In what many are calling a landmark moment for regulatory practices, the U.S. Supreme Court has ruled to limit the Securities and Exchange Commission’s (SEC) enforcement capabilities. This decision, punctuated by a contentious 6-3 vote, has significant implications for how businesses will navigate the regulatory landscape moving forward.

Overview of the Decision

On Thursday, the U.S. Supreme Court ruled that the SEC’s use of in-house judges to enforce securities laws violates the constitutional right to a trial by jury. The conservative majority opinion, authored by Chief Justice John Roberts, argued that concentrating the roles of prosecutor, judge, and jury within the executive branch breaches the principle of the separation of powers.

Liberal Justice Sonia Sotomayor, in a strongly-worded dissent, accused the court’s conservative majority of a “power grab”, highlighting a disconcerting trend of curtailing the authority of federal regulators. She noted that this decision is part of a broader effort to dismantle the so-called “administrative state”.

Securities and Exchange Commission (SEC) vs. Jarkesy (2024)

This ruling stemmed from a legal challenge by hedge fund manager George Jarkesy. After being subjected to an in-house proceeding by the SEC for allegedly making misstatements and omitting relevant information while overseeing two hedge funds, Jarkesy contested the process. Jarkesy’s challenge ultimately led to this significant Supreme Court decision, supported by billionaires Elon Musk and Mark Cuban.

Jarkesy’s case underscores a broader business and conservative ethos advocating against federal regulatory overreach. The New Orleans-based 5th Circuit U.S. Court of Appeals initially ruled against the SEC, prompting the Supreme Court’s involvement.

Implications for Michigan Business Owners

As this ruling reshapes federal regulatory enforcement, Michigan businesses must remain agile and informed. Here are some key takeaways and potential impacts:

1. Shift to Federal Courts: With the SEC now likely to rely more on federal court trials instead of in-house proceedings, businesses may face longer and costlier litigation processes. This shift necessitates robust compliance checks to avoid potential legal entanglements.
2. Heightened Judicial Scrutiny: Cases tried in federal courts will come under increased scrutiny. Practices that might have cleared in administrative settings could face harsher evaluations under federal judicial oversight.
3. Empowered Legal Challenges: The successful challenge by Jarkesy illustrates a path for businesses to contest regulatory actions more vigorously. Companies may find renewed grounds to push back against what they perceive as over-extensive regulatory measures.
4. Evolving Regulatory Environment: This decision is part of a broader mosaic aimed at reducing the “administrative state”. Businesses must stay informed about further judicial or legislative changes that could alter the regulatory landscape.

Strategic Steps Forward

To navigate these changes effectively, consider the following: 

• Compliance Audits: Conduct thorough compliance audits regularly. Ensuring all business practices adhere to federal securities laws can help mitigate risks of enforcement actions transitioning to more stringent federal court proceedings.
• Legal Consultation: Engage with legal experts proficient in both federal and administrative law. Strategic legal advice will be crucial as the regulatory environment continues to evolve.
• Policy Advocacy: Actively participate in policy advocacy. You can help shape the future regulatory framework to reflect more balanced enforcement powers by voicing your business’s concerns.

We Help Businesses Navigate Change | Fausone & Grysko, PLC

This Supreme Court decision marks a pivotal moment in the regulation of securities laws and the broader role of federal agencies. While the reduction in the SEC’s in-house adjudicatory powers creates challenges, it also opens opportunities for businesses to influence and adapt to a new regulatory context.

If you have questions about this ruling or how it could affect your business, contact business attorney Brandon Grysko at Fausone & Grysko, PLC. (248) 380-0000