As finance professors , we find this at least as important. The Supreme Court’s 6-3 ruling in SEC v. Jarkesy could make it more challenging for the Securities and Exchange Commission – the U.S. agency that regulates securities markets – to fight fraud. And any time the SEC loses power, as it just did, market trust and transparency may be at risk.
What matters for investors, including anyone with a 401(k) plan, is how the SEC chooses to handle cases moving forward.
In 2013, the SEC accused the fund manager – George Jarkesy – of committing securities fraud, alleging that he overestimated fund values and made other false claims. The SEC charged Jarkesy and fined him US$300,000 in a proceeding in an in-house SEC court overseen by an administrative law judge .
Jarkesy then sued the SEC, claiming he hadn’t been granted a fair trial.
The case found its way before the Supreme Court, which ruled in Jarkesy’s favor. The ruling determined that the SEC proceedings used to identify fraud and impose fines didn’t meet the criteria for a fair trial. Moving forward, such cases will need to be tried in federal court.
It’s an important precedent for the defense of people accused of misdeeds by government agencies. And the SEC isn’t the only agency to use such internal administrative proceedings. More than two dozen other agencies , including the Department of Labor and the Environmental Protection Agency, will be affected by the court’s ruling.
However, a ruling that the SEC now must turn to judiciary trials or proceedings instead of internal administrative proceedings will move all securities-fraud cases involving fines to the federal courts, potentially raising the cost of prosecution. That, in turn, could result in fewer enforcement efforts, given limited agency resources.
What’s more, losing the implicit home-court advantage the SEC previously had with its internal proceedings could further slow and complicate enforcement efforts. The result could be that when people commit securities fraud, the SEC won’t have the resources to ensure they’re caught and punished.
To understand what will likely change, it’s important to understand the former status quo.
In the most recent fiscal year, 2023, the SEC filed 784 enforcement actions , ordering nearly $5 billion in fines and distributing nearly $1 billion to harmed investors. That was a 3% increase in enforcement actions over 2022. And the past two years of SEC fines have been the largest on record .
But now, the SEC cannot fine defendants through administrative courts and must seek civil penalties through federal courts.
One potential outcome could be a smaller regulatory burden for investment professionals who may have been concerned with how their actions would be viewed by the SEC – including, but not necessarily limited to, fraudsters. This is because the SEC may bring forward fewer fines or cases with fines due to the additional resources necessary for judiciary proceedings.
If that happens, fraudsters might be emboldened – since the expected cost of committing securities fraud would be lower than it was before the ruling – and investors would have to depend less on regulators protecting them and more on limiting risks themselves.
This could pose a problem for less sophisticated investors. Lots of people don’t know how to define securities fraud; even fewer can figure out whether a fund manager may have committed it. That risk, in turn, could limit the way investors participate in markets.
Enforcement will remain key to maintaining transparency in markets, but the method of enforcement – be it in a federal court or elsewhere – may not matter very much. The important thing is that people who commit financial crimes continue to face consequences.
The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
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