Things just got a little harder for the Securities and Exchange Commission, which henceforth must seek certain civil damages for securities fraud by going to federal court, rather than through its own internal adjudicatory process. That’s the upshot of the Supreme Court’s decision in Securities and Exchange Commission v. Jarkesy, which held unconstitutional — under the Seventh Amendment — a provision of Dodd-Frank that allowed the SEC to pursue unregistered advisers without a jury trial.The result, although entirely predictable and probably correct, might play havoc with much more than this tiny corner of the regulatory state.George Jarkesy ran two small hedge funds with about 100 investors and assets of $24 million. In 2011, the SEC brought an administrative action that resulted in a finding that he’d committed securities fraud. Jarksey appealed to the U.S. Court of Appeals for the Fifth Circuit, which found multiple violations of the Constitution. That’s the decision the Supreme Court just affirmed, on the single ground that the case should have been heard by a jury.Nothing in Chief Justice John Roberts’ majority opinion disturbs the SEC’s longstanding authority to go after registered investment advisers before its own administrative law judges rather than in federal court. This authority makes sense because registered advisers, who usually have $100 million or more under management, subject themselves to a detailed federal regulatory scheme, in return for immunity from most statelevel securities regulations. What concerned the court was Dodd-Frank’s extension of that same power when the adviser in question isn’t registered. How on Earth can that distinction be preserved?The answer is, um, tricky.Here’s the relevant part of the Seventh Amendment: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved...”If the courts took this language this literally, the courts would be swiftly overwhelmed. Countless entities, from the National Labor Relations Board to the National Highway Traffic Safety Administration, are empowered to issue civil fines without the bother of trial. To avoid this tidal wave, the Supreme Court has long held that Congress can assign certain adjudications to administrative agencies, provided that “public rights are being litigated.” When the SEC charges a registered adviser with fraud, it’s seeking to vindicate a public right, because regulating those advisers is central to the statutory scheme.But the law on what makes a right “public” is a mess — or, as Roberts dryly ...
