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In a much-anticipated ruling likely to have dramatic ripple effects across government agencies, the U.S. Supreme Court held in SEC v. Jarkesy that the U.S. Constitution’s Seventh Amendment forbids the SEC from pursuing civil money penalties in administrative proceedings before administrative law judges (ALJs). Consequently, the SEC now may bring such actions only in federal court, where federal judges preside over the proceedings and juries are the fact-finders.
With respect to cases brought by the SEC, many commentators agree that the decision will have a significant impact. After all, the SEC’s success rate before its in-house ALJs has been approximately 90%— substantially more favorable than the SEC’s 69% win-rate in federal court, where defendants have greater protections, such as third-party subpoena power and more demanding evidentiary rules.1
SEC actions aside, Jarkesy may also have similar significant implications for other types of administrative enforcement actions, such as those brought by bank regulators, which commentators agree have been similarly favorable for federal agencies.
Because the SEC still can sue companies and their directors and officers (D&Os) in federal court, Jarkesy likely does not materially diminish companies’ and D&Os’ exposure to SEC enforcement actions. That said, the Jarkesy decision warrants careful review of D&O liability insurance policies, particularly to ensure that such policies’ definitions of “Securities Claim” are robust, without restrictions tied to administrative actions that the primary U.S. securities regulator now is barred from bringing. An experienced broker can help optimize coverage terms and conditions. If you have any questions or are interested in obtaining coverage, please contact your Aon broker.
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