The Securities and Exchange Commission (SEC) brought an enforcement action claiming a hedge fund and its founder violated the securities laws. SEC 1) ordered almost a million dollars in penalties and disgorgement and 2) barred the fund’s founder from various securities industry activities. On appeal, the US Court of Appeals for the 5th Circuit vacated SEC’s decision because 1) the fund and its founder were deprived of their constitutional right to trial by jury and 2) Congress failed to give SEC “an intelligible principle” to guide SEC in choosing to file enforcement actions in court or to use SEC’s administrative enforcement procedures.
Many Administrative Agencies Can Choose Administrative or Court Enforcement
Statutes establishing administrative agencies routinely provide for enforcement, commonly authorize the agencies to establish enforcement structures within the agency, and generally give the agency the choice to file enforcement actions in court or use the agency’s administrative enforcement procedures. The 5th Circuit held that giving SEC the discretion as to where to file enforcement actions without adequate guidance through “an intelligible principle” violated the US Constitution’s “separation of powers” requirement, because guidance on that enforcement decision is reserved to the legislative branch.
Impact on Many State and Federal Agencies
States also have “separation of powers” requirements. The 5th Circuit’s decision suggests that virtually all administrative agency enforcement decisions where the agency had the option of enforcing through a court action could be subject to a constitutional challenge that the underlying statute lacks the “intelligible principle” to guide the enforcement decision. (The Texas Commission on Environmental Quality is one Texas example, although 7.105, 7.106, and other Texas Water Code sections may provide the “intelligible principle.”) Agencies concerned about the issue could bring all contested enforcement matters in court, which generally would mean larger penalties and higher defense costs.
One 5th Circuit judge dissented, arguing that Congress was within its constitutional power to give SEC discretion to choose administrative or court enforcement.
To see the 5th Circuit’s decision, including the dissent https://www.ca5.uscourts.gov/opinions/pub/20/20-61007-CV0.pdf