Supreme Court conservatives seem likely to axe SEC enforcement powers

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People walk past the U.S. Supreme Court in Washington, D.C., earlier this month. / AFP via Getty Images

Updated November 29, 2023 at 5:51 PM ET

The U.S. Supreme Court's conservative justices seemed highly skeptical Wednesday about the way the Securities and Exchange Commission conducts in-house enforcement proceedings to ensure the integrity of securities markets across the country. The case is one of several this term aimed at dismantling what some conservatives have derisively called "the administrative state."

Wednesday's case was brought by George Jarkesy, a former conservative radio talk show host and hedge fund manager. After a fraud investigation by the SEC and an in-house evidentiary hearing conducted by an administrative law judge, the SEC fined Jarkesy $300,000, ordered him to pay back nearly $700,000 in illicit gains, and barred him from various activities in the securities industry.

He challenged the SEC actions in court, contending that he was entitled to a trial in federal court before a jury of his peers, and that Congress didn't have the power to delegate such enforcement powers to an agency. Supporting his challenge is a virtual who's-who of conservative and business groups — plus some individuals like Elon Musk, who has repeatedly resisted the SEC's attempts to investigate stock manipulation charges in his companies.

Although Wednesday's case involved several different constitutional challenges to the SEC's enforcement actions, the justices focused almost exclusively on one: the contention that the agency's in-house fact finding process violated Jarkesy's Seventh Amendment right to a jury trial. All six of the conservative justices questioned the notion that an administrative agency can impose penalties without offering the option of a jury trial.

"It seems to me that undermines the whole point of the constitutional protection in the first place," Chief Justice John Roberts said.

Deputy Solicitor General Brian Fletcher repeatedly replied that Congress has, for some 80 years, delegated these core executive enforcement powers to agencies that are charged with applying the law and imposing consequences for violations. If the SEC's administrative enforcement powers are unconstitutional, he said, so too might be similar enforcement powers at some 34 federal agencies, from the Food and Drug Administration to the National Transportation Safety Board and the Social Security Administration, which issues a whopping half million hearing and appeals dispositions each year.

"The assessment and collection of taxes and penalties, customs and penalties, the immigration laws, the detention and removal of non-citizens — all of those things ... have long been done in the first instance by administrative officers," Fletcher said.

Making the counterargument, Michael McColloch, Jarkesy's lawyer, contended that only those functions that are analogous to laws at the time of the founding in 1791 are presumed to be legitimate.

"The dramatic change that you're proposing in our approach and jurisdiction is going to have consequences across the board," Justice Sonia Sotomayor observed, though McColloch insisted that his approach would not have a huge impact.

Justice Elena Kagan added that in recent decades there have been no challenges to these administrative enforcement functions because these powers have been considered "settled." That prompted McColloch to say, "It's settled only to the extent no one's brought it up." To which Kagan replied, "Nobody has had the chutzpah, to quote my people, to bring it up."

Kagan noted that there have been three major tranches of securities legislation to strengthen securities enforcement: first during the Great Depression in the 1930s when the agency was founded, then after the Savings and Loan Crisis in the 1980s and then after the 2008 Great Recession when huge investment banks failed, sending the economy spiraling downward and forcing a federal bailout to prevent even more bank failures.

Each time, observed Kagan, "Congress thought ... something is going terribly wrong here ... people are being harmed." And "Congress said 'we have to give the SEC ... greater authorities.' "

"I mean, is Congress' judgment ... entitled to no respect?" Kagan asked.

The conservative court's answer to that question may well be, "No."

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