Application of Separation of Powers to Regulatory Enforcement
The Securities and Exchange Commission has a critical role in shaping modern financial markets. The body is tasked to protect investors and ensure the fairness and integrity of markets. As financial markets continue to evolve, the SEC’s initiatives have expanded to address corporate political activity. However, regulatory initiatives produced tension with regard to the protection of constitutional rights. This tension is exemplified by the recent United States Supreme Court decision in Securities and Exchange Commission v. Jarkesey, 603 U.S. [1] ___ (2024), in which the defendant challenged the extent of the SEC’s enforcement powers. While investor protection is undoubtedly essential, Jarkesey raises significant questions about regulatory overreach, capitalist freedom, and constitutional rights, including the balance of power among the branches of government.
In Jarkesey, the Supreme Court emphasized the constitutional right to trial by a jury and separation of powers remain central components to preserving the integrity of our judiciary. The Court recognized that Congressional authority is necessary to delineate and preserve the proper scope of agency actions, especially when such actions implicate core judicial functions, in accordance with the nondelegation doctrine. Specifically, congressional authorization may be required for courts or administrative bodies to exercise certain judicial powers that are constitutionally reserved for the judiciary [2].
In 2011 the SEC initiated an investigation into Mr. Jarkesy and his firm, Patriot28, LLC. The SEC filed an action alleging violations of federal securities laws. However, the action was brought as an administrative action within the SEC and not in the federal district court. After an evidentiary hearing, an SEC administrative law judge found Jarkesy liable for securities fraud and imposed a $300,000 monetary penalty, among other sanctions.
Jarkesy sought review of the in-house decision with the U.S. Court of Appeals for the Fifth Circuit. The Court of Appeals reversed the decision of the administrative law judge and found that the SEC’s prosecution of the case in-house, as opposed to in federal court, violated Jarkesy’s constitutional rights for two main reasons. First, the Fifth Circuit found that the decision by an administrative law judge granting civil penalties for fraud violated Jarkesy’s Seventh Amendment right to a jury trial. Second, the appellate court found that Congress’s delegation to the SEC of the absolute right to proceed in-house or in court violated the non-delegation doctrine. In other words, one branch cannot delegate a constitutional power to another branch of government.
The SEC soon appealed the case to the United States Supreme Court [3]. In a 6-3 decision, the Court affirmed the Fifth Circuit. In the majority opinion, Chief Justice Roberts held that certain SEC enforcement actions involving fraud must be heard by federal courts, not through administrative proceedings. These cases involve questions of common law that trigger Seventh Amendment right to trial by jury protections and therefore, such cases may not be heard by administrative law judges. “The remedy the SEC seeks is the sort of penalty that could only be enforced through an action at law [4].” The opinion went on to say that when the SEC enforces antifraud laws they are not executing a purely public regulatory function, they are acting on core private rights. These include the right to earn money and the right to self-defense, therefore, enforcement can not be delegated to an agency. The remedies sought by the SEC are punitive and therefore adjudication of these cases are a traditional judicial function that belongs to Article III courts. Roberts explained, “Congress may not bypass Article III courts and the Seventh Amendment jury trial right simply by giving an agency the authority to enforce the law through its own proceedings [5].”
The Court’s ruling has significant implications. First, the decision significantly limited the SEC’s ability to use its administrative forum. There are substantial costs associated with federal court jury litigation as opposed to in-house proceedings. As a result, the SEC may have to limit and be more selective in its enforcement efforts going forward. This inability to inexpensively prosecute actions could adversely affect the deterrent effect of potential agency action. Parties subject to SEC regulation could be more empowered to violate laws and regulations if the threat of prosecution is lessened [6].
More importantly, the Jarkesy decision raises the issue of whether any federal regulatory agency can bring in-house proceedings to enforce civil penalties. Although some agencies (the SEC) can decide whether to pursue actions for civil penalties in federal court (or previously in an in-house administrative proceeding), other agencies (for example, Occupational Safety and Health Administration), are only statutorily authorized by Congress to pursue enforcement through in-house proceedings. If OSHA no longer has the ability to bring in-house actions and does not have the statutory authority to bring an action in federal court, it loses practically all enforcement potential. Justice Sotomayor noted in her dissent, “the Constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress [7].” Congress would need to enact legislation to authorize OSHA and similar agencies to proceed in federal court.
The ramifications could also have significant effects on Article III courts, which would now be the only venue for civil penalty enforcement actions by many federal agencies. This overloading of court dockets will affect the administration of justice and the ability of Courts to address other cases [8].
Edited by Marshia Ahsan
[1] 22-859 sec v. Jarkesy (06/27/2024). https://www.supremecourt.gov/opinions/23pdf/22-859_1924.pdf.
[2] Sec v. Jarkesy: Constitutionality of administrative enforcement actions | congress.gov | library of Congress. https://www.congress.gov/crs-product/LSB11229.
[3] “Sec V. Jarkesy: A Groundbreaking Supreme Court Decision with Significant Implications for Securities Enforcement: Insights: Greenberg Traurig LLP.” Insights | Greenberg Traurig LLP. https://www.gtlaw.com/en/insights/2024/6/sec-v-jarkesy-a-groundbreaking-supreme-court-decision-with-significant-implications-for-securities-enforcement.
[4] 22-859 sec v. Jarkesy (06/27/2024). https://www.supremecourt.gov/opinions/23pdf/22-859_1924.pdf.
[5] Ibid
[6] “U.S. Supreme Court Limits Use of SEC Administrative Courts in Antifraud Actions.” Insights | Sidley Austin LLP, June 28, 2024. https://www.sidley.com/en/insights/newsupdates/2024/06/us-supreme-court-limits-use-of-sec-admin.
[7] Millhiser, Ian. “The Supreme Court Just Lit a Match and Tossed It into Dozens of Federal Agencies.” Vox, June 27, 2024. https://www.vox.com/scotus/357554/supreme-court-sec-jarkesy-roberts-sotomayor-chaos.
[8] Becker. “Becker Spotlight: Potential Impacts of the Supreme Court’s Sec v. Jarkesy Decision: Becker & Poliakoff.” Becker, April 18, 2025. https://beckerlawyers.com/becker-spotlight-potential-impacts-of-the-supreme-courts-sec-v-jarkesy-decision/.