively rigged against virtually every defendant that goes before an ALJ.
“The agency court in Jarkesy had a nearly spotless record — always ruling for the agency,” Jarkesy’s attorneys wrote in a DC Journal op-ed. “When Jarkesy’s case went to trial, the agency had won the last 200 times.”
Proponents of the in-house system say such proceedings are expedient and allow the SEC to function more efficiently to protect investors. For example, claims brought in-house are 27 times faster than SEC actions brought in federal court, according to a 2020 University of British Columbia study.
“Jarkesy has important implications for the prudential banking regulators’ administrative enforcement processes,” Dustin Nofziger, counsel at Pryor Cashman LLP, told the Washington Examiner.
If the Supreme Court holds that ALJs are unconstitutional, “then so is the prudential banking regulators’ administrative law judge,” Nofziger said, referring to regulators like the Federal Deposit Insurance Corporation, Federal Reserve System, Office of the Comptroller of the Currency, and the National Credit Union Administration, all of which also rely on in-house judges to adjudicate claims.
“And unlike the SEC or the CFPB, the prudential banking regulators do not have the option to bring enforcement actions in federal court, making the administrative hearing process absolutely essential to their enforcement efforts,” Nofziger explained.
The SEC, which enforces U.S. laws that protect shareholders, has faced some setbacks in recent years at the Supreme Court, where the Republican-appointed majority has cast a skeptical eye over expansive federal regulatory power.
The Supreme Court held in 2018 that the SEC erred in the way it appointed in-house judges and in April allowed targets of agency actions to have a better edge in taking their matters to federal court.
Justices have already weighed one case this year concerning expansive federal regulatory powers in a challenge to the Consumer Financial Protection Bureau‘s funding mechanism. While the CFPB was devised by Congress to protect consumers in the fallout of the 2008 financial crisis, challengers are asking the court to rule its direct funding from the Federal Reserve is unconstitutional, an argument that appeared to invite more skepticism than embrace by the Supreme Court during the October session.
The last of three major administrative law challenges the high court will hear this year is Loper Bright Enterprises v. Raimondo, which involves fishermen plaintiffs who are challenging the long-standing precedent known as the Chevron deference.
The 1984 decision that spawned Chevron requires courts to defer to “reasonable” agency interpretation of the ambiguities in federal law, which the fishermen say has led to unreasonable rules that create a crippling financial burden. The actual dispute surrounds the National Marine Fisheries Service finding a previously unknown power under the Magnuson-Stevens Act to force small fishing vessels to pay for their federally mandated at-sea monitors who enforce restrictions on methods and amounts of fishing.
All three cases, if ruled in favor of the challengers to the various agencies, could have the potential to significantly diminish the powers of government agencies under the executive branch. It’s also possible the justices could rule against these challengers or draw more narrow conclusions without upending long-standing precedent.
But for now, the high court will consider whether Jarkesy can win his Seventh Amendment claim against the SEC, a move that could force the agency to send more enforcement cases to federal court.
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Also on the table is Jarkesy’s so-called nondelegation claim, which is a seldom-enforced rule stipulating that Congress can’t give agencies power without settling “intelligible” limits on how the agencies can use it. If justices side with Jarkesy on this claim, it could place the future of agency tribunals in further jeopardy.
A decision in Jarkesy is expected by the end of June next year.
