On 27 June 2024, in a ruling much-anticipated by the securities industry and other similarly regulated industries, the Supreme Court (the Court) held in SEC v. Jarkesy that when the Securities and Exchange Commission (SEC) seeks civil penalties against a defendant based on claims of securities fraud, the Seventh Amendment entitles the defendant to a jury trial. This means that provisions of the securities laws that permitted the SEC to compel adjudication of such claims before an administrative tribunal—where there are no juries—violate the Constitution. The SEC must instead file such claims in federal district court.

Although the SEC has increasingly opted to file fraud cases in court over the past several years in response to the many challenges to its administrative proceedings, the effects of Jarkesy on the SEC’s ability to drive its enforcement agenda (and enforcement statistics) are potentially significant. Moreover, other federal agencies that utilize in-house administrative proceedings will be similarly constrained and are likely to face future constitutional challenges, leaving open questions regarding the reach of the decision.

The SEC’s Administrative Tribunal

The federal securities laws (namely, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940) give the SEC the authority to enforce their respective antifraud provisions either in an in-house administrative proceeding or by filing a lawsuit in federal district court. The SEC originally could only seek civil penalties in federal court, but the Dodd-Frank Act subsequently expanded the jurisdiction of the SEC’s in-house tribunal by allowing the SEC to also seek civil penalties there.

With the statutory power to determine the hearing forum for an enforcement action, the SEC could unilaterally set the procedural parameters for the adjudication. In actions filed in federal district court, the defendant is entitled to a jury trial presided over by an Article III judge, and federal procedural and evidence rules apply. In contrast, if the SEC decides to adjudicate a case internally, an administrative law judge (ALJ) employed by the SEC serves as factfinder, SEC procedural rules govern, and appeals are first made to the SEC itself. 

Jarkesy’s Curtailing of the SEC’s Use of Its Administrative Courts

In 2013, the SEC initiated an enforcement action seeking civil penalties against George Jarkesy and his management firm for allegedly misleading investors regarding aspects of certain funds he managed, including the funds’ strategies, service providers, and value, in violation of the antifraud provisions of the federal securities laws. The SEC opted to adjudicate the matter through its own administrative forum, as permitted under the Dodd-Frank Act. After the SEC ALJ ruled against Jarkesy and imposed a US$300,000 civil penalty, Jarkesy petitioned for judicial review, arguing that the SEC’s decision to adjudicate the matter internally deprived him of his Seventh Amendment right to a jury trial. 

The Fifth Circuit Court of Appeals agreed with Jarkesy, and the Court affirmed, holding that the Seventh Amendment’s right to a trial by jury for all suits “at common law” extends to civil penalty claims asserted by the SEC under the antifraud provisions of the federal securities laws. Specifically, the Court held that the Seventh Amendment applies to nonequity and nonadmiralty claims created by a federal statute if they are “legal in nature,” which depends on (1) whether the cause of action replicates a common law claim and (2) whether the remedy it provides is one traditionally obtained in a court of law. 

The Court held that both factors establish that the securities antifraud provisions are “legal” in nature. Focusing first on remedy—which the Court found “all but dispositive”—the Court explained that civil penalties are (like money damages) designed to punish or deter the wrongdoer, as the SEC is not required to return penalties to victims and both the availability and size of the civil penalty require consideration of the defendant’s culpability, deterrence, and recidivism. Returning to the first factor, the Court also held that a cause of action for securities fraud targets the same conduct prohibited by common law fraud—misrepresentation or concealment of material facts—further cementing that such claims are “legal” and therefore subject to the Seventh Amendment.

The Court rejected the SEC’s attempt to call upon the “public rights” exception to the Seventh Amendment, which allows Congress to assign certain matters for decision by federal agencies rather than juries when they historically could have been decided exclusively by the executive or legislative branches (e.g., cases involving Indian tribes, administration of public lands, public benefits, and patent rights). Although the Court declined to take the opportunity to “definitively explain[] the distinction between public and private rights,” it held that if the substance of the suit is to pursue “traditional legal claims” akin to those at common law, then regardless of its statutory foundation the public right exception does not apply.

The Court did not take up other constitutional issues raised by Jarkesy, including the nondelegation doctrine, which will likely get additional attention in coming years with the Court’s overturning of Chevron (see companion alert on that case here). 

Key Takeaways and Implications for the Regulated Entities

As a result of this decision, the SEC will no longer be able to force defendants facing securities fraud claims that seek civil penalties to defend themselves before an agency ALJ. There are several implications of this ruling that stand out as its effects play out over time. 

First, although the SEC has moved away from relying on its administrative proceedings for fraud claims in recent years, the practical ramifications for the SEC and other agencies could be meaningful. Administrative proceedings can be more cost-effective than federal court review (for both the government and defendants), so this ruling, alongside the elimination of Chevron deference, will put pressure on limited government resources in a way that may cause agencies to be more strategic—and possibly more selective—in their enforcement decision-making. Conversely, the SEC may bring more contested actions in federal court, thereby increasing the time it takes for resolution.

Second, Jarkesy will likely extend to other agencies enforcing similar antifraud provisions through administrative proceedings, such as the Federal Energy Regulatory Commission (FERC) market manipulation rule. 

Finally, the decision will inevitably spur future challenges to other federal agency enforcement efforts relating to claims with ties to the common law or to claims for civil penalties. In holding that securities antifraud enforcement requires a jury trial, the Court distinguished those common law-derived claims from violations of federal regulations that instead resemble detailed technical codes addressing matters specific to a regulated industry. Future litigation can be expected to test where other individual regulatory provisions fall on this spectrum. For example, the Environmental Protection Agency (EPA) regularly uses administrative proceedings to pursue violations of various environmental laws (e.g., Clean Air Act, Clean Water Act), a practice that may come into question under Jarkesy. And as the dissenting Justices warned, certain civil penalties may no longer be enforceable at all. While some agencies can seek civil penalties through administrative proceedings or in federal court (e.g., the SEC, EPA, and the Consumer Financial Protection Bureau), others lack the statutory authority to file suit in federal court and instead must rely exclusively on administrative proceedings. 

Regulated parties and their counsel will have to look closely at how this ruling may carry over to other laws enforced by the SEC and other federal agencies on a statute-by-statute basis as further litigation inevitably unfolds.