The Fifth Circuit recently decided Jarkesy v. Sec. & Exch. Comm’n, No. 20-61007, 2022 WL 1563613, at *1 (5th Cir. May 18, 2022).  The case has significant implications for the SEC’s use of administrative law judges (ALJs).  The majority opinion was written by Judge Elrod and joined by Judge Oldham. Judge Davis penned a dissent.  The majority issued three holdings:

We hold that: (1) the SEC’s in-house adjudication of Petitioners’ case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.

The case involved two hedge funds founded by Jaresky, an investor, businessman, and conservative radio host.  The SEC alleged that Jaresky: (i) misrepresented the identity of the prime broker and auditor; (ii) misrepresented the funds’ investment parameters and safeguards; and (iii) overvalued the funds’ assets to increase the fees collected.  After an evidentiary hearing, an SEC ALJ found that the funds had committed securities fraud.  Jaresky’s defended by raising constitutional challenges to administrative adjudication, among other things.
 
Although his arguments were rejected by the Commission, the Fifth Circuit embraced them.  I’ll overview them briefly in turn before turning to broader context and the long term perspective.  
 
7th Amendment Right to a Jury Trial
 The Fifth Circuit concluded administrative adjudication was unconstitutional “because the SEC’s enforcement action is akin to traditional actions at law to which the jury-trial right attaches. And Congress, or an agency acting pursuant to congressional authorization, cannot assign the adjudication of such claims to an agency because such claims do not concern public rights alone.”  As I read the opinion, the Fifth Circuit’s  seems to find that a right to a jury trial attaches to statutory and administrative claims which significantly overlap with common law claims. This may not be the only reading and I welcome any thoughts in the comments about the scope of this reasoning.
 
There are some immediate implications from this.  If applied more broadly, this reasoning might gut much administrative adjudication outside the SEC as well. This holding does not turn on anything unique to the SEC.  This would also likely significantly shift enforcement actions to federal court.
 
Unconstitutional Delegation
The SEC has long enjoyed the discretion to decide whether to proceed administratively or in an Article III court. The Fifth Circuit concluded that Congress unconstitutionally delegated this discretion because Congress did not specify a specific intelligible principle for this decision.  
 
The SEC had argued that the decision about where to bring its enforcement action was an executive one akin to prosecutorial discretion–not a legislative decision.  The Fifth Circuit disagreed finding that the decision about whether to consign matters to administrative adjudication or Article III courts was a legislative one.  It reasoned that different procedures apply in administrative adjudication and the ability to elect between administrative adjudication and Article III courts allows the SEC to pick the rules under which it would play on a case-by-case basis.
 
The opinion marks another advance for nondelegation doctrine within the federal courts.  As the doctrine expands, the risk to administrative agencies grows significantly.
 
Unconstitutional Removal Restrictions
As a final holding, the Fifth Circuit invalidated the ALJ structure as improperly insulated from presidential control because ALJs enjoy two layers of for-cause removal protections.   It found that: 
 
SEC ALJs perform substantial executive functions. The President therefore must have sufficient control over the performance of their functions, and, by implication, he must be able to choose who holds the positions. Two layers of for-cause protection impede that control; Supreme Court precedent forbids such impediment.
 Whether two layers of for-cause removal protection actually exists remains uncertain.  The Fifth Circuit repeats an error made by the Supreme Court in describing SEC Commissioners as protected by for-cause removal protections.  The SEC’s statute does not address it. See Gary Lawson, Stipulating the Law, 109 Mich. L. Rev. 1191, 1194 (2011) (explaining that despite the widespread assumption that for-cause removal protections protect SEC Commissioners, “is certainly not obvious that the SEC Commissioners enjoy ‘for cause’ protection”); Peter L. Strauss, On the Difficulties of Generalization -Pcaobi N the Footsteps of Myers, Humphrey’s Executor, Morrison, and Freytag, 32 Cardozo L. Rev. 2255, 2276–77 (2011) (explaining that the ability of the President to remove SEC Commissioners remains unclear because there is no statutory provision granting SEC Commissioners for-cause removal protection).
 
The Broader Picture
Many social media reactions to the decision mischaracterize it.  The decision does not declare the SEC unconstitutional or say that administrative agencies are unconstitutional.  Here are two examples:
Filippelli
Filippelli
 
As Bloomberg’s Matt Levine has explained, this particular holding only addressed a small part of what the SEC does.  He explained that we should pay attention, but that it’s not as though the SEC is suddenly shutting its doors:
 
This may not be a particularly big deal. Two judges on one panel of one appeals court found that one small part of what the SEC does is an unconstitutional delegation of power. It is possible that this decision is fairly narrow: Congress did delegate this decision — about whether to bring cases in federal courts or its own forums — to the SEC, fairly recently, without any guidance at all, which is unusual. Perhaps the “intelligible principle” standard allows the SEC to do all of its other rulemaking (because Congress has mostly given it some broad guidance about protecting investors in the public interest, and because SEC rules do help to fill in a fairly detailed statutory system), but not to make this particular decision. Still. I think the Fifth Circuit went out of its way to find a nondelegation problem because the Supreme Court has changed and now there will be a lot more courts finding a lot more nondelegation problems. I think this might be a sign of where things are going.
Others have had similar takes.  Professor Wurman thought the Fifth Circuit didn’t need to reach many issues, but did not see a need to panic. 
Professor Verret welcomed the decision.
Mark Cuban celebrated the result.
Professor Jackson disagreed with the Fifth Circuit’s reasoning with a thread.
 
A Worrying Trendline
I’ve written about the risks that the lines of judicial thought here pose.  Although this decision creates new risks for administrative agencies, financial regulators should pay particularly close attention.  That the Fifth Circuit would declare SEC ALJs unconstitutional wasn’t on my immediate radar, but it didn’t surprise me.  The bigger risk I’m worried about is that a court will suddenly take out some systemically important financial regulator leading to a market collapse and a financial crisis.  One way to think about this risk is that the courts have begun to play a game of Jenga™.   The Fifth Circuit just pulled away a bit of the SEC’s enforcement discretion and use of ALJs within the Fifth Circuit.  Nothing has come tumbling down yet.  What happens when some brief before it raises constitutional challenges to FINRA, the Exchanges, or other SROs?  It’s all fun and games until you pull the wrong block and crash the bond markets.