Law professors Christopher Walker and David Zaring say the SEC’s in-house adjudication system can survive constitutional challenge if the Supreme Court, Congress, or the agency itself implement a right to removal to federal court.
The US Supreme Court heard oral argument Nov. 29 in SEC v. Jarkesy, the most important case on agency adjudication in decades. The justices spent nearly two and a half hours questioning whether the US Constitution allows for the Securities and Exchange Commission to impose civil penalties through its in-house adjudication system, instead of requiring the agency to try the case before a jury in federal court.
This was just one of three constitutional issues raised in Jarkesy. The court spent no time on the other two, and a majority of the court seems poised to rule against the SEC. The stakes are high. Some legal scholars and commentators believe that the court’s decision could fundamentally undermine the federal government’s powers, especially to enforce complicated regulatory schemes.
Jarkesy doesn’t have to create a sea of change. There’s an easy fix: Congress, the SEC, or even the Supreme Court itself could avoid major disruption in administrative enforcement and adjudication by recognizing a “right to remove.”
A regulated party should have a right to remove an SEC enforcement action for civil penalties from an in-house agency adjudication to a federal court. This proposal would resolve the constitutional issues presented in Jarkesy and result in better regulatory policy.
Our proposal isn’t unprecedented. Three decades ago, a task force of the American Bar Association Section of Business Law recommended that Congress legislate such a right to remove, and nearly a decade ago, the US Chamber of Commerce agreed.
In 2022, Senate Republicans introduced a version of this right-to-remove proposal in JOBS Act 4.0. The ABA, US Chamber, and Republicans in Congress grounded their recommendations in fairness and due process for the regulated party.
Those are important values. But more pressing today is that a right to remove solves the constitutional problems presented by Jarkesy. When a regulated party decides not to exercise its right to remove, it consents to an in-house administrative law judge proceeding and an agency final decision on the merits.
As a constitutional matter, this is similar to Fed. R. Civ. P. 73, which allows a magistrate judge to hold a trial based on the parties’ consent. It’s also similar to parties’ agreement to have disputes settled through arbitration.
Congress already has recognized a right to remove in agency adjudication itself, including in the Fair Housing Act, Federal Power Act, and Energy Policy and Conservation Act.
Congress could similarly amend the Securities Act to codify this right to remove in SEC proceedings. But a virtue of this path forward is that we needn’t wait for Congress to act.
The SEC itself can and should implement a right to remove itself. Without even engaging in notice-and-comment rulemaking, the agency could promulgate a regulation tomorrow detailing when and how regulated parties can request the SEC to remove an agency adjudication to federal court.
As a policy matter, a right to remove is preferable over a rule that SEC enforcement actions can only be brought in federal court. Prior to Jarkesy, SEC ALJs adjudicated hundreds of matters each year. Many businesses still may prefer to have their matters adjudicated in-house at the SEC, as it can be more efficient and can leverage the ALJs’ expertise.
By allowing but not requiring regulated entities to remove adjudication matters to federal court, our proposal preserves the advantages of in-house adjudication while creating a safety valve for regulated businesses that prefer a federal judge (and jury) in the first instance. By providing regulated parties with a choice, federal agencies will have increased incentives to improve their in-house agency adjudication systems to compete with federal courts.
For these reasons, we hope the SEC or Congress sees things the same way. Indeed, it’s possible for the Supreme Court to recognize a right to remove in its decision in Jarkesy.
Just two years ago in United States v. Arthrex, the court refashioned the Patent Act to allow for agency-head review of patent adjudication decisions. Congress by statute had expressly precluded such review, but the court didn’t hesitate to override that congressional choice to address a similar constitutional challenge to agency adjudication.
Regardless who acts—Congress, the SEC, or the Supreme Court—recognizing a right to remove would help ensure Jarkesy doesn’t threaten the future of administrative enforcement and adjudication at the SEC and beyond.
The case is SEC v. Jarkesy, U.S., No. 22-859, argued Nov. 29, 2023.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Christopher J. Walker is law professor at the University of Michigan and former chair of the American Bar Association’s section of administrative law and regulatory practice.
David Zaring is professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania.
