The U.S. Supreme Court is set to decide this fall whether the Securities and Exchange Commission (SEC) can continue to pursue charges against Wall Street executives in the same kind of internal tribunals it has employed for decades. During a recent hearing of SEC v. Raymond J. Lucia Companies, Inc., the conservative court justices expressed their concerns about the legitimacy of such tribunals in light of constitutional guarantees.
At issue is whether the SEC, which regulates the securities industry, should be allowed to hold a “judge trial” in which the defendants are denied the right to appeal to a federal court because the outcome is decided by in-house adjudicators hired by the agency.
Justice Neil Gorsuch questioned whether such a “non-Article III forum” – Supreme Court argot for “not just any court” – is lawful and questioned the SEC’s authority to “create jurisdiction out of thin air.” Justice Samuel Alito, echoing Gorsuch’s remarks, said the defendants do not have “basic constitutional protections in the type of proceeding that the SEC has structured here.”
In response, SEC lawyers argued that the tribunal system is necessary to uphold their mission of protecting investors from fraud, and that such proceedings are democratic in nature because they involve a collegial board of SEC-appointed officials who work in the public’s interest.
The court’s liberal justices appeared sympathetic to the SEC’s arguments, suggesting that the tribunals should be given some leeway in their authority, as Congress entrusted them to protect investors in such a capacity. Justice Stephen Breyer suggested that if the court were to strike down the SEC’s tribunal system, it would create an “enormous imbalance of power” in which the agency is no longer able to effectively deal with and prosecute securities-related offenses.
The court’s decision is expected to have a broad-reaching impact on how the SEC carries out its most important mandates. Legal experts note that a decision in favor of the agency could strengthen the legitimacy of its tribunal system and increase its ability to protect investors from fraud, while a defeat could severely weaken its enforcement powers over the nation’s financial markets.
No matter the outcome, the Supreme Court’s decision will certainly affect the manner in which the SEC handles complicated securities-related litigation in the future. Investors should pay attention when the court renders its decision, as it could have a direct impact on the financial security of their investments.
