US court limits agency enforcement powers

The US Securities and Exchange Commission's (SEC) years-long practice of having internal judges oversee portions of enforcement cases is unconstitutional, a federal appeals court has ruled.

The 5th US Circuit Court of Appeals, in a 2-1 decision on 18 May, raises doubts about the role of administrative law judges (ALJs) in enforcement cases across federal agencies. The SEC's in-house adjudication of a 2011 case involving an investment adviser violated the "right to a jury trial" under the US Constitution, the court said, even though the US Congress explicitly authorized those types of proceedings.

"Congress, or an agency acting pursuant to congressional authorization, cannot assign the adjudication of such claims to an agency," judge Jennifer Elrod wrote for the majority on the 5th Circuit.

The SEC and many other federal agencies send some cases to ALJs — who work inside an agency in a quasi-judicial role — to hold evidentiary hearings, review facts and reach initial decisions on what can be highly technical issues. If a civil penalty is imposed, a defendant can appeal the ruling to the federal agency and then a federal court.

But the 5th Circuit said allowing the adjudication of enforcement cases and civil fines before the SEC's in-house judges was a violation of the US Constitution's right to a jury trial, among two other major concerns. Judge W Eugene Davis, in a dissent, said that decades of Supreme Court precedent supported the idea that cases could be handled by administrative law judges.

The SEC said it was "reading and assessing the decision" to determine next steps.

The decision could have effects on pending cases at the SEC and many other federal agencies, which use a similar structure that lets them hand enforcement cases to ALJs for hearings. President Joe Biden's administration could seek to appeal the ruling to the full 5th Circuit and eventually the US Supreme Court.

The US Federal Energy Regulatory Commission (FERC) has multiple pending cases that at some point reached its in-house judges. An ALJ is holding hearings in a case over $223mn in potential fines and restitution from Total over natural gas trading in 2009-12. BP is now appealing to the 5th Circuit a case over natural gas trading where an ALJ recommended a $20mn fine that FERC later voted to uphold.

FERC chairman Richard Glick said it was not "immediately clear" if the 5th Circuit's order was applicable to its enforcement proceedings, but said it was something the agency is taking seriously. FERC has a "very similar structure" to the SEC in the way it uses in-house judges, he said.

Other agencies that rely on ALJs for some enforcement penalties include the US Environmental Protection Agency, the US Commodity Futures Trading Commission, the US Interior Department and the US Federal Trade Commission.

By Chris Knight