Court ruling makes regulators judge and jury of advisors

Court ruling makes regulators judge and jury of advisors

Court ruling makes regulators judge and jury of advisors By Noah Feldman

Should the Securities and Exchange Commission be allowed to act as prosecutor, judge and jury in pursuing civil penalties against alleged violators of the security laws? If you think the answer is yes, you can only be heartened by Tuesday's decision by the U.S. Court of Appeals for the D.C. Circuit refusing to hear constitutional challenges to the SEC’s new powers under the Dodd-Frank Act.

The court said that the defendant, George Jarkesy, could still bring his constitutional claims to the courts after the SEC reaches a final decision in this case, which hasn’t happened yet. In theory, the court could then reach a different result when reviewing the constitutional merits of the SEC’s powers.

But reading the tea leaves of the decision, it doesn’t look promising for challengers to the new powers. And that’s a shame. Even though administrative proceedings are a familiar feature of the U.S. legal system, the erosion of the authority of Article III courts should be a meaningful constitutional issue -- whether the defendants are Guantanamo detainees or white-collar fraudsters.

Before 2010, the SEC could only impose civil monetary penalties if a defendant chose to keep his or her case before the commission, otherwise it had to go to a federal court. The idea was that penalties are in a sense criminal or at least punitive -- and therefore should be the business of ordinary courts, which come with a guaranteed jury trial and all the other procedural protections of the judicial system.

Dodd-Frank was intended to enhance the SEC’s enforcement powers after the 2007-08 financial meltdown. One of its provisions changed the old norm, allowing the SEC to choose its forum for seeking monetary penalties. The SEC can still go to the courts, but it has an overwhelming incentive instead to go to an administrative law judge who works for the SEC. The ALJs, as they’re called, are quasi-independent: They work for an agency, but are supposed to exercise judgment independent of agency prosecutors.

After the hearing before the administrative judge, a defendant can petition the SEC commissioners to revisit the outcome. If still unsatisfied, the defendant can go to the federal appeals courts for further review.

The great probability that the SEC’s powers will be upheld is conventional wisdom. It turns out to be devilishly difficult to distinguish an agency’s enforcement powers, remedial powers and deterrence powers from punishment of the kind that would arguably trigger constitutional protection.

It’s also hard to distinguish the regulated activity of issuing or trading in securities from the regulated activities of running a workplace or a union or a coal mine.

Yet the nature of an SEC enforcement action is so remarkably close to a traditional trial, with allegations closely resembling criminal allegations (and sometimes running parallel to them), and defenses very similar to those in criminal trials -- to say nothing of the monetary penalties.

So it’s still worth noting, and mourning, this impending incremental erosion of the constitutional protections of a civil trial and the jury right that goes hand in hand with it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story: Noah Feldman at
To contact the editor responsible for this story: Stacey Shick at