More Regulation on Wall Street, Not Less



By Kayla Molander
James Fallows Tierney

“It is no understatement to say that Securities and Exchange Commission (SEC) v. Jarkesy is an all-out frontal assault on federal administrative agencies’ ability to pursue their enforcement programs in ways that serve the public interest,” says Chicago-Kent College of Law Assistant Professor James Fallows Tierney.

The United States Supreme Court recently heard oral arguments in SEC v. Jarkesy, and a decision is expected to be made before the end of June 2024.

The case deals with issues of governmental power, and the ability of government agencies to enforce regulations. It also deals with the exact type of work that Tierney, a former SEC attorney, used to perform, working for a team at the SEC general counsel’s office that handled in-house administrative proceedings against investment advisers and stockbrokers.

In the Jarkesy case, the SEC accused a hedge fund manager of committing fraud by lying to investors and asked an agency administrative law judge‚ rather than a federal court judge, to impose sanctions including hundreds of thousands of dollars in fines, an order to stop violating the law, and barring Jarkesy from working in the securities industry again. The SEC’s in-house administrative law judge found that Jarkesy had violated the law and imposed the requested punishment.

“On appeal, the U.S. Court of Appeals for the Fifth Circuit found that the SEC’s in-house administrative law judge system was unconstitutional for a variety of reasons,” says Tierney.

Jarkesy claims that the SEC internal process of handling violations violates his right to a jury trial. One potential consequence of that interpretation of the law, Tierney says, “would be that the SEC would have to pursue potential violators of the securities laws, including those alleged to be running off-the-books investment schemes, in court rather than in-house.” Jarkesy’s lawyers have also argued that administrative law judges shouldn’t be insulated from presidential removal, as they currently are, and that there are problems with how Congress has delegated the power to agencies to decide what rules should govern markets.

“I see the Jarkesy case as a rather radical attack on the idea that we should be intervening in economic life with ordinary, familiar regulatory tools—like Congress determining that an agency can go after a violator in-house rather than literally ‘making a federal case’ out of every violation, no matter how small,” says Tierney. “Shutting down enforcement forums like this will not make federal administrative law more efficient; requiring it all go into federal court will just mean there will be less of it overall, and what does get brought [to federal court] will more likely be shut down by anti-administrative judges.”

Tierney says the case could have devastating consequences across not just federal economic regulatory framework, but on government enforcement across the board.

“Courts are sometimes seen as the guarantors of individual freedoms from arbitrary government action, but this is only half of the story,” says Tierney. “Doctrines that look neutral or even sympathetic can be deployed in ways that hamper regulation and protect the powerful, which is the unspoken premise behind all the business groups and anti-regulation activists who filed briefs supporting Jarkesy in the Supreme Court.”