Beyond Jarkesy: Rethinking the Role of Administrative Law Judges in SEC Administrative Proceedings

Fordham Journal of Corporate & Financial Law Volume 30 Issue 1 Article 1 2025 Beyond Jarkesy: Rethinking the Role of Administrative Law Judges in SEC Administrative Proceedings Mark T. Uyeda U.S. Securities and Exchange Commission Jaime Marinaro U.S. Securities and Exchange Commission Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Administrative Law Commons, Agency Commons, Business Law, Public Responsibility, and Ethics Commons, Civil Procedure Commons, Constitutional Law Commons, Securities Law Commons, and the Supreme Court of the United States Commons Recommended Citation 30 Fordham J. Corp & Fin. L. 1 (2025). This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact . BEYOND JARKESY: RETHINKING THE ROLE OF ADMINISTRATIVE LAW JUDGES IN SEC ADMINISTRATIVE PROCEEDINGS Mark T. Uyeda* Jaime Marinaro** INTRODUCTION.......................................................................................... 2 I. BACKGROUND ................................................................................... 3 A. History of Congressional Authorization and the Expanded Use of Administrative Proceedings for Contested Cases.................................................................... 3 B. How Do Administrative Proceedings Work? ............................ 10 II. EVEN WHEN DEFENDANTS “WIN” BEFORE THE ALJ, THEY CAN “LOSE” UPON COMMISSION REVIEW.............................. 16 A. Flannery & Hopkins ................................................................. 17 B. Aesoph & Bennett .................................................................... 19 C. Implications of Flannery and Aesoph ...................................... 21 III. CONSTITUTIONAL CHALLENGES AND THE EFFECT ON THE SEC ADMINISTRATIVE PROCEEDING ................................... 22 A. Early Constitutional Challenges............................................... 23 1. Due Process ....................................................................... 24 2. Equal Protection................................................................. 25 3. Right to a Jury Trial ........................................................... 26 B. The Supreme Court Rulings on SEC Administrative Proceedings ..................................................... 27 * Commissioner, U.S. Securities and Exchange Commission (SEC or the “Commission”). ** Counsel to Commissioner Mark T. Uyeda, SEC. The views expressed in this essay represent the individual views of the authors in their official capacities at the SEC. They do not necessarily reflect the views of the Commission, any other Commissioners, or the staff of the Commission. The authors wish to thank Commissioner Hester Peirce, Charles Lee, Steven Levine, Holly Hunter-Cici, Gabe Eckstein, Rob Fisher, Benjamin Vetter and Lisa Helvin for their insightful comments. Any errors within the article are those of the authors and not those of the individuals who provided comments to the authors. 1 2 FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW [Vol. XXX 1. Lucia .................................................................................. 27 2. Jarkesy ............................................................................... 30 3. Axon Enterprises ............................................................... 32 C. Challenges Not Yet Addressed ................................................ 33 V. A NEW DIRECTION: FUTURE VISION FOR ADMINISTRATIVE ADJUDICATION ............................... 34 A. Revise How ALJs and Administrative Proceedings Are Used by the Commission ......................................................... 34 B. Forum Selection Based on Remedies Sought .......................... 39 CONCLUSION ...................................................................................... 44 INTRODUCTION Towards the end of its 2023-2024 term year, the U.S. Supreme Court issued a number of decisions affecting administrative law and federal regulators. One particular decision, SEC v. Jarkesy,1 specifically addressed the ability of the U.S. Securities and Exchange Commission (SEC or the “Commission”) to seek civil penalties for alleged securities fraud in enforcement matters adjudicated in-house. In Jarkesy, the Supreme Court held that, in such a case, “a defendant . . . has the right to be tried by a jury of his peers before a neutral adjudicator.”2 An interpretation of the Supreme Court’s opinion is that it reflects constitutional concerns with administrative proceedings that concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch.3 One of the authors of this article has served at the Commission since 2006, becoming an SEC Commissioner in 2022 and Acting Chairman in 2025. During his entire tenure with the agency, he has been involved on a regular basis in administrative proceedings before the Commission. This Article primarily represents his observations on how the use of administrative proceedings at the Commission has changed during his tenure and how they can be reformed to be an effective tool for removing bad actors from the capital markets in a manner consistent with the Constitution. The SEC may enforce the securities laws in two ways. First, it may bring civil actions in federal district court seeking civil penalties, 1. 2. 3. 603 U.S. 109 (2024). Id. at 140. Id. 2025] BEYOND JARKESY 3 injunctions, and other remedies.4 Second, the Commission may institute administrative enforcement proceedings, seeking civil penalties, ceaseand-desist orders, and other remedies.5 The expanded use of administrative proceedings by the SEC after enactment of the DoddFrank Wall Street Reform and Consumer Protection Act in 2010 (“Dodd-Frank Act”) led to increased criticisms of this choice of venue.6 Such criticisms, in part, laid the groundwork for litigation that resulted in the Supreme Court’s opinion in Jarkesy. This Article is intended to contribute to the public discourse by suggesting a path forward whereby the Commission can use administrative proceedings and administrative law judges (ALJs) in a fair and efficient manner that is consistent with the protections against government actions provided by the U.S. Constitution. I. BACKGROUND A. HISTORY OF CONGRESSIONAL AUTHORIZATION AND THE EXPANDED USE OF ADMINISTRATIVE PROCEEDINGS FOR CONTESTED CASES Federal oversight of the securities markets did not occur until after the great stock market crash known as “Black Tuesday,” which caused nearly 5,000 banks to close and led to bankruptcies, high unemployment, wage cuts and homelessness, triggering the Great Depression.7 In the aftermath of this economic downturn, the U.S. Senate Committee on Banking and Currency held h (...truncated)