Supreme Court Agrees to Hear Case on Constitutionality of SEC Administrative Enforcement Actions 

The U.S. Supreme Court agreed to hear a case that could invalidate administrative courts used by the SEC and other federal agencies.  With a 6-3 conservative majority, the Supreme Court has shown increasing skepticism against expansive, federal regulatory power.

In Jarkesy v. SEC, the SEC had brought an enforcement action against George R. Jarkesy, Jr. before an administrative law judge (ALJ) who found that Jarkesy had violated the Securities Act of 1933 and other laws.  Jarkesy appealed the SEC judgment to the U.S. Court of Appeals for the Fifth Circuit.  The Fifth Circuit overturned the SEC’s decision against Jarkesy, holding the SEC’s administrative proceedings unconstitutional on three different grounds. 

The circuit court found the SEC’s administrative proceedings violated the Seventh Amendment right to a jury trial since parties are not entitled to a jury trial in SEC administrative actions.  The court also ruled ALJs were unconstitutionally protected from removal. Lastly, the court concluded the SEC had been delegated too much power since it could choose whether to bring enforcement actions in front of an ALJ or a federal district judge. 

The SEC is now appealing the Fifth Circuit’s ruling to the Supreme Court.  Following the Fifth Circuit ruling, the SEC found itself blocked from bringing internal enforcement actions against potential rulebreakers located in the Fifth Circuit.  If the Supreme Court upholds the Fifth Circuit ruling, administrative proceedings could be curbed nationwide, and federal agencies’ use of administrative proceedings would be greatly impacted.