Last Friday, the U.S. Supreme Court granted the SEC’s petition for certiorari in Jarkesy v. Securities and Exchange Commission, a case in which the respondents are challenging the constitutionality of the SEC’s use of administrative law judges (ALJs).  The outcome of the case could have significant implications for the use of ALJs by all federal agencies, including the CFPB, FTC, and federal banking agencies.

The underlying case in Jarkesy involves an SEC investigation that resulted in an administrative action in which the SEC alleged that the respondents had committed securities fraud and sought both monetary and equitable relief.  After an SEC ALJ’s finding that the respondents had committed securities fraud was affirmed the SEC, the respondents sought review by the Fifth Circuit.  A divided 3-judge Fifth Circuit panel ruled that the proceedings suffered from three constitutional defects, vacated the SEC’s decision, and remanded the matter to the SEC for further proceedings.

The SEC’s certiorari petition presents the following questions:

  • Whether the statutory provision that empowers the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violated the Seventh Amendment of the U.S. Constitution.
  • Whether statutory provisions that authorized the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
  • Whether Congress violated Article II of the Constitution by granting for-cause removal protection to ALJs in agencies whose heads can only be removed by the President for cause.

The Supreme Court will hear Jarkesy in its Term that begins in October 2023.