With the end of the Supreme Court’s term in June, most eyes have been on the release of the last remaining merits decisions. In the midst of issuing the final opinions of the term, the Court also granted certiorari on a number of cases, one of which—Securities and Exchange Commission v. Jarkesy—might have implications for the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).

In Jarkesy, the SEC sued talk radio host George Jarkesy and his two hedge funds (collectively, “the Jarkesy Parties”) through an administrative action before an SEC administrative law judge (ALJ). After an evidentiary hearing, the ALJ determined that the Jarkesy Parties committed securities fraud, and the Commission affirmed the ALJ’s decision, imposing a civil penalty, disgorgement of ill-gotten gains, and enjoining Jarkesy from various securities industry activities. The Jarkesy Parties proceeded to appeal the Commission’s decision to the U.S. Court of Appeals for the Fifth Circuit. The Jarkesy Parties appealed on several constitutional grounds previously raised and denied during the ALJ and Commission proceedings:

  • First, that proceeding before an SEC ALJ violates their Seventh Amendment right to a jury trial
  • Second, that Congress unconstitutionally delegated legislative powers to the SEC by allowing it to bring enforcement actions either in federal court or within the agency
  • Third, that the statutory removal restrictions on SEC ALJs unconstitutionally restricts presidential control

On May 18, 2022, the Fifth Circuit issued its opinion holding that the SEC suffers the three constitutional infirmities alleged. First, the Fifth Circuit determined that the Jarkesy Parties were deprived of their Seventh Amendment right to a jury trial. Since the right to a jury trial attaches to “traditional actions at law” versus cases in equity, the Court reasoned that civil penalties can only be enforced in courts of law, thus carrying a right to a jury trial.

Second, the Fifth Circuit held that Congress unconstitutionally delegated legislative powers to the SEC without an intelligible principle. Here, the Court reasoned that because the SEC has the unfettered discretion to choose where to bring enforcement actions for monetary penalties, it has the power to determine which actions are entitled to be subject to the jurisdiction Article III courts, a wholly legislative authority. The Court determined that this is further exacerbated by the lack of an “intelligible principle” to guide the SEC as to when cases should be brought in federal court or in ALJ proceedings.

Finally, the Court reasoned that because ALJs “perform substantial executive functions,” the two layers of for-cause removal restrictions are an unconstitutional impediment to the Article II requirement that the president must “take Care that the Laws be faithfully executed.”

The SEC’s petition for a writ of certiorari asks the Supreme Court to consider all three of the Fifth Circuit’s constitutionality rulings. In granting cert, the Court did not limit the questions it would review, and the case will be placed on the October Term 2023 calendar. Given that the SEC and FTC have similar (though not exactly the same) structures, the potential ramifications are significant.   

We’ve covered at least one other case where Axon made the same removal restrictions argument against the FTC. Though that case ended up at the Supreme Court on procedural grounds, the Court held that collateral challenges to an administrative proceeding can be brought in federal court before the administrative proceeding is decided.

The Supreme Court’s ruling in Jarkesy may very well be a harbinger of similar challenges to the FTC’s structure. Furthermore, the CFPB, like the SEC but not the FTC, has the ability to seek and award monetary penalties in administrative actions, and the Supreme Court’s ruling on the Seventh Amendment issue would seem to apply to the CFPB as well.   

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