Thomas J Powell Grant

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The SEC on Trial: Reining in Unchecked Power

As the Supreme Court deliberates a pivotal case challenging the enforcement authority of the Securities and Exchange Commission, the U.S. approaches a defining moment regarding the scope of power vested in administrative agencies. SEC v. Jarkesy cuts to the heart of constitutional questions on executive power, individual rights, and regulatory overreach that have intensified in recent years. It holds profound implications for the future of financial regulation and beyond.

The case confronts the SEC’s use of administrative law judges—unelected agency staff who oversee internal enforcement trials, acting as investigators, prosecutors, and judges combined into one troubling package. This centralized power enabled the SEC to pursue unsubstantiated fraud allegations against hedge fund manager George Jarkesy, dragging him through a grueling six-year, in-house adjudication devoid of impartiality.

On trial alongside the SEC’s practices is the terrifying reality of the unchecked regulatory excess they represent—an affront to fundamental constitutional liberties enshrined in the Seventh Amendment. This amendment guarantees citizens’ rights to impartial jury trials for civil cases that exceed twenty dollars. However, the SEC contends such protections do not apply in administrative proceedings, empowering them to unilaterally condemn individuals and impose industry bars without independent oversight. This end-run around constitutional checks and balances should terrify anyone concerned over a fair justice system and only serves to underscore the urgent need for reform reasserting constitutional checks against tyranny—as envisioned by Hamilton and Madison in The Federalist Papers.

During deliberations on November 29, 2023, Justices Thomas and Gorsuch challenged the SEC’s reliance on the “public rights” doctrine against the Seventh Amendment’s jury requirement, likening the agency’s proceedings to traditional common-law fraud necessitating a jury. In contrast, Justices Kagan, Sotomayor, and Jackson invoked the Court’s Atlas Roofing precedent to support the SEC’s position, arguing that creating and enforcing new rights through administrative channels is constitutionally valid.

A Supreme Court decision favoring Mr. Jarkesy would trigger sweeping changes across federal agencies, overturning precedents stretching over a century. This would necessitate redirecting enforcement actions to federal courts and likely overhauling administrative law as we know it. Such reforms may prove tumultuous in the short-term but offer tremendous long-run value by re-establishing constitutional equilibrium between executive power and judicial review. Read the full article

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