Supreme Court doubts agencies’ role as judge and jury
The Supreme Court Questions SEC’s Powers in Case That Could Shake Up the Administrative State
The Republican-appointed majority on the Supreme Court is showing skepticism towards the Securities and Exchange Commission’s (SEC) ability to conduct in-house adjudications without juries. This case, involving hedge fund manager George Jarkesy, has the potential to disrupt the administrative state.
Oral Arguments and Favorable Ruling
Jarkesy, who was fined and barred from the industry by the SEC for securities fraud, appealed to the federal courts to avoid having his case decided by commission-appointed administrative law judges. The U.S. 5th Circuit Court of Appeals ruled in his favor, stating that the SEC’s in-house proceedings violated his Seventh Amendment right to a jury trial.
During the oral arguments, Chief Justice John Roberts expressed curiosity about the increasing influence of federal agencies like the SEC on daily life. Justice Neil Gorsuch also voiced skepticism, stating that this is not the same SEC as in the past.
Potential Impact and Criticisms
If the Supreme Court affirms the 5th Circuit’s ruling, it could have implications for enforcement actions against brokers and investment advisers, potentially causing delays and complications. Critics argue that the authority of administrative law judges gives the SEC an unfair advantage in cases.
Brian Fletcher, representing the SEC, argued that civil penalties through in-house adjudications have been permissible for over 100 years. Justice Sonia Sotomayor supported the government’s position, emphasizing the need to protect the public interest in administrative proceedings.
The Founders’ Intent and Questions for the Supreme Court
Jarkesy’s attorney, Michael McColloch, argued that the founders intended for any defendant, regardless of the agency involved, to have a public trial. The Supreme Court will have to answer three questions in this case: whether the SEC’s power to initiate administrative enforcement proceedings violates the Seventh Amendment, whether the SEC’s ability to choose between administrative and district court actions violates the nondelegation doctrine, and whether Congress was wrong in granting for-cause removal protection to administrative law judges.
Jarkesy expressed gratitude to the justices for taking his case and emphasized the need for a fair and impartial hearing.
What is the key issue at stake in the Supreme Court case involving the SEC’s use of in-house administrative proceedings?
For allegedly defrauding investors, appealed his case to the Supreme Court. His appeal challenges the SEC’s use of in-house administrative proceedings rather than pursuing cases in federal court with a jury. The key issue at stake is whether the SEC’s administrative law judges (ALJs) have too much power without adequate oversight.
During the oral arguments, Justice Elena Kagan remarked that the SEC’s in-house system gives the agency “enormous power” as the ALJs can issue fines and impose lifetime bans on individuals from certain industries. This concern was echoed by Chief Justice John Roberts, who questioned whether the ALJs are considered “inferior officers” who should be subject to presidential appointment and Senate confirmation.
The Supreme Court’s current conservative majority seems sympathetic to Jarkesy’s argument. Justice Neil Gorsuch suggested that the SEC’s in-house system violates the Constitution’s Appointments Clause, which requires “inferior officers” to be appointed by the President, Courts of Law, or Heads of Departments. Justice Brett Kavanaugh expressed concerns about the concentration of power in the ALJs and whether they are exercising executive power without proper oversight.
If the Supreme Court rules in favor of Jarkesy, it could have significant implications for the administrative state. The decision could diminish the SEC’s authority to resolve enforcement cases internally without a jury. This could lead to an increase in cases being litigated in federal court, potentially overwhelming an already burdened judiciary.
The potential impact is not limited to the SEC alone. The decision could impact other federal agencies that rely on administrative proceedings, such as the Federal Trade Commission and the Federal Communications Commission. The administrative state, which allows agencies to wield significant power through regulatory actions, could face a seismic shift in its modus operandi.
Implications and Potential Reforms
If the Supreme Court requires the SEC to litigate cases in federal court with a jury, it may lead to a more transparent and accountable process. The involvement of a jury could provide a stronger check on the SEC’s power and ensure fairer outcomes for individuals accused of wrongdoing.
Additionally, the ruling could prompt discussions of reforms to the administrative state. Critics argue that administrative agencies have amassed excessive power, often not subject to sufficient oversight or accountability. This case presents an opportunity for lawmakers and policymakers to reassess the balance of power between administrative agencies, the judiciary, and other branches of government.
Some potential reforms could include limiting the authority of administrative agencies, implementing stricter standards for appointing ALJs, or requiring agency actions to go through federal court rather than internal proceedings. These changes would aim to ensure a fairer and more transparent forum for individuals facing enforcement actions by federal agencies.
Conclusion
The Supreme Court’s examination of the SEC’s powers in this case highlights the potential shake-up of the administrative state. The outcome could have far-reaching consequences for the SEC and other federal agencies, as well as for the individuals subject to their enforcement actions. The decision could lead to significant changes in how administrative agencies adjudicate cases and could spark broader discussions on reforming the administrative state. As the case continues to unfold, it will be closely watched by legal scholars, policymakers, and those affected by the power of administrative agencies.
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