News & Insights

SCOTUS SCUTTLES CHEVRON DEFERENCE AND LIMITS SEC ENFORCEMENT ACTIONS

The United States Supreme Court recently released two decisions which will impact the application of the Administrative Procedure Act and curb the Securities and Exchange Commission’s (SEC) enforcement of civil penalties. These decisions are likely to have far-reaching implications across the country, from securities rules to environmental regulations and healthcare costs.

Loper

In Loper Bright Enterprises v. Raimondo, No. 22-1219, 2024 WL 3208360 (U.S. June 28, 2024), the Supreme Court held that courts need not, and under the Administrative Procedure Act (APA) may not, defer to an agency’s interpretation of the law simply because a statute is ambiguous. The Loper holding overrules the Court’s landmark 1984 decision in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694, which gave rise to the Chevron Doctrine. Under the Court’s previously annunciated Chevron Doctrine, if Congress had not directly address the issue, courts were required to uphold the relevant administrative agency’s interpretation of the statute – as long as the interpretation was reasonable.

Since the 1984 decision, critics of the Chevron Doctrine have argued that courts, rather than federal agencies, should say what the law means. The Supreme Court found this argument persuasive and well founded in historical constitutional caselaw, as the Loper decision cites to the 1803 case of Marbury v. Madison, wherein the Supreme Court held, “[i]t is emphatically the province and duty of the judicial department to say what the law is.” In the Court’s 35-page ruling, Chief Justice Roberts, writing for the majority, noted that the APA directs courts to “decide legal questions by applying their own judgment” and therefore “makes clear that agency interpretations of statutes — like agency interpretations of the Constitution — are not entitled to deference.” Under the APA,” Roberts concluded, “it thus remains the responsibility of the court to decide whether the law means what the agency says.” Notwithstanding, Justices Kagan, Sotomayor, and Brown-Jackson dissented, essentially arguing that by striking down Chevron, the Supreme Court would open the floodgates of litigation and “cause a massive shock to the legal system.”

Jarkesy

The day before deciding Loper, the Supreme Court issued its decision in Sec. & Exch. Comm’n v. Jarkesy, No. 22-859, 2024 WL 3187811 (U.S. June 27, 2024). In Jarkesy, an investment adviser and his firm petitioned for review of final order of the SEC, which affirmed an administrative law judge’s imposition of a civil penalty of $300,000.00, based on a finding that the advisor and firm had committed fraud under Securities Act of 1933, Securities Exchange Act of 1934, and Investment Advisers Act of 1940. The Court held in Jarkesy that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.

The implications of Jarkesy, including its effect on the SEC’s (and other agency’s) use of administrative tribunals, are considerable. As an initial matter, the decision amounted to a partial rejection of the SEC’s administrative forum. Further, while the SEC has limited the number of enforcement actions it brings in the administrative process in recent years, given the substantial costs associated with federal court litigation, Jarkesy may force the SEC to be even more selective in its future enforcement efforts.

More broadly, the Jarkesy decision calls into question whether any federal regulatory agency — not just the SEC — can bring in-house proceedings to enforce civil penalties. This is particularly noteworthy, because although some agencies (such as the SEC) may choose whether to pursue civil penalties in federal court or via an in-house administrative proceeding, other agencies, such as the Occupational Safety and Health Review Commission, are only statutorily authorized to pursue enforcement through in-house proceedings. As a result, some, including Justice Sotomayor, have voiced concern that because of Jarkesy, the powers of certain federal agencies may be substantially curtailed.

Implications for Investment Professionals and Broker-Dealers

Investment professionals, broker dealers, and business leaders in every industry should be encouraged by the Court’s recent holdings in Loper and Jarkesy. As to Loper, the Court has made clear that the statutory interpretation of administrative agencies is no longer entitled to any deference from the judicial branch. Regarding Jarkesy, securities industry professionals subject to an SEC enforcement action are now entitled to a jury trial and the costs to the SEC associated with bringing enforcement actions are likely to substantially increase.