Supreme Court Looks Poised to Curb SEC Enforcement Powers
George Jarkesy, a former conservative radio talk show host and hedge fund manager, recently took the SEC to court.
The U.S. Securities and Exchange Commission, or SEC, is an independent federal government agency responsible for protecting investors, maintaining fair and orderly markets, and facilitating capital formation. The SEC is an important agency that plays a vital role in protecting investors and maintaining the integrity of the securities markets. The SEC's work helps to ensure that the securities markets are fair, orderly, and efficient and that investors are protected from fraud and manipulation.
SEC Does Its Job, Gets Sued
The SEC suspected Jarkesy of some fraud and conducted an investigation. After an in-house evidentiary hearing conducted by an administrative law judge, the agency fined Jarkesy $300,000, ordered him to pay back nearly $700,000 in illegal profits, and barred him from future securities activity.
Jarkesy, unsurprisingly, wasn't happy about it. Now, Jarkesy's case has made it up to the Supreme Court, in a case that could spell dire consequences for most other federal agencies in the country. Let's take a look at the issues.
Efficient or Unconstitutional?
There were three issues before SCOTUS in the case. The first question presented to the court was whether statutory provisions that empower the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment of the U.S. Constitution. If you're racking your brain trying to remember just what the heck the Seventh Amendment says, don't worry, we've got you covered.
The Seventh Amendment does two major things related to jury trials. First, it guarantees the right to a jury trial in "suits at common law" (many civil cases) where the amount in controversy exceeds $20 (remember, its predecessor, the Sixth Amendment, gives the right to a jury in criminal trials). The Seventh Amendment also prohibits courts from reexamining the facts of a case that has already been tried by a jury. In general, this amendment is an important safeguard against the abuse of government power. It ensures that individuals have a right to have their cases decided by a jury of their peers, rather than by a government bureaucrat. This is particularly important in cases where the government is seeking to impose significant penalties, such as monetary penalties or injunctive relief.
How does the Seventh Amendment relate to the SEC? SEC enforcement actions seeking monetary penalties are generally considered to be "suits at common law" under the Seventh Amendment, meaning that defendants in these cases have a right to a jury trial. This includes cases brought by the SEC to enforce the securities laws and to seek penalties for violations of those laws. SEC administrative actions that seek to impose civil penalties may also be subject to the Seventh Amendment, depending on the nature of the penalty and the specific procedures used in the administrative proceeding. But there's been a good deal of uncertainty about this issue and courts have not yet definitively resolved it.
The Nondelegation Doctrine Once Again
A second issue in the case was 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. The nondelegation doctrine is a constitutional principle that limits Congress's ability to delegate its legislative powers to other branches of government or private entities. It ensures that Congress retains ultimate responsibility for making laws and that other branches of government do not exercise undue power.
Removing Federal Officers Without Cause
The third and final issue before SCOTUS is whether Congress violated Article II of the Constitution by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection. Article II, Section 2, Clause 2, grants the President the power to appoint and remove federal officers with the advice and consent of the Senate. However, the Constitution does not explicitly address the extent of the President's power to remove federal officers, leaving room for debate and judicial interpretation.
The concept of "for-cause removal" refers to the restriction on the President's power to remove federal officers only for specific reasons or causes, rather than at will. This limitation on the President's removal power is derived from the principle of separation of powers and the need to protect the independence of certain federal agencies and officials. The principle of for-cause removal serves as an important safeguard against potential abuses of executive power and helps to maintain the balance of powers within the federal government.
The Supreme Court has addressed the issue of for-cause removal in several landmark cases. Over time, the Court has established that the President's power to remove federal officers is not absolute and that Congress can impose for-cause removal restrictions on certain officers to ensure their independence. But the extent to which Congress can restrict this remains a subject of debate and ongoing legal challenges.
Seventh Amendment Takes Center Stage
Last Wednesday, the focus of the bench seemed to be on the Seventh Amendment issue. The six conservative justices seemed skeptical that an administrative agency could constitutionally impose penalties without offering the option of a jury trial. Chief Justice John Roberts said: "It seems to me that undermines the whole point of the constitutional protection in the first place."
As the attorney for the SEC pointed out, our country has a long history – almost a decade – of delegating core executive enforcement powers to agencies, including the power to impose penalties for violations of law. He pointed out that a ruling that makes the SEC's administrative enforcement powers unconstitutional would also potentially apply to 34 other federal agencies. These include the Social Security Administration, Food and Drug Administration, and the National Transportation Safety Board.
In other words, this SCOTUS ruling could have widespread effects well beyond just the SEC. It could lay the groundwork for a whole smorgasbord of federal agencies getting one hand tied behind their backs. Or at least, since the imposition of a jury trial for each time an agency wants to impose a penalty is a big ask, it could certainly slow things down for an already cumbersome federal government. We'll have to wait and see how SCOTUS rules on this case.
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