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États-Unis | Publication | mai 2022
The constitutionality of the United States Securities and Exchange Commission's (SEC) system of administrative tribunals has long been the subject of fierce debate. Defendants in cases brought by the SEC in-house have raised a bevy of constitutional challenges to the proceedings, ranging from the appointment (and removal) of the Commission's administrative law judges, to the scope of constitutional protections afforded to defendants, to the Commission's discretion to select the venue for prosecution. Even though the ultimate import of the defendants' claims is that the proceedings are unconstitutional, the courts have generally declined to hear these challenges until the proceedings have concluded, citing principles of exhaustion and the provisions of the Securities Exchange Act of 1934 that vest jurisdiction to review SEC orders exclusively in the federal courts of appeals. In the wake of the Supreme Court's ruling in Lucia v. SEC, 138 S. Ct. 2044 (2018), that the appointment of the Commission's ALJs violated the Appointments Clause of the Constitution, federal courts have begun to take a harder look at this system.
Last week, the Fifth Circuit issued an opinion sharply critical of the SEC's administrative tribunals. The decision, Jarkesy v. SEC, No. 20-61007 (5th Cir. May 18, 2022), has significant consequences for how the Commission can prosecute civil securities law violations and how parties facing SEC charges can seek to vindicate their constitutional rights.
In Jarkesy, the SEC brought administrative charges against a hedge fund manager and the fund's investment advisor, alleging fraud under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisors Act of 1940. The defendants sued in the United States District Court for the District of Columbia to enjoin the agency proceedings, contending that the conduct of the proceedings infringed on their constitutional rights. The district court denied relief, holding that the Exchange Act created a comprehensive scheme for reviewing SEC orders that reserved jurisdiction for the federal courts of appeals at the end of the proceedings, and the D.C. Circuit affirmed. See Jarkesy v. SEC, 48 F. Supp. 3d 32 (D.D.C. 2014), aff'd, 803 F.3d 9 (D.C. Cir. 2015). The case moved forward before an ALJ, who found the defendants liable for securities fraud, and the SEC upheld the ALJ's decision. In the process, the Commission rejected the defendants' constitutional arguments, including that the proceedings violated their right to a jury trial under the Seventh Amendment, that the Commission had exercised an unconstitutionally delegated legislative power in choosing to proceed in-house and that the ALJs were unconstitutionally insulated from removal in violation of the Take Care Clause. The defendants then petitioned the Fifth Circuit for review of the SEC's order.
A divided panel of the Fifth Circuit agreed with Jarkesy on each of the constitutional points.
Jarkesy was not the only significant decision for the SEC in recent weeks. Two days before the Fifth Circuit handed down its opinion in Jarkesy, the Supreme Court granted certiorari in SEC v. Cochran, another decision from the Fifth Circuit bearing on challenges to the Commission's administrative tribunals. Cochran squarely presents the question rejected by the D.C. federal courts at the injunction stage of Jarkesy: "Whether a federal district court has jurisdiction to hear a suit in which the respondent in an ongoing SEC administrative proceeding seeks to enjoin that proceeding, based on an alleged constitutional defect in the statutory provisions that govern the removal of the ALJ who will conduct the proceeding." In brief, the defendant in Cochran sued in Texas federal court to enjoin an SEC in-house proceeding based on the Take Care Clause violation recently found in Jarkesy. While the district court dismissed the suit on the same jurisdictional grounds as the D.C. courts, the en banc Fifth Circuit reversed and allowed the case to proceed. See Cochran v. SEC, 20 F.4th 194, 197–98 (5th Cir. 2021) (en banc). Cochran, therefore, may open the door to pre-enforcement suits to enjoin SEC administrative proceedings—at least where the constitutionality of the proceedings is in question.
These developments merit close attention among public companies and those in the financial sector. Key takeaways include:
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