Supreme Court Decision Calls into Question Financial Regulatory Enforcement

When must the federal government respect your constitutional rights? “Always,” said the U.S.

Supreme Court, or at least when it comes to a person’s right to a jury trial under the Seventh

Amendment. In Securities and Exchange Commission v. Jarkesy, 603 U.S. 109 (2024), the

Supreme Court affirmed a decision of the U.S. Circuit Court of Appeals for the Fifth Circuit

vacating a Securities and Exchange Commission order imposing civil penalties for securities

fraud. The appellate court determined that the Seventh Amendment right to a jury trial applied to

the federal agency’s enforcement action, and the SEC did not provide the individual, Jarkesy, the

right to a jury trial before fining him. The high Court affirmed that people don’t lose this critical

constitutional guarantee merely because the government (in that case, the SEC) uses agency

hearings instead of federal Article III courts to enforce its rules.

Jarkesy tells us that the SEC can’t use its in-house administrative tribunals to levy monetary

sanctions for violations of its rules. But what does that mean for organizations over which the

SEC has authority?

What is FINRA?

For generations, federal law has entrusted industry participants with much of the responsibility

for regulating the securities industry. For example, most brokers and other entities involved in

trading stocks, bonds, etc., are members of the Financial Industry Regulatory Authority

(FINRA). FINRA is a non-governmental “self-regulatory organization” (SRO), legally

authorized by the SEC to govern its members’ activity in the financial markets. One cannot act

as a securities broker without joining FINRA.

As a result, FINRA has the authority to discipline its members for violating federal laws or

FINRA’s rules through various penalties, including financial sanctions and expulsion from

FINRA membership (which effectively expels the member from the industry). The SEC oversees

FINRA’s governance, reviewing its rules and enforcement actions. Thus, much of the securities

industry primarily governs itself through SROs like FINRA, but the SEC, per Congress,

maintains ultimate authority over the industry.

What are administrative tribunals?

Many federal agencies use some kind of in-house proceedings that resemble courts. They

generally feature two sides (typically the government and a private individual or company) and

allow each side an opportunity to present evidence and confront the other side’s evidence. They

feature a decision-maker who has some degree of independence from the parties to the

proceeding. Frequently, this decisionmaker is a “hearing officer” or “administrative law judge”

who is an employee of the relevant agency but was not a part of the enforcement action or case at

issue.

Significantly, while many of these elements resemble the characteristics of courtroom

proceedings, agency tribunals differ substantially from Article III trial courts. First, Article III

judges are independent from federal agencies and federal prosecutors. Furthermore, parties to

court proceedings can often have their claims decided by juries. Finally, federal courts follow the

Federal Rules of Civil Procedure and the Federal Rules of Evidence, which ensure that parties

can discover all relevant information before trial and that the judge and jury only rely on reliable

information to make their decisions.

Myriad other elements distinguish district courts and agency proceedings, and generally, these

additional procedures serve to protect the parties’ constitutional rights. Agencies often use their

in-house tribunals to avoid the significant time, expense, and uncertainty that district court

procedures add to government enforcement actions. But employing proceedings that lack

procedures designed to protect individuals’ constitutional rights runs the risk of violating those

constitutional rights. The Jarkesy decision stands as an example of the Supreme Court telling a

federal agency that it has gone too far.

How could Jarkesy impact FINRA’s authority?

In Jarkesy, the Supreme Court decided that the SEC can’t use non-jury administrative

proceedings to impose financial penalties. But what about those SROs, like FINRA, that derive

their enforcement authority from the SEC? That is, if the Seventh Amendment prohibits the SEC

from using its in-house tribunals to impose monetary sanctions, can FINRA, which derives its

authority from the SEC, use its in-house proceedings to likewise impose fines without violating

the Constitution?

Moreover, does the Jarkesy ruling call into question other procedural differences between agency

hearings and federal district courts? For example, if agency proceedings do not afford an

individual a right to fully confront adverse witnesses, follow the Federal Rules of Evidence, or

allow for comprehensive discovery, do they violate the Constitution’s guarantee of due process?

And, if the Court decides that agency hearings must provide additional procedural protections,

do those requirements trickle down to all the SROs, like FINRA, under the agency’s purview?

Additional litigation will be required to answer these questions and others establishing the scope

of the Constitution’s application to agency and non-governmental administrative adjudications.

Please contact CullenLaw attorneys for more information about constitutional issues in agency

and other hearings.