The U.S. Supreme Court recently delivered a significant ruling that affects the U.S. Securities and Exchange Commission (SEC) and its enforcement processes. The 6-3 decision concluded that the SEC’s use of in-house judges infringed upon the constitutional right to a jury trial.
Prior to this ruling, the SEC had the authority to utilize administrative law judges internally to handle civil securities fraud cases and impose financial penalties. This practice was established in 2010 following the Dodd-Frank Act, which aimed to address issues stemming from the 2008 financial crisis.
With the Supreme Court’s decision, the SEC is now required to rely solely on federal trial courts for enforcing securities laws and pursuing financial penalties, limiting its enforcement capabilities.
The ruling’s implications extend beyond the SEC, potentially impacting other federal agencies that have historically employed internal processes for enforcement. One such agency is the National Labor Relations Board (NLRB), which may face similar challenges in light of this decision.
Chief Justice John Roberts, in the majority opinion, emphasized the importance of the right to a jury trial, stating that a defendant accused of fraud should have the opportunity to be tried by a jury and a neutral adjudicator. Justice Roberts highlighted the constitutional principle of separation of powers as a key factor in the decision.
Associate Justice Neil Gorsuch, in a concurring opinion, underscored the violation of individual liberty inherent in the SEC’s enforcement procedures, emphasizing the need for independent judges and due process.
However, Associate Judge Sonia Sotomayor dissented, characterizing the ruling as a ‘power grab’ and expressing concerns about the judiciary dictating the structure of agencies and their enforcement mechanisms. Sotomayor pointed out the potential benefits of the SEC’s internal process, such as efficiency, expertise, and transparency.
The case that led to this ruling, SEC vs. Jarksey, involved allegations of securities law violations against hedge fund manager George Jarkesy Jr. and his firm, Patriot28 LLC. The dispute over the SEC’s internal proceedings ultimately reached the Supreme Court, culminating in the recent decision.