SEC’s Use of In-House Judges Cast in Doubt by Supreme Court

The U.S. Supreme Court’s conservative majority cast doubt on the Securities and Exchange Commission’s use of in-house judges, hearing arguments in a case that could strip the agency of a key enforcement tool.

In a session that lasted more than two hours Wednesday, the justices suggested that people accused of fraud by the SEC have a constitutional right to go before a federal court jury, at least when the commission is seeking civil penalties.

It “seems problematic to say the government can deprive you of your property, your money, substantial sums in a tribunal that is at least perceived as not being impartial,” Justice Brett Kavanaugh said.

The SEC uses its in-house system for hundreds of cases a year – even after scaling back in response to a 2018 loss at the Supreme Court. A fresh high court loss for the commission would reduce its leverage to extract expensive settlements.

The dispute is part of a Supreme Court term likely to have broad implications for federal regulators. The justices are also considering whether the Consumer Financial Protection Bureau’s funding system is constitutional and whether to overturn a precedent that gives agencies leeway when they interpret ambiguous congressional commands.

The session underscored the deep skepticism among the court’s six Republican-appointed justices toward the expansion of federal regulatory power in recent decades.

The “impact of government agencies on daily life today is enormously more significant than it was 50 years ago,” Chief Justice John Roberts said.

One of the court’s liberals, Justice Elena Kagan, countered that “our problems have only gotten more complicated and difficult, and it’s usually Congress that decides how to solve those problems.”

That brought a response from another conservative, Justice Neil Gorsuch. “We all agree Congress has a lot more problems on its plate today than it did 100 years ago, or even 50 years ago, but that doesn’t mean that the constraints of the Constitution somehow evaporate, do they?” he asked Deputy Solicitor General Brian Fletcher moments later.

Jury Right

The Biden administration is appealing a ruling that found multiple flaws with the SEC’s reliance on its administrative law judges. The high court session focused almost entirely on contentions that the Constitution’s Seventh Amendment guarantees the right to a jury trial in SEC enforcement cases.