U.S. Supreme Court Says No More In-House Tribunals for the SEC, Other Federal Regulators

As an analyst, I’ve observed that the Securities and Exchange Commission (SEC) has had the option to manage civil securities fraud allegations through an internal process led by administrative law judges instead of filing a lawsuit in federal court. This authority was bestowed upon the SEC with the enactment of the Dodd-Frank Act in 2010, following the global financial crisis of 2008.

Following the Supreme Court’s ruling, the Securities and Exchange Commission (SEC) will have no choice but to depend exclusively on federal trial courts for enforcing securities laws and imposing monetary sanctions.

As a crypto investor, I’m concerned about the potential impact of the recent court decision on regulatory bodies beyond the Securities and Exchange Commission (SEC). For instance, the National Labor Relations Board (NLRB) could be affected in a significant way. Historically, this agency has relied on internal enforcement processes to ensure compliance with labor laws. However, if the SEC’s enforcement abilities are weakened, it might set a precedent for other agencies facing similar challenges. This could potentially undermine the effectiveness of their internal enforcement mechanisms and make it more difficult for them to protect consumers and maintain fair business practices within their respective domains.

In his leading role, Chief Justice John Roberts penned down the judgment, stating that a defendant in a fraud case is entitled to a trial by a impartial judge and a jury composed of their peers.

“Instead of acknowledging the constitutional right, the dissent argues for granting Congress the power to combine the functions of prosecutor, judge, and jury within the Executive Branch. This goes against the Constitution’s separation of powers principle, which demands a clear distinction between these roles.”

In his separate opinion, Justice Neil Gorsuch contended that the Securities and Exchange Commission’s power to impose penalties on individuals without a jury trial or an impartial judge, using unfamiliar court procedures, infringes upon personal freedoms.

In confirming these points once again, the Court doesn’t deprive the SEC of substantial authority and options, according to Gorsuch’s statement.

In her opposing view, Judge Sonia Sotomayor characterized the decision as an overreach and expressed concern, stating, “This judgment represents a significant intrusion into the domain of other branches, unsettling the balance of powers in our system.”

In her writing, Justice Sotomayor explained that the Court provides guidance to Congress on organizing agencies effectively, protecting the public interest, and establishing mechanisms for enforcing government-granted rights. There are several advantages to having a system like the SEC: it can lead to more efficient and knowledgeable outcomes than jury trials in federal court; it ensures transparency and rational decision-making; and it results in consistent, foreseeable outcomes as well as increased political responsibility.

I analyzed a case, SEC versus Jarkesy, which commenced in 2013. The Securities and Exchange Commission (SEC) accused me, George Jarkesy Jr., and my firm, Patriot28 LLC, of infringing upon federal securities laws by misrepresenting the assets of our two hedge funds.

Instead of taking Jarkesy to federal court initially, the dispute was first handled by an administrative law judge. Jarkesy challenged this decision in 2022, and a New Orleans appeals court declared the SEC’s proceedings unconstitutional. The SEC then petitioned the Supreme Court to review the case, which they did last November.