The U.S. Supreme Court made a significant decision on Thursday that will impact the way the U.S. Securities and Exchange Commission (SEC) enforces securities laws. In a 6-3 vote, the Supreme Court ruled against the SEC’s use of in-house judges, stating that it violates the constitutional right to a jury trial.
Previously, the SEC had the authority to handle civil securities fraud accusations and impose financial penalties through an internal process overseen by administrative law judges, rather than going to federal court. This power was granted to the SEC in 2010 by the Dodd-Frank Act following the 2008 financial crisis.
With the Supreme Court’s ruling, the SEC will now have to rely solely on federal trial courts to enforce securities laws and seek financial penalties. This decision not only impacts the SEC but also sets a precedent that could affect other federal agencies that use internal processes for enforcement, such as the National Labor Relations Board (NLRB).
Andrew Pincus, a partner at Mayer Brown, highlighted the broader implications of the Supreme Court’s decision, stating that many other federal agencies will now have to try enforcement actions before an independent federal judge and jury. This eliminates the “home court advantage” that agencies have enjoyed for decades.
Chief Justice John Roberts emphasized the importance of the right to a jury trial in the majority opinion, stating that defendants facing fraud suits have the right to be tried by a jury of their peers before a neutral adjudicator. Associate Justice Neil Gorsuch also weighed in, arguing that the SEC’s authority to penalize citizens without a jury or independent judge violates individual liberty.
On the dissenting side, Associate Judge Sonia Sotomayor criticized the ruling as a “power grab” by the Court and expressed concerns about the impact on the separation of powers. She argued that Congress has valid reasons for structuring agencies like the SEC in a way that may yield benefits over jury trials in federal court.
The case that led to this decision, SEC vs. Jarksey, began in 2013 when the SEC accused hedge fund manager George Jarkesy Jr. and his firm of violating federal securities laws. The case was initially tried before an administrative law judge, but a New Orleans-based appeals court ruled in 2022 that the SEC’s proceedings were unconstitutional.
This ruling marks a significant shift in the way the SEC and other federal agencies handle enforcement actions, emphasizing the importance of the right to a jury trial and ensuring impartial adjudication in matters of securities law.