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An Appeals Court Has Delivered a ‘Major Blow’ to an Independent Agency

The majority opinion deemed the SEC’s in-house adjudications unconstitutional. 

A federal appeals court’s decision last week delivered a “major blow” to an independent federal agency, prompting concerns about the future of administrative law.

The U.S. Court of Appeals for the 5th Circuit issued a 2-1 opinion on May 18 in response to hedge fund manager George Jarkesy and investment adviser Patriot28 challenging the Securities and Exchange Commission’s decision to charge them with securities fraud. The court’s opinion deemed the following unconstitutional: the agency’s adjudication by an in-house enforcement body; Congress giving the SEC the authority to determine if cases should be held in district courts or in-house; and the SEC’s removal restrictions for administrative law judges. The opinion said this violated the Seventh amendment right to a jury, Article I that vests “all” legislative power in Congress and Article II’s “Take Care Clause,” respectively. 

“Congress has given the Securities and Exchange Commission substantial power to enforce the nation’s securities laws. It often acts as both prosecutor and judge, and its decisions have broad consequences for personal liberty and property,” stated the majority opinion written by Judge Jennifer Walker Elrod, a George W. Bush appointee, and supported by Andy Oldham, a Trump appointee. “But the Constitution constrains the SEC’s powers by protecting individual rights and the prerogatives of the other branches of government.” Judge Eugene Davis, a Reagan appointee, dissented. 

Reactions and Analysis on the Ruling

“Though the Fifth Circuit only covers Texas, Louisiana, and Mississippi, the United States Supreme Court may agree with the Fifth Circuit on appeal or other jurisdictions may follow this holding in the slew of challenges that will inevitably follow Jarkesy, wrote Rachel Maimin and Robert Johnston Jr., partners at the law firm Lowenstein Sandler LLP. “This is a major blow to the SEC’s power to, in essence, adjudicate its own cases when it chooses.” 

Craig Green, law professor at Temple University who specializes in administrative law, among other areas, told Government Executive, “administrative law as we know it, the scope of the federal government as we know it is absolutely under dispute.” 

The fact that the Fifth Circuit made all three rulings was “really pretty extraordinary.” He also noted that the court previously “has taken an aggressive stance against the administrative state in various regards.” 

James Angel, professor at Georgetown University who specializes in the regulation of financial markets, told Government Executive, “This is just another battle in the long war over the so-called administrative state.”

As for precedence for other independent regulatory agencies, he said, “clearly anything that reins in the authorities of administrative law judges or agencies to conduct their own judicial proceedings is going to affect the other agencies as well.” 

Sen. Sheldon Whitehouse, D-R.I., condemned the ruling and the “right-wing scheme to control our court,” in a series of tweets. 

Blake Emerson, an assistant law professor at UCLA, wrote in Slate that the Fifth Circuit “has become something of a think tank in the conservative legal movement’s effort to limit the federal government’s regulatory power” and the May 18 decision is “no exception.” 

The Chevron deference”  is an administrative law principle derived from a 1984 Supreme Court decision that says federal courts should defer to federal agencies when a statute is unclear or ambiguous. 

“This case doesn’t directly affect Chevron,” but aligns with “a very broad and multipart constitutional attack on the federal government and its agencies” in the modern era, said Green.

In a paper published in the Boston University Law Review last year, he wrote: “If Chevron was conservatives’ darling in the 1980s, it is their unconstitutional demon today, and that shift is very recent.”

Angel said, “I don’t think this particular case strikes at the heart of the Chevron deference, but how the [Supreme Court] justices rule would certainly be a signal as to what they might do to the Chevron deference going forward.” 

The Agency's Response

Government Executive asked the SEC for its reaction to the ruling, if it will be appealing and if the agency has any fear of the precedent the ruling could set for the SEC or other independent federal agencies. 

An SEC spokesperson replied, “We are reading and assessing the decision to determine appropriate next steps, working alongside the Department of Justice.” 

Two days before the Fifth Circuit released its decision, the Supreme Court agreed to review another case from the Fifth Circuit, Cochran v. SEC, which “also challenges the SEC’s in-house administrative tribunals,” wrote Proskauer Rose LLP Partner Joshua Newville and Julia Alonzo, senior counsel at the law firm. “Although that case is slightly narrower than Jarksey, the SEC’s adjudicatory ability could hang in the balance of both decisions.” 

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