Regulators are not legislators — and should never behave as if they are.
It's time for the Supreme Court to restore the rule of law.
A t least one form of government abuse might end soon. The U.S. Supreme Court heard oral arguments this term for Securities and Exchange Commission v. Jarkesy, which challenges the unlawful powers wielded by administrative-law courts (ALCs). These are courts inside agencies that do not afford civilians the same protections as independent courts. ALC defendants typically do not get the right to a jury trial. The judges are employed by the agency that also pays their salaries. The agency also sets the ALC’s procedural rules, has different evidence-sharing standards that favor the agency, and stacks the deck against defendants in ways regular courts never could.
The Jarkesy case challenges some of these excesses. The Supreme Court already ruled unanimously against the SEC and FTC’s ALCs in Axon v. FTC (2023), so it may very well again decide to strip the SEC’s court of some of its extra-constitutional privileges.
The Jarkesy case is named for George Jarkesy, a hedge-fund manager who, alongside his financial adviser Patriot28, was charged with securities fraud. Jarkesy’s civil-fraud case in the SEC’s ALC lasted seven years. Like nearly all of the SEC’s ALC defendants, Jarkesy lost before an administrative-law judge (ALJ). He lost again before the full commission. Only then was Jarkesy allowed to appeal his case before a regular court, namely the Fifth Circuit.
The Fifth Circuit court issued a 2–1 ruling in Jarkesy’s favor, asserting that the SEC’s ALJs violated three provisions of the Constitution. First, the SEC’s closed-door ALC hearings denied Jarkesy’s Seventh Amendment right to a civil jury trial. Second, the Dodd-Frank financial-regulation bill violates the nondelegation doctrine — which states that legislatures cannot delegate their powers to the executive branch — by giving the SEC’s ALJs absolute discretion on whether they hear a case themselves or send it to a regular court. Third, ALCs are set up in such a way that makes it nearly impossible for presidents to remove ALJs from the bench, even for cause.
This triple-threat opinion against the SEC’s authority sets the stage for the Supreme Court’s decision, which is due by the end of its current term. The design of the SEC’s ALC raises a number of constitutional problems, as we note in a new paper.
For one, ALCs are a direct affront to Congress. Regulators cannot simply assume powers that Congress has not expressly granted them, as the SEC has done. It robs private litigants of their right to a fair trial when the SEC opts to handle virtually all its enforcement proceedings in-house, where the SEC nearly always wins.
If the Supreme Court fails to end this, then the SEC may not only continue controlling the fate of its cases but can further adopt other nondelegated legislative powers. Regulators are not legislators — and should never behave as if they are.
Just as, on a reasonable reading of the Constitution, an ALC cannot assume nondelegated powers, it should not be able to unequivocally deny a person’s access to constitutional guarantees. The Seventh Amendment guarantees the right to a civil trial by jury. It makes no exceptions for trials held by government agencies.
Devin Watkins, attorney at the Competitive Enterprise Institute, has argued that “the Securities and Exchange Commission accused Jarkesy of a kind of fraud that was well known to the Founders. Such matters were regularly heard in civil courts when the Seventh Amendment was ratified — and, back then, a defendant accused of such things was entitled to a jury.”
The SEC’s court barred Jarkesy from holding several money-managing positions. It cannot do this without a jury trial. In addition, the $450,000 civil monetary penalty against Jarkesy represents a monetary-damages claim, which means he was entitled to a jury under law.
Finally, SEC judges cannot insulate themselves from presidential removal. The president is empowered to remove high-ranking agency employees at will; ALJs meet this threshold. Like the nondelegation issue, the SEC cannot assume something for itself — in this case, protecting ALJs from removal.
The Jarkesy case represents three important challenges to unlawful ALC authority. The Supreme Court must no longer tolerate extra-constitutional behavior by an agency court. When ALCs give themselves powers without any substantive legal authority to do so, the executive and legislative branches are disempowered. Private litigants like Jarkesy are also left powerless to combat a quasi-judicial court that wins nearly every case it controls. It’s time for the Supreme Court to restore the rule of law in ALC adjudication.
Stone Washington is a research fellow at the Competitive Enterprise Institute. Ryan Young is a senior economist at CEI.