The Securities and Exchange Commission, the federal agency tasked with enforcing the nation’s securities laws, has been a foundational piece of the administrative state constructed by the left over the past century.
Over the past few years, however, the SEC has come under fire for potential abuses of power, particularly involving its use of administrative law judges to decide its own cases.
The SEC’s use of its own judges gives it a clear home court advantage—one that a federal appeals court recently deemed unconstitutional.
Now, it appears the SEC may be headed to the Supreme Court with the very constitutionality of its home court advantage on the line.
Though most Americans are unaware of the fact, given that they don’t learn this in civics class, many administrative agencies exercise what appear to be legislative, executive, and judicial powers all at once.
Agencies, of course, write regulations that look like laws and have the force and effect of law. They also have the power to enforce these regulations.
In addition to these legislative and executive powers, agencies also have their own courts and judges.
The SEC tries many of the cases that arise under its rules in front of its in-house administrative law judges. In these cases, in essence, the SEC is not only “judge, jury, and executioner,” but lawmaker, investigator, prosecutor, judge, jury, and executioner.
The SEC’s judges do not have the tenure and salary protections that the Constitution provides for independent “Article III judges.” Instead, they are hired by the agencies and their performance is reviewed by the agencies. Though there are some minimal protections to prevent the SEC from controlling its in-house judges, those protections are a poor substitute for the Constitution.
The results of this scheme are predictable. As The Wall Street Journal noted a few years ago, the SEC’s win rate (90%) in front of its own judges is noticeably higher than when it argues in front of independent judges (69%).
Unsurprisingly, The Journal also found that the SEC brought the vast majority of its cases (80%) to its own courts.
Appeals from the SEC’s judges are to the members of the SEC itself, which—again, unsurprisingly—affirmed its own judges’ decisions 95% of the time during the period The Journal analyzed.
Some SEC judges have suggested that they were pressured by their colleagues at the SEC to be loyal to the agency when making their decisions.
Over the past few years, the Supreme Court has considered the constitutionality of how administrative law judges at the SEC are appointed, leading to the landmark case Lucia v. SEC, which ruled that those judges at the SEC were officers subject to the Constitution’s Appointments Clause.
The SEC now faces a more fundamental challenge to its in-house courts and judges, a challenge that will be another major test of the administrative state’s constitutional legitimacy, and whether it threatens the structure of our constitutional system.
The appeal stems from the 5th Circuit Court of Appeals’ sweeping decision in Jarkesy v. SEC, handed down earlier this year. In that case, the SEC brought an enforcement action against hedge fund manager George Jarkesy for fraud, not in federal court, but in an administrative proceeding in front of its own judge.
When Jarkesy lost the case in front of the SEC’s administrative law judge, and his appeal to the SEC itself was unsuccessful, he brought the case to the 5th Circuit and raised several constitutional challenges.
The 5th Circuit sided with Jarkesy and identified three separate constitutional problems with the SEC’s in-house courts. First, they deprive defendants of the constitutional right to trial by jury. Second, the law allowing the SEC to decide whether to go to its in-house courts or to Article III courts is an unconstitutional delegation of power to the SEC. Third, they aren’t accountable to the president, because the SEC cannot remove them at will, and the president cannot remove members of the SEC at will. This creates two layers of insulation between the judges and the president.
When the case was handed down last May, it received significant attention, even from comedian-commentator Jon Stewart. But many assumed that it would be overturned without reaching the Supreme Court. When circuit courts render initial decisions, those decisions are reached by a three-judge panel rather than the entire court. Those initial decisions can be appealed to the entire court, in what is called an “en banc” review.
When the Jarkesy decision was appealed to the entire 5th Circuit, however, the judges voted not to rehear the case. That means that the decision is final unless it is appealed to the Supreme Court and the Supreme Court hears the case.
Unless the SEC wants to give up its home court advantage, a Supreme Court petition is its only option.
If and when the Jarkesy decision reaches the Supreme Court, it will present an arguably unprecedented challenge to the administrative state’s enforcement actions. Basic rights such as the trial by jury and the independent judiciary will be implicated.
The outcome will affect the entire structure of the modern administrative state.
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