Fifth Circuit Reopens the Door to SEC ALJs as In-House Judges Face New Constitutional Test

Fifth Circuit Reopens the Door to SEC ALJs as In-House Judges Face New Constitutional Test

A federal appeals court has revived a challenge to the Securities and Exchange Commission's use of in-house administrative law judges, giving new life to a constitutional argument that has already reshaped how the agency prosecutes fraud cases.

The U.S. Court of Appeals for the Fifth Circuit issued its decision this fall in a case testing whether the SEC's administrative adjudication process violates the Seventh Amendment right to a jury trial and the separation of powers. The dispute centers on whether defendants hauled before SEC ALJs—rather than federal district courts—are unconstitutionally deprived of a jury. The ruling follows years of litigation over the agency's internal courts, including the Supreme Court's 2018 decision in Lucia v. SEC, which held that the agency's ALJs were "Officers of the United States" and had to be appointed in compliance with the Appointments Clause.

The case lands as the SEC continues to defend its administrative forum against mounting skepticism from federal judges. In recent terms, the Supreme Court has narrowed agencies' ability to adjudicate private claims internally, most notably in SEC v. Jarkesy, where the Court held that the SEC cannot impose civil penalties for securities fraud through its in-house tribunals when the claims sound in common law—a decision that forced the agency to rethink how it brings enforcement actions.

What to watch: whether the government seeks Supreme Court review, and whether the Fifth Circuit's reasoning deepens a circuit split over the future of agency adjudication. Defense counsel are already citing the decision in pending enforcement matters, arguing that administrative proceedings lack constitutional footing.

Primary sources: U.S. Supreme Court, SEC v. Jarkesy (2024); U.S. Supreme Court, Lucia v. SEC (2018)