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Supreme Court to consider multi-pronged constitutional attack on SEC

The argument on Wednesday in Securities and Exchange Commission v. Jarkesy will present a remarkable spectacle of three entirely distinct constitutional challenges to wholly disparate attributes of the SEC. Ordinarily, the ability of the justices to control their docket would allow them to wait on each question for the development of a circuit conflict and select a suitable case in which to resolve each issue. But in this case a bold (I did not say “rogue”) panel of the U.S. Court of Appeals for the 5th Circuit accepted all three arguments and invalidated three aspects of the SEC’s operations. To leave the decision unreviewed would force Congress to revise substantially the affected portions of the securities laws solely based on the opinion of one divided lower court panel – hence, the Supreme Court’s buffet of constitutional law topics on Wednesday morning. Because the arguments are so far-ranging and distinct, an article of reasonable length can offer only the barest summary of the principal arguments on each point. Suffice it to say that both sides have support from large groups of prominent amici.

The case stems from an administrative proceeding that the SEC brought against hedge fund founder and investment adviser George Jarkesy in 2013. The SEC’s in-house enforcement proceedings eventually found that Jarkesy and his firm had committed securities fraud, and it ordered them to pay $300,000 in fines and to repay nearly $700,000.The first question before the justices is whether Congress constitutionally authorized the agency to adjudicate administrative proceedings that impose monetary penalties. That raises a question under the court’s deeply fraught doctrine of “public rights,” which offers an exception to the Seventh Amendment jury trial requirement. Under the Seventh Amendment, most defendants in civil cases seeking monetary damages have a right to a jury trial; the exceptions generally require establishing that the type of action in question could have been brought in the 18th century (when the Seventh Amendment was ratified) in an equity court without a jury. Within that framework, the public rights doctrine is the doctrine that allows administrative agencies, operating without a jury, to impose monetary penalties. When it applies, it is because the right in question is a “public” right that would not have required the kind of “[s]ui[t] at common law” to which the Seventh Amendment applies.

The government’s view in this case is that the Constitution affords Congress a broad authority to create new obligations by statute, and that because those statutory obligations were unknown to the common law, they are public rights that Congress can assign to an administrative tribunal without a jury. It should be enough to validate the congressional scheme that the features of the securities cause of action here do not match the elements of the 18th century cause of action for fraud.

In contrast, Jarkesy broadly calls for the eradication of the public rights doctrine, arguing that one of the main “catalysts” and “flashpoints” for the American Revolution was the British crown’s practice of trying claims for statutory penalties in admiralty courts without a jury. Jarkesy does contend in passing that the particular features of the government’s claims against him are much more similar to common-law fraud claims than those in the early public-rights cases. But his principal argument is that the Supreme Court in recent years has rejected those cases (“wiping out the[ir] last vestiges”) in a line of cases involving the bankruptcy code, so that now Congress’s power to assign new statutory causes of action to administrative tribunals (without juries) is limited to cases in which requiring a jury trial would “dismantle the statutory scheme.”

The second question is whether Congress can delegate to the SEC the power to decide whether a case should be pursued as an administrative proceeding or as a civil enforcement action – that is, within the agency or  in a federal district court. The government contends that the court’s decisions repeatedly and firmly have recognized congressional power to vest decisions about the enforcement of civil and criminal proceedings in the executive branch. For the government, Congress’s legislative power under Article I of the Constitution is “to determine the range of enforcement mechanisms” that should be available to the agency, while the executive branch’s power under Article II is “to choose among permissible enforcement mechanisms in particular cases.”

Jarkesy’s discussion of that point is remarkably concise – less than five pages of a 73-page brief. He reasons that the power to assign a particular claim to an Article I (that is, administrative) tribunal is “quintessentially legislative in nature.” Thus, Congress could create two separate causes of action, assigning one to an Article I tribunal and another to an Article III tribunal (a court), but it cannot create a single cause of action and allow the agency to decide in which tribunal it should be brought. Because the statute provides “no intelligible principle to constrain” the agency’s decision between tribunals, it impermissibly delegates the legislative power to the agency.

The third question in the case is whether the Constitution allows Congress to give the SEC’s administrative law judges protection from removal. Here, the key authority is the Supreme Court’s 2010 decision in Free Enterprise Fund v. Public Company, which held that Congress impermissibly limited the president’s executive power when it imposed “multiple” levels of tenure protection – so that an inferior officer could only be removed for cause by a principal officer, who could also be removed only for cause. Chief Justice John Roberts reasoned for the majority in that case that the president “cannot” fulfill his constitutional obligation to “‘take Care that the Laws be faithfully executed’ if he cannot oversee the faithfulness of the officers that execute them.”

Jarkesy has a simple argument here, because it is difficult to contest that the SEC’s administrative law judges have two tiers of protection against removal without cause. The government’s argument, essentially, is that Free Enterprise Fund applies only to “policymakers,” not to “adjudicators.” Roberts left that question open in Free Enterprise Fund, and the government pleads for an answer in its favor in this case, arguing that Congress surely can offer the agency more “leeway” to protect adjudicators. In substance, it is a plea that the administrative state requires tenure protection for adjudicators to provide any semblance of a fair process for adjudicating claims brought by the agency. The government pointedly notes that administrative law judges have had such protections since the original adoption of the Administrative Procedure Act shortly after World War II, and it decries the widespread disruption affirmance would wreak.

The summary above should make it clear that a complete affirmance of the 5th Circuit’s decision probably would be the most important administrative law decision of the last half-century. That suggests of course a pretty strong likelihood that several of the justices will be reluctant to go nearly so far. The argument should give a lot of insight as to which of the three challenges is likely to survive.

Recommended Citation: Ronald Mann, Supreme Court to consider multi-pronged constitutional attack on SEC, SCOTUSblog (Nov. 27, 2023, 11:30 AM),