The U.S. Supreme Court has ruled 6-3 to limit the enforcement powers of the SEC, declaring the agency's use of in-house judges unconstitutional.
The U.S. Supreme Court has ruled 6-3 to limit the enforcement powers of the U.S. Securities and Exchange Commission (SEC), declaring the agency's use of in-house judges unconstitutional. The ruling, delivered on Thursday, marks a significant shift in how the SEC will be able to pursue civil securities fraud cases, according to a CoinDesk article.
For years, the SEC had the option to use internal administrative law judges to handle securities fraud accusations and impose penalties, a process established under the Dodd-Frank Act in 2010 following the 2008 financial crisis. However, with the Supreme Court's decision, the SEC is now compelled to bring these actions to federal trial courts.
Chief Justice John Roberts, writing for the majority, stated, "A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator." He further criticized the dissent's stance, asserting that allowing Congress to centralize the prosecutorial and judicial roles within the executive branch undermines the Constitution's separation of powers.
Associate Justice Neil Gorsuch, concurring with the majority, emphasized the importance of individual liberty and highlighted that the ruling does not leave the SEC powerless, but rather reaffirms traditional legal procedures. Conversely, Associate Judge Sonia Sotomayor, authoring the dissent, lamented the decision as part of a concerning pattern and defended the SEC's internal process as potentially offering benefits such as efficiency, expertise, and uniformity.
The case that led to this ruling, SEC vs. Jarksey, began in 2013 when hedge fund manager George Jarkesy Jr. and his firm were accused by the SEC of misrepresenting assets. Instead of proceeding in federal court, the case was initially heard by an administrative law judge. After an appeal in 2022, a New Orleans-based court deemed the SEC's proceedings unconstitutional, prompting the appeal to the Supreme Court, where arguments were heard last November.
The implications of the Supreme Court's decision extend beyond the SEC, potentially affecting other federal agencies like the National Labor Relations Board (NLRB), which also uses internal adjudication processes. The decision imposes a significant limitation on federal agencies' ability to internally adjudicate enforcement actions.
