Again Curbing Regulatory Agencies, Supreme Court Rejects S.E.C.’s Tribunals


The Supreme Court on Thursday rejected one of the primary ways the Securities and Exchange Commission enforces rules against securities fraud, likely also making it harder for other regulatory agencies to bring enforcement actions.

The S.E.C., like other regulators, sometimes enforces its regulations and imposes penalties using in-house tribunals without juries rather than federal courts. Chief Justice John G. Roberts Jr., writing for a six-justice conservative majority, said that practice violated the Seventh Amendment right to a jury trial.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” the chief justice wrote.

The decision in the case divided along ideological lines. Justice Sonia Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, dissented, accusing the majority of upending “longstanding precedent” to cut back on the authority of administrative agencies.

The so-called administrative state is how American society imposes rules on powerful business interests. Congress has passed laws to broadly govern various sectors of the economy — like barring publicly traded companies from defrauding investors or limiting how much factories may pollute the air or water — and created agencies of technocratic experts to carry out those statutes by crafting detailed regulations and then enforcing them.

Many of those agencies bring enforcement actions against violators using in-house proceedings with administrative judges who can impose fines and other financial punishments. During arguments, lawyers for the S.E.C. warned that some two dozen other agencies could be affected if the Supreme Court ruled against its practice of doing so.

Those would include the Federal Trade Commission, the Internal Revenue Service, the Environmental Protection Agency, the Social Security Administration, the National Labor Relations Board and the Occupational Safety and Health Administration.

Devin Watkins, an attorney for the Competitive Enterprise Institute, a think tank that opposes regulation, hailed the outcome as a victory.

The ruling “will ensure that 12 everyday Americans, not government bureaucrats, will decide whether a defendant’s property should be taken,” he said in a statement.

But Robert Weissman, president of Public Citizen, a consumer advocacy group, cautioned of the implications for the financial system given that it would hamper the agency’s ability to regulate.

“Today’s decision is another step in the long-term corporate project of neutering federal agencies’ ability to protect the public from fraudsters, rip-offs, dangerous products, carbon polluters, and more,” he said in a statement.

The case, Securities and Exchange Commission v. Jarkesy, No. 22-859, concerned George Jarkesy, a hedge fund manager accused of misleading investors. The S.E.C. brought a civil enforcement proceeding against him before an administrative law judge employed by the agency, who ruled against Mr. Jarkesy. After an internal appeal, the agency eventually ordered him and his company to pay a civil penalty of $300,000 and to disgorge $685,000 in what it said were illicit gains.

Mr. Jarkesy appealed to the U.S. Court of Appeals for the Fifth Circuit, in New Orleans. A divided three-judge panel of that court ruled against the agency, including by saying that he had a right to face a jury trial. The agency then appealed to the Supreme Court.

In her dissent, Justice Sotomayor accused the majority of ignoring the court’s precedents to reach a conclusion that was “plainly wrong.” She said Congress had the constitutional authority to decide that civil proceedings to protect the rights of the public generally, as opposed to private lawsuits, could be decided by administrative tribunals.

“Beyond the majority’s legal errors, its ruling reveals a far more fundamental problem: this court’s repeated failure to appreciate that its decisions can threaten the separation of powers,” she wrote.

But Chief Justice Roberts disagreed with that casting, saying that the issue centered not on Congress’s constitutional role but on the rights of people who are accused of breaking the law. That view “would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the executive branch” he wrote. “That is the very opposite of the separation of powers that the Constitution demands.”

In one respect, the majority’s opinion did not go as far as critics of the administrative state would have liked. In the appeals court’s earlier ruling against the agency, the Fifth Circuit panel had also held that the agency’s judges were excessively insulated from presidential oversight and that Congress could not allow the agency itself to decide where suits should be filed.

Those other two grounds for ruling against the agency also held the potential to disrupt enforcement of not only the securities laws but also many other kinds of regulations. Chief Justice Roberts emphasized, however, that the majority justices were affirming the appeals court on the jury trial issue alone and “do not reach the remaining constitutional issues.”

Since President Donald J. Trump appointed three justices to the court, ensuring a conservative supermajority, business interests have brought a flurry of challenges aimed at curtailing the power of the administrative state. The S.E.C. case is just one of several such cases this term.

Last month, the court rejected a challenge to the way the Consumer Financial Protection Bureau is funded. The vote was 7 to 2. Siding against the agency would have opened the door to lawsuits to nullify every regulation and enforcement action it has taken in its 13 years of existence, including ones concerning mortgages, credit cards, consumer loans and banking.

In January, the court heard arguments in a pair of challenges to the so-called Chevron doctrine, a foundational part of administrative law. Under the doctrine, judges should defer to federal agencies when it comes to interpreting the laws by which Congress created and empowered them, in cases where a provision is ambiguous and an agency’s understanding of it is reasonable.

The Supreme Court has not yet announced its decision in that case, which is considered one of its potential blockbuster rulings yet to be handed down at the end of its term.



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