Fifth Circuit Declines to Reconsider Opinion that In-House SEC Enforcement Actions are Unconstitutional

Earlier this year in Jarkesy v. SEC, a split panel of the Fifth Circuit Court of Appeals ruled that the Constitution prohibits in-house Securities and Exchange Commission (SEC) adjudication of securities law violations. 34 F. 4th 446 (5th Cir. 2022). The panel found three constitutional defects in the SEC’s administrative proceeding mechanism: (1) a violation of the Seventh Amendment right to a jury trial in securities fraud cases where the SEC seeks monetary penalties; (2) an improper Congressional delegation of power enabling the SEC to bring securities fraud enforcement actions in-house without reference to an “intelligible principle” provided by Congress; and (3) a violation of the take care clause of Article II of the Constitution.  In response, the SEC filed a petition for rehearing en banc, which sought a review of the panel’s decision before all of the judges of the Fifth Circuit.

On October 21, the Fifth Circuit denied the SEC’s petition for rehearing. A circuit court may rehear a case en banc if a majority of the judges on the court vote to do so. Here, only six of sixteen judges voted to rehear the case.

Only the judges dissenting from the denial of the rehearing announced their reasoning, including concern about a shift in the law.

“[H]aving deviated from over eighty years of settled precedent, the opinion doubtlessly merits a full review. Beyond its massive impacts on the directly involved statutes, the opinion’s potential application to agency adjudication more broadly raises questions of exceptional importance.” Jarkesy v. SEC, No. 20-61007 (5th Cir., Oct. 21, 2022) (Haynes, J., dissenting).

The original panel ruling caught the attention of many lawyers and non-lawyers alike, including comedian Jon Stewart, who devoted an entire podcast to it. Many wondered whether the case would spell a permanent end to SEC administrative proceedings, and concerns persist over the viability of this agency enforcement tool.

The SEC is likely to ask the U.S. Supreme Court to grant a writ of certiorari in Jarkesy. The SEC will be forced to grapple with Jarkesy’s implications, especially in disputed fraud cases seeking civil money penalties – which the agency was already reluctant to file in-house due to prior legal disputes – but potentially in other matters as well. This will continue to be the case unless and until the Supreme Court intervenes in the agency’s favor, or a legislative solution gives the SEC a way forward.

In the meantime, the SEC will soon defend another challenge relating to its in-house proceedings before the high court in Cochran v. SEC, which involves the question of whether district courts can hear constitutional challenges to SEC administrative proceedings. 20 F. 4th 194 (5th Cir. 2021) (en banc) appeal docketed, 21-1239 (November 7, 2022). The Supreme Court is set to hear oral argument in Cochran during the first full week of November 2022. Even if the agency secures a win in Cochran, the questions flowing from Jarkesy will remain, absent final judicial or legislative resolution.

Given the current uncertainty in the law, it remains to be seen whether the SEC will begin shying away from bringing settled administrative cases (like it has with contested cases) as well as cases where a remedy is unique to the administrative setting, for fear of challenges to the constitutionality of this forum. Parties navigating administrative proceedings before the SEC should be aware of constitutional questions surrounding this aspect of the SEC’s enforcement regime. Likewise, anyone facing administrative enforcement actions by other agencies should consider the potentially broader, government-wide implications of the constitutional dangers now menacing the SEC.