SEC v. Jarkesy: Navigating Changes to the Regulatory Landscape
On June 27, 2024, the Supreme Court ruled that the SEC’s use of in-house legal proceedings to enforce civil penalties against defendants is unconstitutional, citing that these procedures violate the Seventh Amendment right to a jury trial. Going forward, defendants will be entitled to a jury trial before civil penalties are enforced.
Enforcement power was initially granted to the SEC in 2010, when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation was passed in response to the 2008 financial crisis, authorizing the SEC to impose civil penalties through in-house proceedings, without needing to go through federal courts.
In 2011, the SEC began an investigation of George Jarkesy’s firm, Patriot28, LLC. In 2013, following the investigation, the SEC filed an in-house action claiming that the firm had violated antifraud provisions of federal securities laws. An SEC administrative law judge heard the case and ordered $300,000 in monetary penalties, in addition to other sanctions. Jarkesy petitioned for judicial review, and in 2022, the Fifth Circuit Court of Appeals reversed and remanded the SEC’s decision, claiming that it had violated Jarkesy’s Seventh Amendment right to a jury trial.
On June 27, 2024, the Supreme Court ruled in favor of Jarkesy in a 6-3 vote, finding that the SEC’s use of in-house legal procedures to charge defendants with civil penalties is in violation with the Seventh Amendment. In the future, defendants will be entitled to a jury trial before penalties are imposed.
While the implications of this decision are still uncertain, we can predict a change in the way that violations of securities laws are handled in the US, as enforcement power will shift from the SEC, a government agency, to federal courts. Litigation is more expensive and time consuming than in-house proceedings, which could impact how enforcement cases are handled. There may be changes in the number of cases pursued and the types of cases brought to court.
The SEC v. Jarkesy decision serves as a reminder for firms to consider the financial and reputational consequences of compliance breaches. With ever-changing regulatory landscapes, IMP believes that prevention is the best policy. Taking steps to organize and optimize compliance rule libraries can aid in preventing trading errors. Leveraging CLEAR Compliance® allows IMP to proactively review requirements and implement sustainable, long-term compliance solutions for our clients.
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