The Supreme Court will hear argument on November 29, 2023 in a case that has the potential to fundamentally alter the manner in which the Securities and Exchange Commission resolves its enforcement actions. Specifically, the decision in SEC v. Jarkesy, Jr., No. 22-859 has the potential to fundamentally alter the use of administrative proceedings. The case presents three issues for resolution (as stated by the SEC in its merits brief):

Whether statutory provisions that empower the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.

Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.

Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.

The opinion of the lower court is available at 34 F. 4^th 446 (5^th Cir.). The briefs of the parties are briefly summarized below.

Respondent George Jarkesy operated two hedge funds through his investment advisory firm, Patriot28 L.L.C. The funds had 28 investors and about $24 million in assets under management. The charges brought against Petitioner were based primarily on misrepresentations. For example, Respondents told brokers and investors that a prominent accounting firm served as the auditor to the funds. The claim was not correct. They also told investors that a prominent investment bank represented the funds. The claim was incorrect. The investment strategies of the funds were misrepresented. The financial results of the funds were misstated.

A hearing before an ALJ, initiated in 2013, resulted in findings that Mr. Jarkesy had violated provisions of the Securities Act, the Exchange Act and the Advisers Act. Respondents’ claim that the agency adjudication violated the Seventh Amendment was also rejected. Similarly, a claim that the Commission’s authority to choose between judicial and administrative enforcement violated the nondelegation doctrine was also rejected.

The Fifth Circuit subsequently granted the Petition for Review. The court concluded that the Seventh Amendment had been violated since the SEC had been empowered to bring administrative proceedings seeking civil penalties. Key to this point is if the claims arose at common law. Here the questions did not involve public rights since the claims arose at common law.

The Circuit Court also concluded that Congress can only grant regulatory power to another entity if it provides an “intelligible principle” by which the power can be exercised. Here that had not been done. The court concluded by finding that the statutory restrictions on removal of the SEC’s ALJs violated Article II of the Constitution under the Supreme Court’s Free Enterprise Fund ruling.

The Supreme Court’s decision in Atlas Roofing Co. v. Occupational Safety & Health Review Comm’s, 430 U.S. 442, 450 (1977) controls the ruling in this case regarding the Seventh Amendment. There the Court held that Article III permits Congress to assign the adjudication of claims involving so-called “public rights” to non-Article III tribunals. That doctrine permits Congress to create “new statutory obligations,” impose civil penalties for their violation and commit the resolution of issues to an administrative agency. Accordingly, the proceedings were consistent with Article III.

In this matter, the court of appeals simply reached the wrong conclusion. This resulted in part from overreading the Supreme Court’s prior decisions; it also resulted in part from misreading the Court’s prior decisions.

Equally clear is the fact that Congress did not violate the nondelegation doctrine by permitting the SEC to decide the forum in which each case should be brought. When the Commission brings an enforcement action it “exercises only enforcement discretion, a core executive power that stems from the President’s authority” to “take Care that the Laws be faithfully executive,” Citing Article II, Section 3. In this case since the SEC only exercised an enforcement power that is typically administered by agencies it has acted within its discretion. The court of appeals reached the incorrect decision here by failing to properly understand the concept of “legislative power.”

Finally, Congress did not violate Article II in granting tenure protection to the SEC’s ALJs. To the contrary, when Congress vests the appointment of an inferior officer in a department head it can limit and restrict the power of removal as it deems best in the public interest.

The SEC’s contention that juries are not required when the government seeks penalties for common law fraud claims as here is based on a flawed interpretation of the “public rights” doctrine. The question of if a public right or private right is at issue depends on the nature of the underlying claim.

Here the SEC initiated a fraud action for penalties seeking to deprive the target of that action of a “core” right – private property. Such questions should be resolved by a jury. This is consistent with the earliest interpretations of the right to a jury. It is also consistent with the Fifth Circuit’s conclusion that Congress’ delegation of the unfettered power to the agency to assign the enforcement action to either forum violates the separation of powers doctrine. The proper remedy for this violation is thus setting aside the decision.

Atlas Roofing is not to the contrary. There the Court considered a claim under OSHA.

After analyzing the statute, and considering a case being prosecuted by the government, the Court found that the rights at issue were public. The attributes considered by the Atlas Roofing court however – the claims were unknown at common law, they were new, the remedies were new and the administrative forum would provide a speeding remedy – should not apply here. There it was the novelty of the statutory claims that guided the result. That concept does not apply here.

The decision in the case is due by June 30, 2024.