Securities Enforcement: Impact of the Supreme Court’s SEC v. Jarkesy Decision

Dmitriy Smirnov

October 3, 2024

Securities Law

On June 27, 2024, the U.S. Supreme Court issued a pivotal ruling in SEC v. Jarkesy that will significantly reshape securities enforcement. As outlined below, it already has. In a 6-3 decision, the Court ruled that the Securities and Exchange Commission’s (“SEC”) use of in-house tribunals to resolve securities fraud cases violated the U.S. Constitution, affirming a defendant’s right to a jury trial under the Seventh Amendment. Specifically, the Court stated that the Seventh Amendment’s guarantee of a jury trial applies to “[s]uits at common law,” which includes statutory claims that are “legal in nature.” The Court explained that the remedy the SEC sought against Jarkesy—civil monetary penalties—is the “prototypical common law remedy,” underscoring that the SEC’s action was legal in nature (as opposed to equitable actions, which do not require a jury trial). The Court noted that the civil penalties aimed to “punish and deter” wrongdoers rather than to enforce a public right or “restore the status quo.” This decision is expected to have wide-ranging consequences not only for the SEC but for other regulatory bodies that use administrative tribunals, such as the Office of Foreign Assets Control (“OFAC”).

Key Aspects of the Decision

Right to a Jury Trial: The Supreme Court ruled that George Jarkesy, who had been judged by an administrative law judge (ALJ) within the SEC, was denied his constitutional right to a jury trial. The Court held that the Seventh Amendment guarantees a jury trial in cases where the government seeks civil penalties, making it unconstitutional for the SEC to bypass this through its administrative process.

Delegation of Powers: The decision also evaluated the constitutionality of Congress’s delegation of power to the SEC. The Court determined that granting the SEC unchecked authority to decide whether to bring cases before its in-house judges or federal courts violated the non-delegation doctrine.

Separation of Powers: The Court emphasized that the structure of the SEC’s enforcement process posed separation of powers concerns. The insulation of SEC ALJs from removal by the president was seen as infringing on executive authority, as the ALJs were not directly accountable to elected officials.

Potential Implications of the Ruling

The Jarkesy decision may lead to substantial changes in how securities fraud and other regulatory cases are handled. Some key implications include:

More Jury Trials: The SEC will likely be required to bring more enforcement actions in federal courts, entitling defendants to jury trials. This shift could slow down the pace of securities enforcement as federal courts are often more constrained in resources than the SEC’s in-house tribunals.

Increased Litigation Costs: Federal court trials are generally more costly and time-consuming than administrative proceedings, leading to higher litigation expenses for both the SEC and defendants. The SEC may also become more selective in the cases it pursues due to these increased costs.

Impact on Other Agencies: The ruling could extend beyond the SEC, affecting agencies like OFAC, the Federal Trade Commission (FTC), and the Consumer Financial Protection Bureau (CFPB), which also rely on in-house adjudications. This could prompt broader reforms in administrative enforcement across multiple sectors.

Reforms to Administrative Enforcement: The decision might inspire legislative or regulatory reforms to address the Court’s concerns. Congress could provide clearer guidelines on when the SEC can use in-house tribunals or modify the process to comply with constitutional requirements. In the meantime, Jarkesy already appears to have influenced the SEC’s approach to Rule 102(e) cases. 

SEC Rule of Practice 102(e) allows the SEC to seek relief against individuals or firms that violate professional standards. Typically, these cases are heard administratively before an ALJ. However, in light of Jarkesy, the SEC has begun filing cases it typically would bring administratively in federal court when seeking civil penalties. For example, the SEC sued an audit firm for independence violations in federal court in the Southern District of Florida. Previously, this would have been an administrative case under Rule 102(e).

While this shift may only apply to cases where civil monetary penalties are pursued, the SEC seems to believe that Jarkesy prevents any Rule 102(e) proceedings from being litigated administratively. The SEC has already dismissed two contested Rule 102(e) proceedings against accountants for alleged audit violations, only one of which involved such penalties. This is significant because Rule 102(e) is one of the SEC’s most powerful tools, and the threat of administrative litigation has been a key driver in securing settlements. Without that leverage, parties may be less willing to settle, and the SEC may choose to pursue only the most serious cases in federal court. This could substantially weaken the SEC’s ability to regulate professionals.

Moving Forward

The SEC v. Jarkesy decision is likely to have extensive implications for other regulatory agencies. It will be intriguing to see how federal practitioners use the decision to counter enforcement actions involving civil monetary penalties prosecuted administratively.