Complaints about the way the SEC brings and resolves nearly all of its enforcement actions, including FCPA violations, have finally come to the surface. First, with a unanimous Supreme Court decision in April that gives defendants an easier path to challenge the constitutionality of the SEC’s in-house court. And second, with a case the Supreme Court put on its docket in May that questions whether the SEC’s in-house court should exist at all.
Because the SEC adjudicates nearly nine out of ten enforcement actions in-house, major changes to the powers of its in-house court could radically reshape the enforcement landscape.
Quick background: The SEC can enforce the federal securities laws (including the FCPA) either through its in-house court presided over by an administrative law judge or through a civil enforcement action in federal court.
Before 2010, the in-house court could only hear cases that involved directly regulated people and entities — securities exchanges, brokerage firms, broker-dealers, investment firms, investment advisors, and auditors. In 2010, Congress (via Dodd-Frank) gave the SEC’s in-house court “the same enforcement power as federal district courts,” as one commentator puts it, expanding its jurisdiction to include “nearly all defendants with alleged civil violations of securities laws, including non-regulated defendants.”
What’s the problem with the in-house court? The SEC hires and pays its administrative judges, so SEC employees serve as both prosecutors and judges. There are no juries, and appeals from the in-house court must be heard first by the SEC commissioners, who sign the judges’ paychecks and have the power to keep or fire them.
In Dodd-Frank, Congress stipulated that SEC defendants cannot dispute the jurisdiction of the in-house court until it issues a final determination, typically after finding the defendant guilty of securities law violations and imposing penalties. Additionally, challenges must bypass federal district courts and proceed directly to appellate courts.
The case the justices decided in April is SEC v. Cochran, which the court consolidated with an FTC case with similar issues known as Axon Enterprise, Inc. v. Federal Trade Commission et al. The Supreme Court’s unanimous opinion on April 14 held that laws creating and empowering the SEC and FTC don’t “displace” federal courts from hearing constitutional challenges to what those agencies are doing.
Thus Cochran opens the way for SEC defendants to litigate jurisdictional issues in federal district courts before the SEC’s in-house court decides their matter.
The second case now pending before the Supreme Court is Jarkesy v. SEC. The issues for review are: (1) Whether the SEC’s in-house court violates the constitutional right of defendants to a jury trial guaranteed by the Seventh Amendment, (2) whether Congress has the constitutional authority to delegate to the SEC (part of the executive branch) the ability to choose enforcement through its in-house court instead of the federal courts, and (3) whether protections the SEC’s in-house judges enjoy from for-cause removal infringe the President’s powers to supervise the executive branch.
How will the Supreme Court decide? The 9-0 ruling in Cochran in April and the justices’ willingness a month later to docket Jarkesy indicate their constitutional concerns. And yet, it’s clear that the enormous power Congress granted to the SEC’s in-house court has paid huge enforcement dividends.
For example, in FY 2022, the SEC brought a staggering 760 enforcement actions and ordered civil penalties, disgorgement, and prejudgment interest of $6.4 billion, the most in SEC history. The SEC adjudicated about 90 percent of its cases in-house and resolved close to 99 percent of those through agreed settlements. Further, the average duration to resolve SEC cases in-house is about 27 times faster than in federal court.
But what is the cost of all that enforcement efficiency? At worst, SEC defendants feel steamrolled by an opaque, conflicted, and largely unaccountable in-house adjudication. How many defendants, including those accused of FCPA violations, agree to resolutions because they fear far worse outcomes in the SEC’s in-house court?
Federal litigation against deep-pocketed and heavily lawyered corporate defendants is enormously difficult. No wonder Congress allowed the SEC to avoid federal courts in favor of an internal “administrative” procedure. But the future reverberations from Cochran, and a ruling against the SEC in Jarkesy, could spell the end of the SEC’s in-house court for most cases. If that happens, it’s hard to see how the SEC can maintain its current level of enforcement activity.