On June 27, 2024, the US Supreme Court issued its highly anticipated decision in Securities and Exchange Commission v. Jarkesy, finding that the Securities and Exchange Commission (SEC) could not impose civil penalties in an enforcement action because doing so deprives a defendant of his right to a jury trial.

The decision jeopardizes the use of in-house courts by the SEC and other administrative agencies. While the case focused on antifraud charges, the decision raises important questions about its broader implications at the SEC and other federal administrative agencies with enforcement powers.

The Background of Securities and Exchange Commission v. Jarkesy

Jarkesy began as an SEC enforcement action against investment advisors George Jaresky, Jr. and Patriot28, LLC, (collectively the “Respondents”). The SEC claimed the Respondents violated antifraud provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. An Administrative Law Judge (ALJ) determined the Respondents committed securities fraud, and the SEC imposed civil penalties, including disgorgement, a cease-and-desist order, and industry and officer-and-director bars.

The Respondents appealed, claiming the in-house adjudication of an antifraud claim violated multiple constitutional provisions, including the right to a trial by jury. The case was appealed to the U.S. Supreme Court.

On appeal, the Supreme Court noted that the Seventh Amendment to the US Constitution guarantees the right to a jury trial for “[s]uits at common law,” which the Court explained includes claims that are “legal in nature.” To determine whether a claim is legal in nature, a court should consider whether the claim resembles a claim at common law and whether the remedy is the sort traditionally obtained in a court of law. The Court stated that the remedy is the more important consideration and was “all but dispositive,” emphasizing that, in Jaresky, the SEC sought to impose civil penalties, which are a type of remedy that, at common law, could only be enforced by a court of law.

Having found that the claims implicated the Seventh Amendment, the Court considered whether the claims fell within the “public rights” exception, which allows Congress to assign enforcement matters to an agency without the right to a jury trial. The Court explained that “[i]f a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.”

Having found that the Respondents were entitled to a jury trial in an Article III court, the Court ruled that the imposition of civil penalties without a jury trial was a constitutional violation.

The Broader Implications of Jaresky

When the SEC files an enforcement action, it can choose to file the case in an Article III federal district court or adjudicate the case in its own internal administrative forum. Federal administrative agencies like the SEC and the Federal Trade Commission (FTC) claim to maintain an internal separation between their investigative, enforcement, and adjudicatory functions. But recent disclosures have called this alleged separation of function into question.

Cases filed in a federal Article III court are presided over by a federal judge with a lifetime appointment. Federal Rules of Evidence apply, and a jury determines the relevant facts. In an internal administrative action, members of the SEC staff investigate the claim, the Commission approves the enforcement action, SEC staff prosecute the case, and an ALJ (also an SEC insider) makes an initial decision. Any appeal is decided by the Commission — the same group of people who approved the case at the outset. Additionally, different discovery rules and rules of evidence apply to cases brought through an enforcement action.

Jaresky presented the question of whether the SEC’s fact-finding and imposition of civil penalties deprived a defendant of their constitutional right to a trial by jury. But the case has broader implications for all federal agencies that have an internal adjudicative function. Congress has enacted “more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.” The Jaresky decision may encourage other federal agencies to pursue claims in federal courts rather than risk an enforcement action being challenged or be overturned in federal court.

As a practical matter, in recent years, the SEC has filed almost all litigated proceedings in federal court. Following Jaresky, the SEC will likely continue this trend, reserving its administrative function for defendants who are willing to agree to a civil penalty and waive their right to a jury trial as part of an administrative resolution.

The Jaresky decision could have far-reaching implications and could preclude administrative proceedings at many federal agencies. The majority opinion was careful to distinguish cases that involve tariffs, immigration, pensions and other government benefits, public lands, and patents as involving true “public rights.” However, the majority did not distinguish the more than two dozen federal agencies cited by the dissent that could lose their statutory authority to bring administrative proceedings. The biggest question is what authority will the IRS Tax Court have after Jaresky? Without congressional action, those agencies could be foreclosed from enforcing the federal statutes and regulations they are tasked with administering.

Jaresky represents a significant extension of the trend of federal courts reigning in the authority of administrative agencies, and experts anticipate additional challenges to the so-called “administrative state.”

Hope Lefeber is a federal white-collar criminal defense attorney serving people in Philadelphia and New York City. She began her career as an enforcement attorney with the SEC and has over 30 years of experience representing people accused of federal financial crimes.