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US Securities and Exchange Commission

Fifth Circuit Denies Rehearing in SEC Administrative Judges Decision

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

The Fifth Circuit on Oct. 21, 2022, denied the SEC’s petition for a full-court rehearing following the May decision in Jarkesy v. SEC, which undercut the commission’s administrative enforcement regime.

Ten judges voted against en banc rehearing, while six judges voted in favor, leaving a Supreme Court petition as the SEC’s potential next step. The commission did not immediately respond to a request for comment.

The agency in early July sought the rehearing after a divided three-judge panel vacated its judgment against hedge fund manager George Jarkesy and investment adviser Patriot 28 LLC, opening up new uncertainty for the future of the SEC’s use of administrative law judges (AJLs). Observers predict the decision could have far-reaching consequences across the federal government, despite the commission having already largely turned away from the use of ALJs in litigated administrative proceedings.

Fifth Circuit Judge Jennifer Walker Elrod, writing for the majority in the May opinion, flagged what she framed as three constitutional defects with the commission’s administrative action: The petitioners have a right to a jury trial under the Seventh Amendment for actions where the SEC seeks monetary penalties; Congress failed to articulate an “intelligible principle” when it delegated the power to the commission to choose whether it brings cases before its own ALJs or in district court; and removal restrictions on ALJs violate Article II of the Constitution, which dictates the president must “take care that the laws be faithfully executed.” (See Beyond Jarkesy, SEC Administrative Proceedings Face Attacks on Multiple Fronts in the June 17, 2022, edition of Accounting & Compliance Alert

Five of the six judges who voted in favor of the rehearing issued a dissent, written by Judge Catharina Haynes, quarreling with each of the three holdings in Elrod’s Jarkesy opinion.

“The panel majority opinion, in addition to being incorrectly decided, is more than worthy of en banc consideration,” Haynes wrote. “Indeed, having deviated from over eighty years of settled precedent, the opinion doubtlessly merits a full review. Beyond its massive impacts on the directly involved statutes, the opinion’s potential application to agency adjudication more broadly raises questions of exceptional importance.”

The SEC, in its petition, had argued the Fifth Circuit panel’s decision “nullifies provisions Congress determined necessary to enforce the securities laws and calls into question adjudication within the Executive Branch more broadly.” Jarkesy and Patriot 28, in a July response urging the Fifth Circuit to deny the en banc rehearing petition, argued the Fifth Circuit panel “faithfully applied current Supreme Court precedent under the unique circumstances of this case and the precise challenges raised by” the petitioners.

“The nature of those challenges— and the resultant holdings by the panel—have now been recast by the SEC to avoid the inevitable consequence of the unconstitutional expansion of its power afforded by Dodd-Frank §929P(a),” Jarkesy stated in the brief. “That unprecedented legislation vested the SEC with unreviewable authority to try ‘any person’ in its in-house ‘courts’ without a jury, for any claim under the antifraud provisions of the securities laws.”

Under the Dodd-Frank Act’s Section 929P, Congress gave the commission broader authority to seek monetary penalties administratively. Sec. 929(p) of PL111-203


This article originally appeared in the October 26, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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