The Supreme Court decision in SEC v. Jarkesy, ruling that the Securities and Exchange Commission can’t use administrative court proceedings in cases where it seeks civil penalties, may close down one lane the SEC uses to enforce the market, but it won’t altogether change how the Public Finance Abuse Unit operates.
The municipal securities market has seen its share of high profile cases settled through administrative court proceedings, such as Dolphin & Bradbury v. SEC in 2008 where the Commission alleged securities fraud by an underwriter, or in Ira Weiss v. SEC where the Commission went after a bond lawyer.
“I think the decision was somewhat expected and that’s demonstrated by them not having pursued any recent municipal actions through the administrative judge court proceeding, like they had in the past,” said Andrew Kintzinger, counsel at Hunton Andrews Kurth. “But it hasn’t really curtailed their enforcement powers. The Public Finance Abuse Unit has many enforcement arrows in its quiver and have shown that they can work around that and go with an administrative settlement or litigation. “
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This case sprang up partly because of the process the Commission goes through when it pursues administrative court proceedings. Once a case was ruled internally, any decision was reviewed or appealed by the full Commission and if that decision by the full Commission was then reviewed or appealed, it came down to the D.C. Court of Appeals for final resolution, which happened in this case against Jarkesy.
“I think there was a perception on the part of defendants that that appeals procedure was unfair,” Kintzinger said.
SEC Chairman Gary Gensler’s administration, like other recent SEC leadership, has not hesitated to bring cases that perhaps would’ve traditionally been tried as administrative cases to federal court. High profile muni market cases such as the
“You go down the list of the most impactful cases in our space and they were brought in federal court,” said Ed Fierro, partner at Bracewell and former senior counsel to the SEC’s Office of Municipal Securities. “So this decision won’t impact those,” he added. “It’s really the administrative cases that are in the hot seat here and even narrower than that, because those cases have to involve a civil penalty to be under the scope of this decision.”
The decision may force the Commission to reexamine the cases it has ongoing, Fierro said. Earlier this year Commission staff noted they are seeing many unregistered MAs in P3s and charter schools but have yet to bring any serious charges on that front. Time will tell if those are handled any differently than they would’ve been without the Supreme Court decision.
But the decision still represents a high-profile loss for the Commission, even if its impact is limited.
“This is a big loss for the SEC because it forces the SEC to have trials with juries, which may be more skeptical of the more aggressive theories,” said Brad Bondi, global co-chair of the Investigations and White Collar Defense practice at Paul Hastings. “This is a landmark decision that has broad ramifications across other government agencies that use administrative proceedings.”
News of that decision came just a day before two other similar cases were settled as in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, which ruled against the so-called Chevron doctrine that allows federal agencies to rely on their own rules and interpretations.
“Today’s decisions are necessary to stop an out-of-control administrative state from continuing to trample on our democracy,” said American Securities Association president and chief executive officer Chris Iacovella. “Returning policymaking authority to the elected representatives of the American people is a major victory for our Constitution and the separation of powers in our country.”
But the case may not be able to change the large amount of precedent leaning on that statute.
“What’s going to come out of that is that the Supreme Court is going to change their methodology and they’re no longer going to follow the Chevron deference doctrine,” one source who chose to remain anonymous said of the ruling. “But I noticed that Chief Justice Roberts writes in the decision that courts should still look to agency interpretations. But ultimately, courts have to decide what the correct interpretation is.”
“I don’t think that the Chevron case today is going to cause courts to ignore the huge body of interpretation that the SEC has released in regulations and other interpretive notices of SEC law,” they said.