Notice & Comment

Jarkesy’s First-Order Consequences, by James Fallows Tierney

Over the last week, the Supreme Court put the administrative state under significant new scrutiny, signaling a turning point in a larger project of consolidating policy decision-making power in the judiciary. One case to spotlight is SEC v. Jarkesy, which raises questions about the future role of agencies in enforcing statutory violations.

The Court in Jarkesy held that SEC administrative adjudications seeking civil penalties for antifraud violations too closely resemble common law fraud, warranting a jury trial. Justice Roberts’ majority opinion and Justice Gorsuch’s concurrence disagree about the precise reasons (e.g., Seventh Amendment vs. Article III) for diverting antifraud civil-penalty cases from APA adjudications to the federal courts. Yet they both apply a framework that sees agency enforcement as fundamentally different from those proceedings that historically fell under the purview of the executive or legislative branches—like public land management or public benefits administration.

As Chris Walker pointed out here, the scope of Jarkesy’s implications will depend on whether courts apply its private rights framework expansively beyond the narrow securities antifraud context. None of the opinions called directly for the overruling of the Atlas Roofing framework, where proceedings for civil penalties and abatement of unsafe working conditions were deemed appropriate for agency adjudication. Yet the potentially expansive vision for “private rights” is sure to invite reevaluation of the broader framework. And as in Janus v. AFSCME, Shelby County v. Holder, and other cases before it, the Atlas Roofing framework might well be at risk of being overturned anyway. As Justice Kagan described the Roberts Two-Step in her Loper Bright dissent, disfavored precedents are criticized and abandoned, then later overturned for having been criticized and abandoned.

One potential response is that SEC antifraud proceedings are sui generis compared to most administrative enforcement actions. This notion that Jarkesy will turn out to be a narrow defeat for the administrative state rests on the outlier nature of the Dodd-Frank Act and the aberrance of the changes it brought to SEC enforcement. As Justice Gorsuch’s concurrence points out, before Dodd-Frank the SEC would’ve had to go to a court (with all the associated procedural protections) to bring an enforcement action against the respondent, who was not registered as an investment adviser. Dodd-Frank gave the SEC power to hale him before the ALJs. 

This implicates “blowback theory.” Alex Platt has argued, for instance, that after the SEC received expanded powers in Dodd-Frank it did not adjust upwards the procedures “commensurate with the stakes of the adjudication,” upsetting a previously more balanced equilibrium and spurring deep judicial skepticism of SEC adjudications.[1] More recently, Platt argued before Jarkesy’s release that the consequences of the then-pending decision could end up being constrained to the fact that the respondent was not “registered.” On this theory, the SEC could still deem registered entities to have consented to the forum, or to have waived their rights as a result. Although that may well be right on the doctrinal analysis, it is seriously doubtful the SEC will push its luck with that theory.

Jarkesy is likely to influence not only the kind of SEC enforcement actions brought moving forward, but also the processes by which they are initiated and settled. Traditionally, many SEC enforcement actions were resolved through administrative proceedings. But the SEC mostly hasn’t been bringing civil penalty antifraud cases in-house for the last few years, focusing instead on categories of cases that are significantly less exposed to litigation risk of structural constitutional challenges. 

Jarkesy does not by its terms apply to anti-money laundering violations, or omissions to make mandatory periodic disclosures, or where a respondent has defaulted, or in follow-on proceedings to impose an “industry bar” on an investment adviser who has been enjoined in court from violating the securities laws. Yet some courts will be receptive to arguments that some of these involve “private rights.” The ambition appears to be to make any action to collect “fines” one that needs a jury trial. Jarkesy’s seemingly narrow focus on antifraud civil penalties may well prove to be the proverbial camel’s nose under the tent.

There is also a strong incentive to push the law further in this direction.  Suppose defense counsel is negotiating a settlement of an SEC enforcement action, which in many cases would be resolved in a settled order instituting proceedings. The cost that can be imposed on the SEC by resting on one’s rights and not settling will now be higher after Jarkesy. SEC enforcement faces a similar dynamic as prosecutors who could not litigate every now-plea-bargained case if push came to shove. That reality affects the range of settlement terms that defense counsel can extract. Wouldn’t it be malpractice not to argue that Jarkesy bars the claim—either to extract better terms in settlement, or because if you were to litigate after Axon Enterprises v. FTC there’d be better odds of facing a more receptive decision maker?

For this same reason, Jarkesy’s implications are unlikely to be limited to claims involving “civil penalties,” as compared to administrative cease and desist orders and the like. After cases like Kokesh v. SEC (2017)involving the statute of limitations provision applicable to “penalties,” the defense bar latched onto the holding to challenge other sanctions as impermissibly punitive. Theresa Gabaldon characterized this as litigation by “soundbite,” and I suggest we will see more like it after Jarkesy. As I have written in a recently published article on “industry bars,” I tend to think that sanction is likely to be the next target.

The implications of Jarkesy are also likely to extend broadly across securities regulation, including to the self-regulatory frameworks that are central to it. Pending before the D.C. Circuit is a challenge by Alpine Securities to a enforcement proceeding by broker-dealer self-regulatory organization FINRA. In a stay order last summer, Judge Walker issued a concurrence analogizing FINRA’s hearing officers to the SEC administrative law judges found to be inferior officers in LuciaThough that case raises overlapping issues, the trend raises the question whether FINRA enforcement could involve private rights as well. Ben Edwards has argued, and we have elaborated in other work, that this would signify a major shift in the administrative framework of securities regulation.

There’s also the matter of the Fifth Circuit holdings that Jarkesy left in place related to nondelegation and removal. Those aggrieved by SEC final agency action can appeal to the DC Circuit or their home circuit. That, too, will create a significant degree of uncertainty around the SEC’s enforcement programs related to entities and individuals who are or can be relocated there. The broader legacy (as, e.g., Emily Bremer has written) of Jarkesy with respect to APA adjudication and presidential removal remains to be seen. 

Finally, the idea that JarkesyLoper Bright, and Corner Post v. Board of Governors reflect judicial aggrandizement has also gained considerable attention, as highlighted in a recent contribution by Allen Sumrall and Beau Baumann building on Justice Sotomayor’s concurrence in Jarkesy. The critique focuses on the the judiciary’s increasingly dominant role in areas traditionally managed by legislative and executive branches. Congress relied on the Atlas Roofing framework to create many statutory provisions and administrative frameworks that follow a similar pattern. In this view, Jarkesy may undermine the role of agency adjudication with respect to a wide range of statutory theories and sanctions.

This last first-order consequence of Jarkesy and other cases over the last week underscores the severity and urgency of the challenge to regulatory policymaking. Many observers, particularly those on the political left of center, have reacted to these developments with concern. This shift towards judicial predominance complicates policymaking, and challenges the grand project by which representative democracy results in enduring policy successes that serve the public interest. 

As the implications of these decisions unfold, the need for substantial court reform has struck many as increasingly apparent. The challenge is in stirring elected representatives from a lethargy induced from a bygone institutionalist era—encouraging them to rise to the moment facing them. Reform ideas once seen as radical are, to many observers anyway, now inadequate in addressing what Blake Emerson has described as an existential challenge to the administrative state. 

James Fallows Tierney is an Assistant Professor at the Chicago-Kent College of Law.

[1] My own view, having spent time before academia as a staff attorney with the SEC OGC’s Adjudications group, was that the process was neither unfair nor subject to bias. SEC staff tend to be mission driven public servants who believe in regulation for the public interest and the protection of investors, but that is very different from “bias.”

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