No, Jarkesy v. SEC won’t end the administrative state

“A wild new court decision [that] would blow up much of the government’s ability to operate.” That’s how Vox’s Ian Millhiser characterizes the U.S. Fifth Circuit’s decision in Jarkesy v. Securities and Exchange Commission — which the SEC since has asked the court to reconsider en banc. And while this case has been somewhat overshadowed by the whirlwind of the end of the U.S. Supreme Court term, it’s an important case that much of legal journalism has gotten wrong. 

Millhiser goes on to argue that the decision “seeks to dismantle much of the system the federal government uses to enforce longstanding laws.” Slate legal journalist Mark Joseph Stern tweeted that the Fifth Circuit “dismantled the SEC’s power to enforce securities law. This decision is beyond radical. It is nihilistic. … I mean, this is basically striking down the administrative state.” Jon Stewart said the ruling “strikes at the heart of the government’s ability to regulate anything … clean air, clean water, food … anything.”  

Stewart is often hilarious, but his comments on Jarkesy are hilariously wrong. While Fifth Circuit Judge Jennifer Elrod’s opinion recognizes important limits on the federal administrative state’s power, nothing in it prevents the SEC from carrying out its core function of protecting investors.  

How did we get here? George Jarkesy, a hedge fund manager, was charged with misrepresenting his financial state to prospective investors. That’s conduct just about everyone agrees should be (and is) illegal.  

How should the government respond to such allegations of fraud? The SEC thinks that they should be handled in an in-house court within the agency, where agency employees essentially act as judge, jury and executioner. But the Fifth Circuit instead held that such allegations must be heard by a real federal court, where an unbiased jury of the defendant’s peers can hear both government and defendant’s story and sort out what is the truth.  

Jarkesy doesn’t ban in-house courts altogether, but it does find that the use of them in this case — and cases like it — is unlawful in three ways.  

First, the SEC’s in-house adjudication of this case violated Jarkesy’s Seventh Amendment right to a jury trial. Second, Congress unconstitutionally delegated legislative power to the SEC by failing to provide an “intelligible principle” by which the SEC could exercise the delegated power. Third, statutory restrictions on removal of the SEC’s administrative law judges (ALJs) violate the Take Care Clause of Article II of the Constitution. 

Regarding the first factor, that the SEC’s in-house adjudication of this case violated Jarkesy’s Seventh Amendment right to a jury trial: The Seventh Amendment protection reflects the core principle that fundamental fairness requires serious accusations to be heard by a representative group of one’s peers, so that an individual does not face unfairly severe consequences based on the views of one biased fact-finder. There is a limited exception to the Seventh Amendment’s jury trial requirement in in-house agency proceedings, but the court concluded that the exception didn’t apply to this case. 

The claim at stake in Jarkesy — a traditional claim of redress for fraud, involving individual victims — typically would receive a jury trial at common law. And the Fifth Circuit correctly determined that Jarkesy had a constitutional right to a jury trial.  

Second, Congress unconstitutionally delegated legislative power to the SEC by failing to provide an “intelligible principle” by which the SEC could exercise the delegated power. Under our system of government, each branch has certain powers enumerated in the Constitution. To prevent any branch from becoming too powerful, no branch can delegate its unique powers to another branch. At the same time, the executive branch needs some flexibility to fill in minor gaps left by Congress. Such gap-filling is not an unlawful delegation if Congress provides an “intelligible principle” for the executive branch to follow.  

Congress gave the SEC the power to decide whether to bring securities enforcement actions either in an in-house proceeding or within a traditional federal court. It did not create any rules for the SEC to follow in determining which defendants should receive which legal process. Because Congress failed to set forth an “intelligible principle” for the SEC to follow here, the Fifth Circuit found a violation of the nondelegation doctrine.  

Third, statutory restrictions on removal of ALJs violate the Take Care Clause of Article II of the Constitution. The Take Care Clause requires the president to “take Care that the Laws be faithfully executed,” which means that the president must have power over officers’ appointment and removal. This provision ensures that officials who enforce the law are accountable to the president and, in turn, to the American people. Bureaucracies insulated from any kind of democratic control threaten individual liberty because they answer to no one. The SEC’s administrative law judges are protected from presidential removal. The court held these ALJ protections unconstitutional. 

Although Jon Stewart concluded his segment by musing that he couldn’t see how the SEC continues to exist after this opinion, none of the opinion’s three core holdings fundamentally threatens the SEC’s ability to enforce the securities laws, as long as its process is fair and protects due process as required by our Constitution. The government can, and should, protect investors from fraud and ensure that defendants’ constitutional rights are respected. Jarkesy shows a path by which the SEC can do both.  

Alison Somin is an attorney at Pacific Legal Foundation, a nonprofit legal organization that defends Americans’ liberties when threatened by government overreach and abuse. Follow her on Twitter @AlisonSomin.