5th Circuit finds SEC’s in-house courts unconstitutional


A Fifth Circuit ruling stating that the U.S. Securities and Exchange Commission’s in-house courts are unconstitutional has left legal experts with more questions than answers. The ruling was made on May 18, 2022, by a divided panel. 

The ruling found the SEC’s in-house administrative proceeding against hedge fund manager George R. Jarkesy Jr. and his investment adviser company Patriot28 LLC violated his right to a jury trial and that the in-house judges who oversee SEC administrative proceedings are unconstitutionally protected from removal. The 2-1 decision held that the SEC's judgment should be vacated. The decision could go so far as to upend the role of administrative law judges and weaken the agency’s powers.

The passage of the Dodd-Frank Act in 2010 expanded the SEC's powers, including its powers to bring cases in its own administrative court. Since then, conservative lawyers and judges have attempted to use the non-delegation doctrine, which states that Congress cannot delegate its legislative power to other entities, to rein in federal agencies and regulators. 

The recent decision is so broad that it implicates the legitimacy of the agency, and the constitutionality of the whole administrative state.
 

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Cristina Paneque's practice is focused on securities litigation. She is an associate in the firm's New York office.

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