Fifth Circuit holds the SEC s administrative adjudications to be unconstitutional | Davis Polk
On May 18, 2022, the Fifth Circuit ruled in Jarkesy v. SEC that SEC administrative proceedings are unconstitutional on three independent bases.
- Judge Elrod, writing for the court in a 2 1 decision, first held that the SEC s proceedings violate the Seventh Amendment right to a civil jury. The court reasoned that actions for monetary penalties under the federal securities laws are sufficiently similar to common law fraud actions and sufficiently involve private rights as opposed to public rights that the targets of such actions are entitled to have a jury trial.
- Second, the Fifth Circuit ruled that Congress unconstitutionally delegated legislative power to the SEC by failing to provide the SEC with an intelligible principle to guide its decisions whether to file cases as federal court actions or internal administrative proceedings. The court reasoned that the mode of determining which cases are assigned to administrative tribunals is within the control of Congress, not the executive branch, and the relevant statutes underpinning the SEC s authority do not provide any guidance on how to make that determination.
- Finally, the court held that statutory removal restrictions for SEC ALJs are also unconstitutional. The opinion extended the reasoning of two U.S. Supreme Court cases: Lucia v. SEC, which held that SEC ALJs are inferior executive officers, and Free Enterprise Fund v. PCAOB, which held that two layers of for-cause protection from the President s power to remove inferior executive officers were unconstitutional. The Jarkesy majority similarly held that ALJs cannot be doubly insulated from the President s removal power, even if the ALJs are functionally exercising adjudicatory rather than executive power. As a result, the Fifth Circuit vacated the SEC ALJ s decision that George Jarkesy Jr. and investment adviser Patriot 28 LLC committed securities fraud.