In a watershed opinion, a divided panel of the Fifth Circuit has ruled that the United States Securities and Exchange Commission's (SEC) system of in-house administrative tribunals is unconstitutional. The case, Jarkesy v. SEC, No. 20-61007 (5th Cir. May 18, 2022), holds that (1) defendants facing securities fraud charges have the constitutional right to a jury trial under the Seventh Amendment, (2) the Exchange Act's grant of complete discretion to the SEC to decide whether to bring charges in an administrative tribunal or in federal court violates the non-delegation doctrine and (3) the SEC's administrative law judges are unconstitutionally insulated from removal in violation of the Take Care Clause. This decision follows on the heels of several Supreme Court decisions casting doubt on the constitutionality of agency administrative proceedings, Lucia v. SEC, 138 S. Ct. 2044 (2018), and the need for targets of agency enforcement to submit to those proceedings before raising constitutional challenges in the federal courts, Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021) (en banc) cert. granted, --- S. Ct. ----, 2022 WL 1528373 (May 16, 2022); Axon Enter. v. FTC, 986 F.3d 1173 (9th Cir. 2021), cert. granted in part, 142 S. Ct. 895 (2022).

These developments merit close attention among public companies and those in the financial sector. Key takeaways include:

  • The Fifth Circuit in Jarkesy found three separate constitutional violations in the SEC's administrative tribunals. The first, centering on the right to a jury trial under the Seventh Amendment, is specific to securities fraud claims; the other two, relating to the non-delegation doctrine and the Take Care Clause, sweep more broadly. Therefore, defendants facing administrative charges of securities fraud may want to consider invoking their Seventh Amendment right to a jury trial, and all defendants, regardless of the SEC's charges, now have grounds to challenge the constitutionality of the proceedings.
  • The dissent in Jarkesy contended that the decision placed the court out of line with its sister circuits, at least on the application of the Supreme Court's "public rights" precedents that authorize Congress to assign adjudicative functions to an administrative forum when the government sues in its sovereign capacity to enforce public rights created by federal statute (i.e. an exception to the Seventh Amendment right to a jury trial). Indeed, the Fifth Circuit's strict conception of "public rights" casts doubt on the constitutionality of all kinds of in-house agency enforcement actions beyond the SEC. This makes it more likely that the full Fifth Circuit may agree to hear the case en banc, if the Commission requests review or an individual judge calls for a vote, and that the Supreme Court may grant certiorari if the decision stands.
  • In Cochran, the Fifth Circuit held that the provision of the Exchange Act vesting exclusive jurisdiction to review SEC orders in the federal courts of appeals did not implicitly strip district courts of jurisdiction to hear pre-enforcement challenges to SEC administrative proceedings. If the Supreme Court agrees, parties facing SEC administrative charges would no longer need to submit to the proceedings before arguing to a federal court that the proceedings were unconstitutional or ultra vires. This would represent a considerable expansion of the doctrine set forth in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), and its progeny, providing that the existence of a comprehensive statutory scheme for review of agency action generally precludes federal jurisdiction over pre-enforcement challenges. While Cochran is focused on the Exchange Act's jurisdictional provisions, the Supreme Court could well issue a decision that reverberates through other agency enforcement actions. Indeed, Axon presents essentially the same question with respect to the FTC. Together, Cochran and Axon should clarify the circumstances under which a party facing administrative charges can short-circuit the onerous review process and present an Article III court with pre-enforcement challenges to the agency's action.


Co-Head of Regulatory, Investigations, Securities and Compliance, United States
Head of White Collar Defense and Investigations, United States

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