Jarkesy v. SEC: Are Federal Courts Pushing the U.S. Toward the Next Financial Crisis?

Abstract

In the wake of both the Great Depression and the Financial Crisis of 2008, Congress established and expanded the powers of the Securities and Exchange Commission (SEC). As part of this expansion, the SEC in-house administrative proceedings, designed to adjudicate SEC violations before the SEC’s administrative law judges (ALJs), were born. These in-house proceedings have faced multiple constitutional attacks in the past decade. In the most recent iteration of such challenges, Jarkesy v. SEC, the Fifth Circuit held that the SEC’s in-house proceedings were unconstitutional on three grounds: (1) the in-house proceedings deprived petitioners of their constitutional right to jury trial, (2) Congress unconstitutionally delegated its legislative power to the SEC, and (3) the statutory removal restrictions of the SEC’s ALJs violated Article II of the Constitution.

This Note rejects the Fifth Circuit’s majority opinion, argues that future courts should be wary in following the Jarkesy holding, and provides a synopsis of the multifaceted impacts the Jarkesy decision would have on administrative agencies if affirmed by the United States Supreme Court. This Note also encourages the SEC to implement policies to combat the Jarkesy decision, and suggests that Congress implement legislative changes to the underlying statutes that govern the SEC.

The SEC plays a major role in protecting investors and ensuring orderly and efficient financial markets. A look back at the events that led to the rise of the SEC and its administrative powers shows the risks that come with hindering the SEC’s ability to adjudicate securities violations—namely, wide-spread market crashes, recessions, and an overall lack of confidence in the U.S. markets.