Welcome to Compliance Hot Spots, our weekly snapshot on white-collar, regulatory and compliance news and trends. Today, we explore the implications of a new court ruling on SEC's in-house judges. Plus, a Kaplan Hecker partner is leaving for a senior role at DOJ and Morgan Lewis counsels a bank ensnared by the SEC's ESG task force. Please get in touch with tips and feedback. Contact me at [email protected] and @AGoudsward on Twitter.

U.S. Court of Appeals for the Fifth Circuit in New Orleans. Photo: Mike Scarcella/ALM

Fifth Circuit Ruling Strikes at Heart of SEC Enforcement

In a ruling that could potentially upend the SEC's enforcement proceedings going forward, a federal appeals court ruled May 18 that the SEC's in-house adjudication process is unconstitutional, my colleague Marianna Wharry reports.

A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit said in a 2-1 opinion in Jarkesy v. SEC that the agency's use of administrative law judges violates defendants' Seventh Amendment right to a jury trial, that Congress unconstitutionally delegated legislative power to the SEC in giving it "unfettered authority to choose whether to bring enforcement actions in Article III courts or within the agency," and that statutory restrictions on the president's ability to remove SEC ALJs violates the Take Care Clause of Article II.

"The Seventh Amendment guarantees Petitioners a jury trial because the SEC's enforcement action is akin to traditional actions at law to which the jury-trial right attaches," Circuit Judge Jennifer Walker Elrod wrote for the majority, joined by Circuit Judge Andy Oldham. "And Congress, or an agency acting pursuant to congressional authorization, cannot assign the adjudication of such claims to an agency because such claims do not concern public rights alone."