US Supreme Court Case Puts SEC’s In-House Enforcement Powers in Jeopardy

Challenges to the U.S. Securities and Exchange Commission’s authority to combat fraud are increasingly a subject of debate. On Wednesday, the Supreme Court will hear an appeal by President Joe Biden’s administration regarding a lower court’s decision limiting the SEC’s ability to enforce securities laws through its internal tribunal system. This case involves George Jarkesy, a hedge fund manager fined and banned by the SEC for securities fraud.

Critics argue that the SEC’s internal tribunal system gives it an unfair advantage by prosecuting cases before its own judges rather than before a federal court jury. Supporters of the legal challenge, including conservative and business groups, have raised concerns about the regulatory reach of the federal “administrative state” across various sectors, such as energy, the environment, climate policy, workplace safety, and financial regulation.

Legal experts say that if the SEC’s power to penalize misconduct is weakened, it may be more difficult to remove bad actors from the securities industry. Professor Benjamin Edwards of the University of Nevada, Las Vegas, emphasized the importance of a robust enforcement structure in maintaining trust in the financial system.

The SEC, responsible for protecting investors under U.S. laws, has faced a series of legal challenges, signaling skepticism towards federal regulatory power. In 2018, the court criticized the selection process for in-house judges, and recently made it easier for targets of agency actions to challenge in federal court.

In a separate case, the Supreme Court is poised to decide if the Consumer Financial Protection Bureau’s funding structure aligns with the U.S. Constitution, which could overturn a long-standing precedent supporting federal agencies in regulatory actions.

The SEC began investigating Jarkesy in 2011, leading to a series of charges before an in-house judge. Ultimately, the Fifth Circuit overturned the SEC’s decision, citing concerns about the right to a jury trial and the agency’s choice between in-house or federal court proceedings, as well as the job protections for its administrative judges. Another case challenging the structure of the Financial Industry Regulatory Authority (FINRA) is currently before an appellate court and could reach the Supreme Court.

Amid frustration in the business community with the SEC’s aggressive fines, UCLA School of Law expert James Park suggested that the agency’s discretion may be seen as unchecked in the current system.

(Reporting by Andrew Chung; Editing by Will Dunham)


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