July 22, 2024
What Happened?
On June 27, 2023, in SEC vs. Jaresky, the U.S. Supreme Court held that a jury trial is required under the Seventh Amendment in securities fraud cases brought by the SEC. If the SEC seeks civil penalties, like monetary fines, then it lacks the authority to initiate administrative proceedings. Instead, it must file a lawsuit in federal court, where it would argue for such penalties before a jury.
Prior to the decision, the SEC had broad power to issue civil penalties and sanctions, and to permanently bar participants from SEC-regulated activity through administrative proceedings. In , an SEC administrative law judge (“ALJ”) found the defendant liable for securities fraud and ordered several remedies, including civil penalties, in an administrative proceeding. On appeal, the U.S. Supreme Court held in a 6-3 decision that “[w]hen the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.”
This decision means that the SEC can no longer use these “in-house” proceedings to seek monetary fines. Likewise, the use of administrative proceedings by any other federal agency will be similarly narrowed. This will be a change for many agencies, since ALJs act as both judge and jury. Fact-finding, discovery disputes, and evidentiary questions are all decided by the ALJ with the agency’s rules governing the proceeding. By contrast, in federal court, where Article III judge presides, the federal rules of evidence and rules of discovery govern the trial, and a jury serves as factfinder.
What does this mean for me?
Federal agencies that want to bring charges of civil penalties will now have to go through the time and effort of a jury trial. However, the SEC is not likely to be slowed down very much by this change. The SEC was already bringing fraud cases to federal court with greater frequency and is no stranger to federal litigation. Knowing the work that a trial requires could lead the SEC to bring fewer enforcements or be more selective with the penalties sought. We will have to wait and see.
While Jaresky may not have a large impact on the SEC, this decision will make it harder for other administrative agencies that rely on administrative proceedings and are not accustomed to bringing charges in federal court. The dissent points out that Jaresky calls into question “more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations” that were enacted by Congress.
This decision is another in a series of decisions handed down by the courts that weaken the administrative state (see our prior coverage of the end of Chevron Deference, and the vacated Private Fund Reforms). We will continue to monitor legal challenges, proposed rules, and agency actions that impact compliance programs.
