WASHINGTON – Securities regulators cannot file lawsuits to seek financial sanctions through their domestic courts, a federal appeals court ruled Wednesday.
The decision, from a split panel of the U.S. Court of Appeals for the Fifth Circuit, adds to the legal backlash on federal agency courts that some critics say violates the separation of powers doctrine. The Securities and Exchange Commission, one of the largest and busiest financial regulators, has been a focal point in the fight. Its executors sometimes litigate cases before administrative law judges who are employees of the SEC, but are supposed to exercise independent judicial powers.
In the case decided on Wednesday, the judges ruled that an almost a decade-long SEC enforcement action against a small hedge fund manager was invalid because it violated his right to a jury trial. An SEC judge in 2014 found George Jarkesy responsible for fraud, ordered him to pay a $ 300,000 fine and banned him from the securities industry, according to SEC records.
In some cases, Congress may assign legal disputes to the agency’s courts, but SEC fraud cases are not so special as to justify channeling them to these forums, the judges wrote.
The SEC’s domestic courts have caused little controversy for decades, but the 2014 decision to rely more heavily on them provoked a negative reaction. Until then, the SEC had only used administrative courts to sue Wall Street defendants for direct regulation, such as stockbrokers, public auditors, and money managers. The 2010 Dodd-Frank Financial Review Act allowed the SEC to sue anyone in administrative courts, including those accused of misconduct, such as insider trading, who did not work in the securities industry.
An extended version of this report appears on WSJ.com.
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