High Court Jarkesy Decision Will Change SEC Enforcement Process

In SEC v. Jarkesy, the US Supreme Court held that a defendant has a constitutional right to litigation in a federal court with the possibility of a jury when the Securities and Exchange Commission seeks civil monetary penalties for securities fraud. For such cases, the SEC may not use its internal court-like system called administrative proceedings, or APs, which don’t use juries and differ in other ways from federal court proceedings.

The decision effects a major change to the statutory authority and historical practice of the SEC. It did so to protect personal personal liberty and property interests from the concentration of power in government agencies.

Jarkesy also is noteworthy because its rationale could be extended to other claims and remedies in SEC enforcement cases and to APs at other agencies permitted to impose civil penalties.

In an opinion by Chief Justice John Roberts joined by five other justices, the Supreme Court held that SEC charges under the anti-fraud provisions of the securities laws implicate the civil jury trial right in the Seventh Amendment because the provisions “replicate common law fraud” and common law claims must be heard by a jury.

An important factor for the court was that the SEC sought civil monetary penalties as relief. Civil penalties are designed to punish, and only courts of law issued monetary penalties as a form of punishment.

In addition, the securities fraud charges against Jarkesy incorporated prohibitions from common law fraud.

The majority next discussed whether the public rights doctrine applied to permit Congress to allow an SEC AP to decide a fraud charge for penalties. The public rights doctrine isn’t well-settled, but in general creates an exception from the general rule that courts must decide traditional legal claims to protect the role of the federal judiciary under Article III.

Congress may not withdraw from resolution by the federal courts any matter involving rights and remedies handled by a suit at common law, in equity, or admiralty but could allow executive branch officials to reach initial decisions in cases concerning public rights, such as the granting of public benefits.

The majority concluded that the public rights doctrine didn’t cover the SEC claims against Jarkesy. The claims were akin to suits at common law for the reasons the Seventh Amendment applied.

In the majority’s view, the public rights doctrine didn’t always except civil enforcement by the government. In this case, the object of the SEC was “to regulate transactions between private individuals interacting in a pre-existing market.”

Concern about personal liberty interests in government enforcement cases was an undercurrent in the majority opinion. The majority preserved a defendant’s trial by jury before a neutral adjudicator in accordance with the separation of powers in the Constitution and contrary to the concentration of “the roles of prosecutor, judge, and jury in the hands of the Executive Branch.”

The result of Jarkesy is to deprive the SEC of using APs for an important part of its enforcement docket: claims for monetary penalties for securities fraud.

The SEC probably will be able to shift those cases to federal court without much disruption, but the reverberations from Jarkesy are likely to be wider.

The court’s decision to strike down the use of APs for certain enforcement and penalty cases is consequential for other administrative agencies such as the Commodity Futures Trading Commission, Consumer Financial Protection Bureau, and Federal Communications Commission. More than two dozen agencies may impose civil penalties in APs.

Defendants in enforcement cases are likely to test the boundaries of Jarkesy at the SEC and other agencies.

A decision as significant as Jarkesy creates new questions. For example, to be entitled to litigation in federal court:

• Should the substance and remedy of an agency claim be associated with a common law court, or is one or the other element sufficient? In Jarkesy, the majority emphasized the remedy of civil penalties but found both elements present.
• How closely similar to a common law claim must the agency charge be? Would similarity to a tort cause of action be enough?
• Does a remedy other than monetary penalties suffice? What if an agency has authority to seek relief to compensate victims?

Even with the blurry boundaries, Jarkesy makes only a limited modification of the administrative state. It won’t interfere with agency decisions on immigration, social security, or veterans’ benefits.

Further, it should strengthen confidence in the operations of agencies that have enforcement powers because it says those agencies may no longer judge some of their own cases. They must support a case for penalties from securities fraud with evidence and legal argument persuasive enough to convince an impartial and objective decision-maker.

The case is SEC v. Jarkesy, U.S., No. 22-859, 6/27/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Vollmer is a scholar with the Mercatus Center at George Mason University, a former deputy general counsel of the SEC, and former professor of law, general faculty, University of Virginia School of Law.

He filed an amicus curiae brief in Jarkesy arguing that the President doesn’t need a reason to remove an SEC commissioner.

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