“[I]t is hard to find a better example of what is sometimes disparagingly called ‘administrative creep’ than this expansion of the S.E.C.’s internal enforcement power.”
Judge Jed Rakoff
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) expanded the discretion of the Securities and Exchange Commission (SEC) to bring enforcement actions “in-house” via internal administrative proceedings in front of administrative law judges (ALJs). There has been, unsurprisingly, a dramatic outpouring of industry backlash to the SEC’s choice to take advantage of this legislative change.
Practitioners have raised a range of constitutional challenges to these proceedings, arguing, among other things, that ALJs are not appointed pursuant to the Appointments Clause or that the procedural limitations of the SEC administrative proceedings do not meet due process requirements.
Much of the scholarship to date has focused either on gamesmanship considerations, that is, questioning whether the SEC has created for itself a strategic prosecutorial advantage by bringing cases in front of its in-house judges, or alternatively, on the merits of the various constitutional challenges to the in-house proceedings.
Rather than rehash the many thoughtful treatments of SEC strategy or the constitutionality of SEC administrative proceedings, this Note instead scrutinizes a threshold question at the sequential beginning of this otherwise widely discussed topic: Do—and just as importantly, should—federal district courts have subject matter jurisdiction over constitutional challenges to an internal SEC proceeding while the proceeding at issue is still underway?
When a statute governing an administrative scheme established by Congress does not explicitly prohibit Article III courts
from exercising parallel jurisdiction over constitutional challenges to the administrative proceeding itself, Thunder Basin Coal Co. v. Reich instructs Article III courts to presume a claim is not confined to administrative channels if: (1) preclusion would prevent “meaningful judicial review”; (2) the suit is “wholly collateral” to a statute’s review apparatus; and (3) the claims brought are “outside the agency’s expertise.”
On June 17, 2016, in Tilton v. SEC, a split Second Circuit panel evaluated a claim challenging the constitutionality of SEC ALJs—after the SEC had already begun a separate in-house enforcement action against petitioners—and held that subject matter jurisdiction was indeed precluded.
In doing so, the Second Circuit aligned with the Seventh, D.C., and most recently Eleventh and Fourth Circuits in interpreting Thunder Basin and its progeny to suggest both that “meaningful judicial review” is the most important of the three “Thunder Basin factors” identified above; and “meaningful judicial review” is satisfied if an administrative scheme provides for any eventual judicial review of petitioner’s claim.
Given this circuit alignment, it appears that this jurisdictional issue may soon move beyond (at least jurisprudential) resuscitation.
This Note argues that this development, notwithstanding the legitimate interest in streamlining and empowering SEC enforcement post-Dodd-Frank,
is (1) a doctrinally dubious application of the Thunder Basin factors, as it excises the “meaningful” from “meaningful judicial review”; (2) concerning insofar as it constrains the ability of Article III courts to develop administrative and constitutional law; and (3) undesirable as a policy matter in that it significantly hinders the ability of parties to challenge purported SEC constitutional violations, undercutting the legitimacy of the SEC at a time when skepticism toward the Commission and its enforcement strategy runs relatively high.
This Note proposes two responses, one legislative and the other doctrinal. Legislatively, the SEC or (ideally) Congress should promulgate binding and detailed forum selection guidelines for enforcement actions. Doctrinally, Article III courts that have yet to rule on this question should employ standard injunction analysis, exercising jurisdiction over the constitutional claims and gauging the likelihood of success on the merits of those claims.
The first proposal will help mitigate the industry uproar by improving the transparency of SEC reasoning regarding forum selection and will encourage much-needed discussion regarding the types of cases that should properly be brought in each forum, that is, the administrative law court or Article III body. The second proposal will ensure that those prosecuted by the SEC have a meaningful opportunity for judicial review of their constitutional and administrative law claims in the district court while also weeding out frivolous defensive tactics camouflaged as constitutional challenges.
Allowing district courts to exercise jurisdiction over parallel constitutional challenges to SEC administrative proceedings will act as a prophylactic mechanism, cautioning the SEC against engaging in unconstitutional behavior, reassuring the industry that legitimate constitutional violations will be subject to meaningful review, and preventing important questions of administrative and constitutional law from being decided outside Article III courts.
Part I of this Note provides background on the SEC’s use of internal enforcement actions and describes the doctrinal framework governing subject matter jurisdiction in cases challenging the constitutionality of ongoing administrative proceedings. Part I directs special attention to the tension between allowing meaningful Article III court review of challenges to administrative proceedings and reluctance to allow such challenges to disrupt congressionally enacted administrative schemes.
Part II catalogues the recent line of cases refusing to exercise subject matter jurisdiction and then discusses in detail the reasoning in and implications of the Second Circuit’s split Tilton decision. Part III outlines potential solutions to the problems identified in Parts I and II.
I. Overview of the Legislative and Doctrinal Framework
This Part provides an overview of the legislative and doctrinal background governing judicial consideration of exclusive subject matter jurisdiction in constitutional challenges to ongoing administrative proceedings, with a focus on the SEC, SEC ALJs, and SEC in-house proceedings. Section I.A offers a description of SEC in-house enforcement capabilities before and after Dodd-Frank, with a short subsection devoted to correcting some common misconceptions about the SEC ALJs tasked with overseeing SEC administrative proceedings. Section I.B then turns to the doctrinal framework used by Article III courts to determine whether an exercise of subject matter jurisdiction is appropriate.
A. SEC Administrative Proceedings Before and After Dodd-Frank
This section briefly discusses the ways in which Dodd-Frank altered the SEC enforcement landscape.
The intent here is not to exhaustively chronicle changes to the SEC’s regulatory apparatus but rather to highlight several modifications that have stoked industry ire and raised an array of constitutional eyebrows.
The question of whether or not to grant exclusive subject matter jurisdiction to SEC administrative proceedings can appear to be a trivial or anomalous feature of a recent string of circuit cases, unless one appreciates the extent to which Dodd-Frank expanded SEC discretion and emboldened the Commission to prosecute in-house. In order to avoid muddying the waters of this discussion, this section simply provides a targeted snapshot of SEC administrative proceedings before (section I.A.1) and after (section I.A.2) Dodd-Frank—rather than investigating the interim dynamics that catalyzed these changes—before briefly addressing several common misconceptions regarding the nature of the ALJs tasked with overseeing these internal adjudications (section I.A.3). Section I.B then explains how the changes introduced by Dodd-Frank intersect with the doctrinal framework governing the question of exclusive subject matter jurisdiction.
1. SEC Administrative Proceedings Before Dodd-Frank. — Even before Dodd-Frank, the SEC was authorized under the Securities and Exchange Act of 1934, and subsequent rules and amendments thereto, to pursue internal administrative proceedings as an alternative to bringing enforcement actions in federal district court.
Indeed, internal enforcement at the SEC preceded the SEC Division of Enforcement itself, as administrative adjudication before the 1972 establishment of the Division simply took place in various decentralized SEC divisions.
When the SEC chooses to bring an enforcement action internally—at least since the inception of the SEC Division of Enforcement—the SEC Division of Enforcement acts as a party to the dispute and aims to prove the SEC’s case in front of an ALJ.
Thereafter, “[t]he ALJ . . . presides over the matter, including the evidentiary hearing, and issues an initial decision.”
If a defendant loses before an ALJ, the defendant then may petition for the SEC to review the case de novo.
A party that loses in front of the SEC itself can petition for review by a federal court of appeals, either in the aggrieved party’s home circuit or the D.C. Circuit.
If the SEC’s findings of fact are “supported by substantial evidence,” the reviewing circuit court must find these facts conclusive.
Thus, neither the SEC’s ability to proceed in-house nor the basic structural framework of these proceedings originated with Dodd-Frank—so what was different about pre-Dodd-Frank proceedings as compared to contemporary SEC administrative enforcement?
For purposes of this Note, the key limitations of pre-Dodd-Frank SEC administrative proceedings were the jurisdictional scope of these actions, the inability to impose certain forms of harsh punitive measures, and perhaps most importantly the relative infrequency with which the SEC made use of the administrative pipeline as a policy matter. Regarding jurisdictional scope, prior to Dodd-Frank the SEC was authorized to “impose civil penalties in Administrative Proceedings”
only against regulated entities, that is, “registered broker-dealers and investment advisers.”
If the SEC wished to “obtain civil penalties from non-regulated entities,” such as a hedge fund or investment fund, “the SEC was required to file a civil enforcement action in federal district court.”
Detailed discussion of the SEC’s enhanced punitive abilities and the post-Dodd-Frank choice to bring a greater percentage of actions internally is reserved for the following section, but here it suffices to note that (1) prior to Dodd-Frank the SEC lacked the ability to impose “collateral bars,” a fairly draconian punitive mechanism;
and (2) as part of a concerted policy effort to utilize the enforcement capabilities introduced by Dodd-Frank, the percentage of total actions brought in-house by the SEC increased from twenty-one percent in 2010 (the year of Dodd-Frank’s passage) to seventy-six percent by 2015.
At the risk of blurring history through generalization, several commentators seem to agree that in the early days of the SEC, and certainly in the days before Dodd-Frank, the SEC was both relatively constrained by Congress with respect to its choice of forum and, as a policy choice, less inclined to make frequent use of administrative proceedings. Both of these factors contributed to a regulatory ecosystem in which defendants viewed SEC administrative proceedings as largely noncontroversial.
2. SEC Administrative Proceedings After Dodd-Frank. — Dodd-Frank was signed into law in July 2010 amid the tumultuous aftermath of the 2008 financial crisis.
Dodd-Frank “gave the SEC more power to impose secondary liability for employees aiding their company’s illegal activity” and “gave the SEC and the Public Company Accounting Oversight Board (PCAOB) more power to regulate foreign private accounting firms,” among other significant enhancements of enforcement power.
However, arguably the most significant of Dodd-Frank’s conferrals of power in the context of securities regulation came in the form of the SEC’s newfound ability to “pursue monetary penalties against non-regulated entities through administrative proceedings, rather than strictly in federal court” under section 929P(a) of the Act.
“Non-regulated” refers to entities that are not “directly regulated by the SEC,” in contrast with registered broker-dealers or investment advisers long considered “regulated entities” for purposes of SEC jurisdiction.
This increased power has contributed to a corresponding increase in the use of administrative proceedings.
Indeed, in 2013, then-Director of Enforcement at the SEC Andrew Ceresney announced publicly, “Our expectation is that we will be bringing more administrative proceedings given the recent statutory changes.”
The SEC contemporaneously added several new ALJs to accommodate this strategic pivot.
Responding to these changes, Judge Jed Rakoff of the Southern District of New York, an outspoken critic of the SEC’s increased use of in-house enforcement, observed:
The final, and largest expansion of the S.E.C.’s administrative enforcement power came, however, with the passage [of Dodd-Frank]. Section 929P(a) gives the S.E.C. the power through internal administrative proceedings to impose substantial monetary penalties against any person or entity whatsoever if that person or entity has violated the federal securities laws, even if the violation was unintentional.
Despite this increased enforcement scope, Congress did not implement clear constraints on the SEC’s discretion over choosing a forum.
The implication of this change—coupled with the absence of constraints on forum choice—is difficult to overstate for the (in some cases, newly) regulated parties: After Dodd-Frank, targets of SEC internal enforcement actions no longer have the ability to defend themselves with the advantage of “extensive discovery and a jury trial” in federal court, but instead may be subject to a “potentially substantial penalty” in an SEC administrative proceeding.
That is to say, the SEC has complete discretion when deciding whether to bring a case in federal district court, where defendants enjoy the procedural protections inherent therein, or instead to bring an action internally, where the SEC’s own Rules of Procedure are, for example, generally more receptive to hearsay and less willing to permit depositions.
Dodd-Frank also enabled the SEC to prosecute previously untenable causes of action and increased the SEC’s discretion to impose harsher sanctions for proven violations.
With respect to new causes of action, Dodd-Frank both broadened the SEC’s ability to bring aiding and abetting and “control-person liability” claims, and, in the case of aiding and abetting, lowered the culpable state of mind requirement from “actual knowledge” to recklessness.
With respect to increased punishments imposed for securities violations, Dodd-Frank authorizes ALJs presiding over administrative proceedings to impose fairly draconian bans—known as “collateral bars”—on securities law violators from associating with the effective entirety of the securities industry.
To be sure, collateral bars are very likely justifiable punishments for certain transgressions, but the fact remains that prior to Dodd-Frank, the forced isolation of actors from the remainder of the securities industry could not be imposed by the SEC’s ALJs.
The SEC’s increased scope of regulation, power to impose punishment, and discretion to select a forum for enforcement actions all might have independently jarred the regulated community, but even these sweeping changes do not necessarily explain why this funneling in-house has generated such pronounced backlash. The simplest explanation of the backlash seems to be the concerted policy effort by the SEC to bring a significantly larger percentage of cases in-house
coupled with the industry’s suspicion, whether or not empirically supported, that cases brought before ALJs are more likely to return a favorable outcome for the SEC. One frequently cited piece observed that the SEC achieved favorable results in ninety percent of internal SEC proceedings between October 2010 and March 2015, compared to in sixty-nine percent of federal court cases during the same timeframe.
The upshot has been clear: In the aftermath of Dodd-Frank, the SEC, invigorated with a significant expansion of enforcement capabilities and unaltered discretion as to when the Commission can bring enforcement actions in (purportedly SEC-favorable) administrative proceedings, began to bring more cases internally as opposed to in federal court.
One observer, after considering many of the foregoing changes, noted the following: “The SEC denies that its current procedures are improper, but as it shifts more enforcement actions in-house, the critics will only grow louder.”
The critics have indeed grown noisy,
with criticism permeating the public psyche beyond the confines of the law review universe.
The regulated community has made essentially the following argument: First, the SEC is directing cases in-house more frequently
and appears to win the vast majority of these in-house prosecutions.
Second, the incentive to settle SEC enforcement actions is therefore paramount, making it, practically speaking, extremely unlikely for defendants to endure several layers of SEC review in order to have the opportunity to appear before a federal court.
Finally, those who do eventually appear before a federal court must overcome the presumption that SEC decisions are “correct unless unreasonable.”
Several commentators have pushed back, arguing that the SEC is not “too tough” in its in-house prosecutions.
Moreover, the SEC itself has pointed to several reasonable justifications for bringing cases in-house, including speed and relatively flexible evidentiary rules.
But these arguments, notwithstanding their possible merit, seem to have had little effect on the industry’s feeling of futility and criticism from the media,
former SEC officials,
and at least one current federal judge,
Whatever the merits of these critiques, it is clear that the SEC’s repeated attestations that the policy of increased in-house enforcement is simply utilized in the name of efficiency
has done little to assuage the general sense that the SEC is attempting to play judge, jury, and prosecutor.
Indeed, for defendants, the SEC’s justification for more aggressive in-house prosecution and the existence, or lack thereof, of a statistically significant in-house advantage are likely much less relevant than this sentiment that the regulated community is on the receiving end of enforcement gamesmanship—a sentiment only exacerbated by the fact that federal judges are being prevented from disciplining the SEC from overstepping administrative or constitutional law boundaries in prosecutions
due to preclusions of jurisdiction coupled with intense pressure to settle cases.
3. Appointment and Removal of ALJs: Addressing Some Common Misconceptions. — Dodd-Frank and accompanying policy choices have undeniably altered the jurisdictional scope, punitive abilities, and frequency of SEC administrative proceedings.
These changes have placed ALJs, as the individuals tasked with overseeing the first critical layer of in-house proceedings, at the center of debates regarding the proper role of the SEC and the administrative state writ large. Unfortunately, these debates and critiques often overlook or oversimplify the nature of these ALJs, with some suggesting SEC ALJs are hired, fired, and controlled absolutely by the SEC,
and others, including the SEC itself, dismissing outright the possibility that SEC ALJs face any risk of institutional bias.
It appears the reality is somewhat more complicated. Most importantly, it is misleading to say that ALJs are “hired” by the SEC. While the SEC does appoint ALJs, ALJs must first be hired by the Office of Personnel Management (OPM), then added to a list (based on a variety of OPM-determined factors) from which the SEC can then select and appoint ALJs.
Then, once ALJs have been appointed, they have “statutory protection from agency oversight to protect their decisional independence.”
For example, agencies are not permitted to grant bonuses to ALJs as a reward
and agencies may remove ALJs only for “good cause established and determined by the Merit Systems Protection Board” after a formal administrative hearing.
Still, claims that SEC ALJs are subject to some degree of capture by the Commission are not entirely implausible, as the Commission is able to exert influence over ALJs in ways less explicit than outright removal, for example, by setting the procedural rules that dictate the information that reaches ALJs in proceedings, or even unintentionally inculcating the SEC ALJs with the views of the SEC.
In a concerning illustration of this latter possibility, former SEC ALJ Lillian McEwen publicly alleged that she had been the subject of improper attempts at influence by then-Chief ALJ Brenda Murray; although the SEC’s internal investigation found the ALJs to be sufficiently independent, the fact alone that McEwen felt pressure—whether real or imagined—to rule in favor of the SEC supports the conceivability of bias via unintentional inculcation.
In sum, ALJs at the helm of the SEC’s administrative proceedings are likely neither entirely captured by the SEC nor entirely free from risk of bias.
B. Exclusive Subject Matter Jurisdiction and Administrative Proceedings
Having discussed some of the most salient changes to SEC administrative enforcement vis-à-vis Dodd-Frank, and by implication the motivation for industry actors to challenge the SEC’s emboldened behavior, this section turns to the doctrinal framework governing these challenges. Section I.B.1 introduces the Thunder Basin framework implicated by questions of exclusive subject matter jurisdiction in administrative proceedings. Section I.B.2 then reviews the jurisprudential backdrop to Thunder Basin alongside a brief discussion of administrative preclusion and exhaustion.
1. The Doctrinal Framework: Thunder Basin Factors. — When the SEC, or any government agency for that matter,
elects to bring an action via administrative proceeding as opposed to in federal district court, the party subject to the enforcement action may challenge any or all aspects of the nature of the administrative proceeding itself.
In the typical case in the context of SEC administrative proceedings, the target of the SEC’s in-house enforcement action seeks to enjoin the SEC in an Article III court from further pursuing the internal enforcement;
the SEC then responds by asserting that the statutory framework authorizing the internal enforcement scheme precludes review by an Article III court pending conclusion of the administrative proceeding.
At this point, the reviewing Article III court faces the dilemma of determining whether or not it has jurisdiction over the request for injunctive relief on constitutional grounds.
If the statute at issue does not expressly preclude federal court jurisdiction,
the court must resolve the jurisdictional question with a view to implicit delegation or withholding of jurisdiction.
In order to resolve this question, courts look to Thunder Basin Coal Co. v. Reich, which lays out a general framework within which courts are instructed to consider whether Congress intended to limit the jurisdiction of federal courts pending the conclusion of an agency proceeding.
In Thunder Basin itself, the petitioning mine operator refused to comply with a regulation of the Department of Labor’s Mine Safety and Health Administration requiring mine operators to publicly post certain union representative information, promulgated pursuant to the Federal Mine Safety and Health Amendments Act of 1977.
Instead, petitioner “filed suit in the United States District Court” and the “District Court enjoined respondents from enforcing [the regulation]” on grounds that requiring the petitioner to challenge the interpretation of the Act in the statutory review process would constitute a Fifth Amendment Due Process violation.
On appeal, the Supreme Court upheld the Tenth Circuit’s decision, concluding that the Act “preclude[d] district court jurisdiction over the pre-enforcement challenge made” and that judicial review “in the appropriate court of appeals” is precluded until completion of the administrative review.
The Court identified three factors to help lower courts determine whether Congress intends, absent an explicit directive, to limit Article III court jurisdiction over such challenges:
[W]e presume that Congress does not intend to limit jurisdiction  if “a finding of preclusion could foreclose all meaningful judicial review”;  if the suit is “wholly collateral to a statute’s review provisions”; and  if the claims are “outside the agency’s expertise.”
The so-called “Thunder Basin factors” have remained operative, with little substantive change, in the years since Thunder Basin was decided.
The continued utility of the Thunder Basin test seems to reflect, in part, a dual intuition that the administrative state is the proper forum for certain claims but not others (for example, constitutional claims) and the desire to give aggrieved parties the opportunity for meaningful judicial review before Article III judges.
2. The Evolution of Thunder Basin. — Thunder Basin does not exist in isolation. The question of whether claims against an agency may be precluded or delayed from judicial review implicates the fairly robust bodies of administrative law on implied preclusion (which asks if judicial review will be available) and exhaustion (which asks when judicial review will be available). An in-depth discussion of either topic here is unnecessary, but even the cursory review provided below underscores three important points about these bodies of law relevant to this Note. First, courts as a general matter seem to disfavor preclusion, particularly of constitutional questions.
Second, in cases where administrative action entails a coercive effect, courts appear skeptical of either preclusion or forcing the aggrieved party to exhaust its administrative remedies.
Finally, notwithstanding the first and second points, courts recognize that imposing no preclusion or exhaustion requirements may improperly disrupt an administrative scheme.
Preclusion is grounded in the language of the APA. Under § 701(a)(1) of the APA, judicial review is available “except to the extent that—(1) statutes preclude judicial review.”
While there is an interesting line of cases demonstrating the ability of courts to creatively provide for review even in cases of express preclusion,
more pertinent here is the question of implied preclusion, as the SEC has not, to date, argued that judicial review of parallel constitutional challenges was expressly precluded by Congress.
Under the doctrine of implied preclusion, the Supreme Court has held that the presumption of judicial review is a “heavy burden”
to overcome but also that this presumption may be countered when congressional intent to preclude is “fairly discernible in the statutory scheme.”
The Court has held that the presumption of review is strongest in cases raising questions of constitutional or statutory interpretation.
In Sackett v. EPA, a relatively recent treatment of implied preclusion, the Supreme Court refused to find a challenge to the issuance of an EPA compliance order (these orders entail potential fines of up to $75,000 per day for noncompliance) precluded from judicial review.
The Court specifically rejected the Government’s “efficiency” argument, that is, that compliance orders “can obtain quick remediation through voluntary compliance” with the Clean Water Act:
The APA’s presumption of judicial review is a repudiation of the principle that efficiency of regulation conquers all. And there is no reason to think the [Act] was uniquely designed to enable the strong-arming of regulated parties . . . without the opportunity for judicial review.
On the other hand, Block v. Community Nutrition Institute (CNI) illustrates the Court’s countervailing concern with excessive access to judicial review.
In CNI, the Court refused to allow individual milk consumers to challenge milk market orders issued under the Agricultural Marketing Agreement Act of 1937.
The Court reasoned that access to review was intended only for milk producers and handlers, and to hold otherwise would disrupt the operation of the scheme enacted by Congress.
CNI also provides an instructive segue to the closely related doctrine of exhaustion, which in some cases requires parties to present their arguments to the relevant agency before bringing these arguments into an Article III court. Although later cases have seemingly stymied the longstanding practice of judicial superimposition of exhaustion requirements on top of the APA,
CNI recognized the potential disruption that might result from parties using the presumption of reviewability to avoid exhaustion of administrative remedies: “It would provide handlers with a convenient device for evading the statutory requirement that they first exhaust their administrative remedies.”
At the crux of this tension—between impeding the ability of agencies to function and depriving regulated entities from meaningful review—lies Thunder Basin. Thunder Basin cobbled together several of the cases cited above, in addition to various others,
in order to provide an analytical tool for courts—absent explicit Congressional guidance—to differentiate the types of challenges to agencies that are best funneled through agency administrative schemes from those challenges best brought directly to Article III courts.
Before proceeding, it should be noted that referring to Thunder Basin as a “tool” rather than a “resolution” is intentional. The Thunder Basin decision itself reflected the difficulty that courts face in determining when judicial review will be “meaningful,” suggesting in one instance that eventual judicial review can be meaningful,
while suggesting in another that eventual judicial review may lack meaning when parties cannot obtain “full postdeprivation relief.”
The Thunder Basin factors provide a clear example of law implicating policy. As such, in keeping with the line of cases leading to Thunder Basin, courts are likely to achieve the best results by tying decisions to the practicalities of the particular scheme at issue.
II. Backlash: Constitutional Challenges and Tilton v. SEC
The recent line of cases leading to and including Tilton v. SEC illustrates the three general problems that have been exacerbated by Article III courts refusing to exercise subject matter jurisdiction over constitutional challenges to SEC administrative proceedings pending completion of the administrative action. First, reading Thunder Basin to imply that “meaningful” review is satisfied by any eventual review
effectively reduces Thunder Basin to a binary analysis (“will review be available at some point?”) without consideration of the coercive or constitutionally dubious elements of an administrative proceeding. Second, given the incentive for parties to settle prior to reaching a trial, administrative or otherwise, this cabining of constitutional challenges constrains the ability of Article III courts to develop administrative and constitutional law. Third, the insulation of SEC administrative proceedings from constitutional challenge runs counter to fairness intuitions, feeding suspicions of gamesmanship
and undercutting the perceived legitimacy
of the SEC.
Importantly, this section assumes—and indeed, greatly relies upon—the SEC’s self-interest in maintaining institutional legitimacy, even as it seeks to prosecute more aggressively post-Dodd-Frank. Section II.A briefly chronicles several constitutional challenges to SEC administrative proceedings that closely predated Tilton. Section II.B then provides a close reading of Tilton, underscoring the problems exacerbated by the outcome.
A. Constitutional Challenges
The manifestation of the industry-consternation zeitgeist vis-à-vis Dodd-Frank-induced SEC internal enforcement has been an array of attacks on the constitutionality of SEC administrative proceedings.
Given the combination of industry outrage and the stakes of SEC enforcement actions, several have observed that it seems unlikely for the pace or creativity of challenges akin to Tilton to decrease without action on the part of the SEC, Congress, or federal courts.
In each case of constitutional challenge, up to and including Tilton, Article III courts must decide at the outset whether the administrative scheme at issue precludes judicial review pending the conclusion of the agency action.
It is important to understand when Tilton occurred on the timeline of circuit court decisions that considered the issue of exclusive subject matter jurisdiction.
While Tilton emerged after the Seventh
Circuits had ruled on the issue, Tilton was also decided in the context of Gupta v. SEC and Duka v. SEC, two lower court decisions in the Southern District of New York coming out strongly the opposite way,
and a district court judge criticizing the policy implications of expanded SEC enforcement jurisdiction.
Tilton was also decided only months before the Eleventh Circuit overturned a lower court decision functionally identical to Duka and Gupta.
The Seventh Circuit’s decision in Bebo v. SEC provided the first example of a federal appeals court engaging this question of subject matter jurisdiction.
In Bebo, after the SEC alleged that Laurie Bebo had committed various securities violations, Bebo brought suit in the district court for the Eastern District of Wisconsin, alleging that the SEC’s enforcement scheme violated the Equal Protection Clause.
The Seventh Circuit, affirming the district court, found that 15 U.S.C. § 78(y), the statute governing the SEC’s administrative scheme, indicated that “Congress intended plaintiffs in Bebo’s position ‘to proceed exclusively through the statutory review scheme’” and refused to exercise subject matter jurisdiction.
Bebo’s disposition was less significant than the Seventh Circuit’s two notable observations on the Thunder Basin factors.
First, the court concluded that the “meaningful judicial review” prong is the most important of the three-pronged test, relegating the “wholly collateral” and “outside agency expertise” prongs to an ambiguous role in the framework, to the extent they retain any force at all.
Second, the court made clear that “meaningful judicial review” could be satisfied by any eventual judicial review in an Article III court.
The Seventh Circuit’s reading of the Thunder Basin factors makes it very difficult, if not impossible, for parties to have constitutional claims heard in Article III courts prior to the conclusion of administrative proceedings, even when these claims are outside the agency’s expertise and wholly collateral to the statute’s review provisions, so long as the statutory provision allows for any hearing in front of an Article III court. Indeed, this is exactly what happened in Bebo: The Bebo court conceded that “Bebo’s suit can reasonably be characterized as ‘wholly collateral’ to the statute’s review provisions and outside the scope of the agency’s expertise,” and yet it still refused to exercise subject matter jurisdiction over the claims because Bebo could eventually raise her complaints in the D.C. Circuit on appeal.
In rendering this final decision, the Seventh Circuit appeared preoccupied with the possibility that allowing the exercise of subject matter jurisdiction could open the floodgates to defendants using constitutional challenges to evade SEC administrative proceedings.
Rather than risk introducing a potential avenue of evasion, the court raised a formidable jurisdictional barrier.
Bebo requires parties to undergo the expense and negative publicity associated with an SEC prosecution and to endure several layers of administrative review prior to the hearing of constitutional arguments before an Article III court, at which point the damage of the allegedly unconstitutional proceeding will have already been done.
Indeed, in all likelihood the case will at that point have been settled.
Some observers, surprised with this implication, predicted Bebo would become an outlier for its jurisdictional holding.
This intuition was proven incorrect in Jarkesy v. SEC.
Because Jarkesy gave voice to several policy concerns with allowing parallel subject matter jurisdiction for constitutional challenges to SEC in-house procedures, it merits close attention.
In Jarkesy, the SEC brought an administrative enforcement action against George Jarkesy, Jr. on the basis of alleged securities fraud.
After Jarkesy countered with a parallel suit in D.C. district court raising several constitutional challenges to the proceeding, the district court found Congress had “implicitly precluded concurrent district-court jurisdiction.”
On appeal, the D.C. Circuit applied the Thunder Basin factors and upheld the preclusion. Judge Srikanth Srinivasan, writing for the court, provided the following Thunder Basin gloss:
We do not understand those considerations to form three distinct inputs into a strict mathematical formula. Rather, the considerations are general guideposts useful for channeling the inquiry into whether the particular claims at issue fall outside an overarching congressional design.
Judge Srinivasan did not cite to Thunder Basin to support this interpretive proposition. This is not to suggest Judge Srinivasan was necessarily incorrect in refusing to “mathematically” apply the Thunder Basin factors but rather to underscore the fact that the Jarkesy opinion appears to implicitly blur the factors and consequently privilege the “meaningful judicial review” factor over the remaining two. Perhaps more tellingly, Judge Srinivasan specifically noted, with approval, that the Bebo court appeared to merge several of the Thunder Basin steps in the fashion discussed above.
Jarkesy is noteworthy for two additional background elements that suggest an awareness of the general industry tumult reviewed above and a tendency toward defensive opining: First, the D.C. Circuit seemed concerned that defendants like Jarkesy could use facial attacks on the constitutionality of a statute to deflect any SEC administrative enforcement to the federal forum.
Second, the court indicated that the logistical kerfuffle and cost that would be permitted by exercising jurisdiction could throw into disarray the entire framework established by Congress.
Bebo and Jarkesy demonstrate two crucial points: First, the courts evinced, not necessarily unreasonably, concern that exercising subject matter jurisdiction over these constitutional challenges could open the floodgates to use of these challenges as a dilatory vehicle
or, worse, a large-scale attack on the administrative state. Second, both courts read the Thunder Basin three-factor test as prioritizing consideration of “meaningful judicial review,” but with that factor interpreted purely as “eventual” judicial review. It is this second doctrinal mutation that comes to the fore in Tilton, and with which Judge Christopher Droney in dissent took issue.
B. Tilton and Its Implications
This section provides a close reading of Tilton v. SEC; such a reading suggests that the Tilton court ignored the fact that, even if the “meaningful judicial review” prong of Thunder Basin overpowers in some sense the other two, review cannot be meaningful if defendants must suffer the very harm, that is, the reputational and expense costs of litigation (not to mention alleged constitutional impropriety), that they seek to enjoin.
1. Tilton Background. — In March 2015, the SEC initiated an in-house proceeding against Lynn Tilton, known affectionately as the “Diva of Distressed” for her work with troubled companies,
for alleged violations of the Investment Advisers Act.
The SEC alleged Tilton defrauded investors by mischaracterizing assets of her fund Patriarch Partners.
Tilton then filed suit in the Southern District of New York seeking an injunction, raising the affirmative defense that the in-house proceeding was unconstitutional because the presiding ALJ’s appointment violated Article II’s Appointments Clause.
The district court dismissed the suit for lack of subject matter jurisdiction,
creating a split within the Southern District of New York.
On appeal to the Second Circuit, Tilton argued that the failure of the SEC to appoint ALJs in accordance with the Appointments Clause rendered the administrative proceeding unconstitutional, warranting a permanent injunction of the administrative proceeding.
As such, the ongoing proceeding would “itself constitute a grave constitutional injury that could not be redressed after the fact.”
To support this position, Tilton raised, among others, the following related arguments: First, Thunder Basin has been understood to evaluate “not whether denying district court jurisdiction could preclude all judicial review, but rather, whether such a denial would preclude all ‘meaningful’ judicial review.”
Second, forcing exhaustion upon Tilton would lead to meaningless review in that it would fail to offer the relief sought, that is, an injunction to block an allegedly unconstitutional proceeding, and force injury upon Tilton in the form of “the attendant ‘embarrassment, expense, . . . ordeal[,] . . . [and] state of anxiety and insecurity’” particularly given the multiple layers of review Tilton would need to endure to reach an Article III court.
2. The Tilton Majority. — At a key inertial moment, that is, at a time when it seemed possible to some that federal courts might find exercise of subject matter jurisdiction proper under Thunder Basin,
the Second Circuit refused 2-1 to exercise jurisdiction over Tilton’s constitutional claims. Writing for the majority, Judge Robert Sack reviewed the Thunder Basin factors in the mode endorsed by Bebo and Jarkesy: Judge Sack acknowledged that the questions of whether the suit was “wholly collateral to a statute’s review provisions” and whether the claims were “outside the agency’s expertise” presented close calls,
but stressed that the Appointments Clause claim would be subject to meaningful judicial review through administrative channels and that this “weigh[ed] strongly against district court jurisdiction.”
In refusing to exercise jurisdiction, Judge Sack specifically rejected the argument that review cannot be meaningful as a product of “inherent remedial limitations of post-proceeding review,” and made clear, as did the Bebo and Jarkesy courts, that “meaningful judicial review” may be satisfied by “any” judicial review.
Acknowledging that post-proceeding relief may fail to restore “financial and emotional resources,” Judge Sack nonetheless maintained that this “imperfect” relief “suffices to vindicate the litigant’s constitutional claim.”
To support this proposition, Judge Sack pointed to FTC v. Standard Oil Co. of California,
in which an oil company argued that the requirement to exhaust all administrative options before bringing suit in federal court should be waived because the company would suffer injury from “expense and disruption” if compelled to complete the administrative proceeding.
In Standard Oil, the Supreme Court recognized that the company would suffer “substantial” expense and disruption at the hands of the administrative proceeding, but that this hardship was “part of the social burden of living under government,” rather than an irreparable injury requiring immediate judicial review.
Judge Sack then proceeded to provide relatively brief treatments of the second and third Thunder Basin factors. Regarding the question of whether Tilton’s claim was wholly collateral to the administrative proceeding, Judge Sack argued that the Appointments Clause claim could be “narrowly categorized as collateral to the statutory merits” but was not “wholly collateral to the SEC’s administrative scheme more broadly,” given that the claim was “procedurally intertwined” with the proceeding.
Regarding expertise, Judge Sack briefly noted that perhaps the SEC could bring to bear its expertise in resolving factual issues related to the constitutional claims, even if this relationship between factual and constitutional issues was proven solely by the SEC’s ability to “obviate” the need to hear Tilton’s constitutional arguments with an order in favor of Tilton.
All told, the Second Circuit added momentum to the interpretations given in Bebo and Jarkesy, finding both that “meaningful judicial review” is the key prong of the Thunder Basin review and that this prong can be satisfied by eventual review in an Article III court, even if the harm sought to be avoided has, by that time, already occurred.
Shortly after Tilton, the Eleventh Circuit reversed the Northern District of Georgia’s willingness to exercise subject matter jurisdiction, noting in part that the court “agree[d] with the Second and Seventh Circuits that the first factor—meaningful judicial review—is ‘the most critical thread in the case law.’”
3. Judge Droney’s Dissent. — Judge Droney’s Tilton dissent provides the only example at the circuit level of serious concern regarding the prioritization of “meaningful judicial review” over the remaining Thunder Basin factors. Judge Droney, seeing nothing in the case law to justify this emergent hierarchy within the Thunder Basin framework, argued that the majority’s holding eviscerated the remaining two factors.
Judge Droney reasoned that the majority’s singular focus on whether the statutory scheme provides for Article III review (as a proxy for meaningful judicial review) changed the Thunder Basin analysis from one aimed at substantively evaluating the constitutional claims at issue into one procedurally concerned with whether petitioners had the ability to eventually reach an Article III forum.
To this end, the majority, per Judge Droney’s interpretation, had misread Thunder Basin to suggest that “a claim is not wholly collateral if it has been raised in response to, and so is procedurally intertwined with, an administrative proceeding,”
and that a claim was not outside agency expertise if the agency’s decision “might fully dispose of the case.”
The end result, Judge Droney argued, was a reduction of the “wholly collateral” and “agency expertise” prongs to a binary analysis of whether or not administrative proceedings are ongoing.
After critiquing the doctrinal shift away from Thunder Basin’s “holistic analysis” of congressional intent, Judge Droney turned to the proverbial elephant in the Note: meaningful judicial review. Judge Droney began his discussion of meaningful judicial review by conceding that, per the majority’s analysis, “this factor tends to weigh in favor of preclusion because a subsequent appeal to this Court following a final Commission order is available.”
And yet, perhaps spurred by “wholly collateral” and “agency expertise” losing doctrinal significance in any substantive sense, Judge Droney raised the “substantial question as to whether subsequent judicial review here would be ‘meaningful.’”
Judge Droney reasoned that review cannot be meaningful if the proceeding defendants seek to challenge has already occurred by the time defendants reach a federal court:
Forcing the appellants to await a final Commission order before they may assert their constitutional claim in a federal court means that by the time the day for judicial review comes, they will already have suffered the injury that they are attempting to prevent. . . . In my view, this diminishes the weight of [the meaningful judicial review factor], for while there may be review, it cannot be considered truly “meaningful” at that point.
Judge Droney’s dissent engaged the exact tension raised in the discussion of implied preclusion and exhaustion above.
In determining whether exhaustion or preclusion is appropriate, courts attempt to balance the “institutional interest” of the agency in forcing parties to proceed through administrative channels against the “individual interest” in prompt Article III court review.
In some contexts, eventual review appears to be sufficient.
In other contexts, perhaps most saliently constitutional challenges or instances in which an administrative action is deemed coercive, courts appear highly uncomfortable with equating meaningful and eventual review.
Judge Droney is no doubt aware that preclusion is a permissible and longstanding feature of administrative law, but he seemed to dissent out of concern that an absolute reduction of preclusion analysis to a binary question of whether “eventual” review is available may not be a desirable outcome.
4. Tilton Epilogue. — Suffice it to say, in light of all the foregoing, the present cocktail of industry outrage, expansion of SEC authority, and failure to grant the regulated community the opportunity for meaningful—rather than “eventual”—hearing of their constitutional complaints, is undesirable and unstable. Spirited challenges to the SEC’s enforcement framework seem unlikely to subside,
the legitimacy-threatening accusations of gamesmanship seem unlikely to dissipate, and Article III courts will be impeded from developing administrative doctrine and acting as a meaningful constitutional check on the behavior of administrative agencies.
III. Return to Meaningful Judicial Review
It should be clarified emphatically at the outset, before turning to the proposals below, that this Note is concerned with what Article III courts, the SEC, and Congress should do, rather than what each body could do within the bounds of the law. Notwithstanding the doctrinal critique—a critique this author happens to believe is meritorious—regarding the recent lack of faithfulness to Thunder Basin, concern with industry outrage, interest in preserving SEC legitimacy, and worry that SEC in-house prosecution may stunt Article III court development of administrative and constitutional law are all concerns of policy and institutional design.
This Note simply seeks to draw attention to a doctrinal development that has effectively stripped the Thunder Basin evaluation of any serious attention toward substantive, meaningful review of constitutional challenges, which may have repercussions both insofar as it insulates the SEC from Article III court review given the incentives to settle
and in the sense that outright hostility from the regulated community is not a desirable policy outcome. Moreover, this niche jurisdictional question has proven a vehicle for shadowboxing over the proper role of the administrative state in pursuing complex statutory objectives, and as such, it offers an opportunity for more forthright dialogue between the SEC and the regulated community.
This Part proposes two solutions: (1) The SEC or Congress should promulgate detailed, and binding, forum selection guidelines, thereby reducing the impression that SEC forum decisions are arbitrary or evidence of gamesmanship; (2) future courts hearing challenges similar to Tilton should apply standard injunction analysis akin to Duka v. SEC.
A. Forum Selection Guidelines
The SEC or Congress should clearly indicate the types of enforcement actions that will be brought internally within the SEC as opposed to those pursued in federal district court. Through this adoption of binding forum selection guidelines, private parties will be able to spend more time ensuring compliance with securities laws and preparing for the possibility of prosecution in a particular forum and less time contesting the nature of the forum. In May 2015, the SEC released a very brief commentary on its process for forum selection.
However, this statement, identifying a “non-exhaustive list of factors” to help determine the proper forum, was both nonbinding and too general to have meaningful impact on industry frustration.
That is to say, when the forum guidelines are drafted such that the SEC has enough wiggle room to effectively retain complete discretion, the guidelines will do little to assuage the regulated community’s suspicions that the SEC is leveraging the forum purely to secure an advantage.
Providing more specific forum selection guidelines, and binding the SEC to these guidelines, should appeal both to the regulated community insofar as it avoids being blindsided by SEC forum choice and also to the SEC, given the SEC’s explicit recognition of the souring public impression of internal enforcement.
While “industry outrage” is not necessarily itself cause for concern,
the fact that this outrage translates to challenges threatening major changes to the SEC’s enforcement apparatus should give the SEC reason for pause.
If the SEC or Congress were to adopt forum selection guidelines, this would allow the SEC or Congress to take command of the SEC’s future rather than wait for a potentially adverse outcome in challenges to the very nature of the SEC.
Section III.A.1 argues that detailed and binding forum selection guidelines will help to bolster the SEC’s legitimacy insofar as they counter the impression that forum selection has become an exercise in prosecutorial advantage. Section III.A.2 then presents the related argument that forum selection guidelines, regardless of the allocation codified, will serve as a starting point for a much-needed discussion over the proper scope and role of SEC internal enforcement among legislators, the SEC, and the regulated community.
1. Maintain SEC Legitimacy. — Forum selection guidelines may go a long way toward bolstering the perceived legitimacy of the SEC as an enforcement body to the extent that these guidelines could combat the critique that the SEC is leveraging the bias of in-house judges to prosecute difficult cases.
That being said, several have argued that, much like the SEC’s in-house judges, Article III judges have problematic biases of their own. In The Real World of Arbitrariness Review, Professors Thomas Miles and Cass Sunstein, after empirical review, conclude that judges’ “[p]olitical commitments” significantly impacted their ability to unbiasedly review agency adjudicative decisions in cases involving the EPA and NLRB.
This Note can muster two brief responses to this objection: First, the biases of Article III judges, unlike the supposed one-directional biases of SEC ALJs, are cross-cutting—that is, Democrat-appointed and Republican-appointed judges are more likely to be sympathetic to liberal and conservative agency decisions, respectively.
Second, and more importantly, regardless of the extent to which actual bias exists in either the SEC or Article III courts, it is difficult to contest the fact that a body (in this case, the SEC) with the ability to investigate, prosecute, and judge parties in-house gives rise to a somewhat troubling fairness aesthetic. If this is indeed the case, the absence of forum selection guidelines may lead skeptics to question the propriety of the SEC’s forum choices, even when these choices are justified. In the words of one commentator: “Even if it doesn’t create actual bias, it doesn’t look good.”
In an oft-cited passage, Professor Gary Lawson outlines one stylized progression of agency enforcement that reflects the intuitive distaste for intra-agency combination of functions:
Consider the typical enforcement activities of a typical federal agency—for example, of the Federal Trade Commission. The Commission promulgates substantive rules of conduct. The Commission then considers whether to authorize investigations into whether the Commission’s rules have been violated. If the Commission authorizes an investigation, the investigation is conducted by the Commission, which reports its findings to the Commission. If the Commission thinks that the Commission’s findings warrant an enforcement action, the Commission issues a complaint. The Commission’s complaint that a Commission rule has been violated is then prosecuted by the Commission and adjudicated by the Commission. This Commission adjudication can either take place before the full Commission or before a semi-autonomous Commission administrative law judge. If the Commission chooses to adjudicate before an administrative law judge rather than before the Commission and the decision is adverse to the Commission, the Commission can appeal to the Commission. If the Commission ultimately finds a violation, then, and only then, the affected private party can appeal to an Article III court. But the agency decision, even before the bona fide Article III tribunal, possesses a very strong presumption of correctness on matters both of fact and law.
One could perhaps counter with the point that SEC ALJs are well aware that they will ultimately be subjected to Article III review, however circuitous the procedure to get there, and will therefore render unbiased decisions.
However, the fact that most SEC enforcement actions settle
calls into question the constraining effect of subsequent judicial review. Ultimately, given the troubling aesthetic of the SEC both prosecuting and judging the same action,
forum selection guidelines could improve confidence in the regulated community.
2. Encourage Dialogue Regarding the Proper Role of SEC Internal Enforcement. — Promulgation of detailed forum selection guidelines would provide the opportunity for all interested parties—the SEC, Congress, regulated actors, and so on—to constructively debate a baseline forum allocation.
In light of the uncontested differences in procedural mechanisms available in federal court versus an ALJ proceeding
(and bracketing, for a moment, claims that SEC ALJs are far more likely than Article III judges to return a guilty verdict), it is crucial for both the SEC and regulated parties to consider how to best differentiate the types of cases properly heard in front of an Article III judge versus an ALJ.
To some extent, the “debate” regarding the propriety of expanded SEC jurisdiction and discretion has already begun, but without the essential component of guidelines to evaluate. For example, several have argued that allowing the SEC to continuously widen its enforcement scope will undercut the SEC’s mission by limiting federal courts from developing the law and effectively insulating SEC decisionmaking from meaningful checks.
Others, perhaps most prominently Professor David Zaring, argue that the complete discretion of the SEC to prosecute where it chooses is an essential component of its ability to enforce effectively.
In either case, having clear forum selection guidelines offers an opportunity for parties to propose, without excessive speculation absent guidelines, ways to limit what many deem “unacceptable systematic ambiguity.”
Moreover, to the extent outlining forum selection guidelines mitigates the outrage of the regulated community, this solution might help anticipate and prevent the industry agitating for a destabilizing overreaction to the SEC’s aggressive enforcement tactics.
B. Duka, Meaningful Judicial Review, and Injunction Analysis
While forum selection guidelines—both their creation and improvement—have been proposed in other contexts,
doctrinal proposals are far less frequent. Recall that in Tilton, the Second Circuit was faced with a district court split on this question of subject matter jurisdiction.
The court chose to affirm Judge Abrams’s analysis in the trial court, thereby refusing to exercise subject matter jurisdiction, and in doing so rejected Judge Berman’s alternative approach in Duka v. SEC, which involved the use of standard injunction analysis to review the constitutional challenges. This Note argues that future courts hearing challenges akin to Tilton should apply the framework employed most explicitly in Duka, which allows aggrieved parties the opportunity for meaningful judicial review of constitutional claims in an Article III court while enabling the Article III court to quickly return the case to the SEC ALJ if the constitutional challenge appears unlikely to succeed on the merits.
Duka involved a paradigmatic case as far as this Note is concerned: The SEC initiated an internal enforcement action against Barbara Duka for alleged violations of section 17(a) of the Securities Act and Duka countered by filing an injunction in the Southern District of New York, claiming that ALJs are unconstitutionally insulated from presidential oversight in violation of Article II of the Constitution.
Judge Berman held that (1) the court had subject matter jurisdiction over Duka’s constitutional claims, but (2) the preliminary injunction ought to be denied on grounds that the court deemed Duka unlikely to succeed on the merits.
Duka thus provided both meaningful judicial review while avoiding the trap of entertaining (what the court deemed) a meritless challenge.
1. Putting the “Meaningful” Back in Meaningful Judicial Review. — Duka’s willingness to exercise subject matter jurisdiction over the constitutional claim intimated the Court’s sensitivity to the frustration of defendants who feel that the inability to bring challenges in district court has unfairly stacked the deck in the SEC’s favor.
The Duka court took the position that “eventual” judicial review of a constitutional challenge to an administrative proceeding cannot in any real sense be meaningful if the challenge is relegated to the aftermath of the administrative action, indicating that money spent on litigation and reputational costs were worthy of consideration.
That is to say, regardless of outcome, Duka framed the decision to clearly signal that the court took the constitutional challenge seriously, as opposed to simply a defense mechanism to the SEC enforcement.
One possible objection to Duka’s threshold consideration of the merits of the constitutional challenge would be to argue that this approach wastefully imposes costs on the SEC Enforcement Division, which must convince an Article III court to dismiss a constitutional challenge before proceeding with the administrative action. This may very well be true, but this argument ignores the possibility that the ire of the regulated community may, via lobbying or otherwise, encourage an overly heavy-handed legislative response that causes far more disruption to the SEC enforcement regime than the Duka approach.
This possibility is far from insubstantial—in April of 2017, Congressman Warren Davidson (R-Ohio) introduced H.R. 2128, the Due Process Restoration Act, which proposes to “provide respondents in SEC enforcement cases with the option to have their proceedings advance in a federal district court instead of internal SEC administrative courts.”
Congressman Davidson’s proposal, currently pending before the House Financial Services Committee, declines Duka’s relatively middle-ground approach and instead would allow all defendants to simply opt out of administrative enforcement.
Article III courts, as well as all believers in the merits of administrative adjudication, therefore have good reason to adopt a compromise approach of the Duka ilk rather than await current industry antipathy to manifest itself in an incautious rollback of SEC enforcement capabilities.
2. Granting Injunctions (or Not) Using Standard Injunction Analysis. — The key decisional element that this Note argues makes Duka the desirable framework is the second step of the analysis, that is, considering the success of the constitutional challenge on the merits. By employing standard injunction analysis
—asking whether “Plaintiff (1) is likely to succeed on the merits of her claim, (2) will suffer irreparable harm absent injunctive relief, and (3) the public interest weighs in favor of granting the injunction”—Duka’s approach catalyzes several positive effects: First, entertaining subject matter jurisdiction and then reviewing likelihood of success on the merits allows defendants to receive a hearing in federal court without having to navigate the serpentine internal processes of the SEC, with the very likely possibility of the parties settling during the interim.
Second, as was the case in Duka, the second step of injunction analysis, which includes review of the likelihood of success on the merits, will weed out frivolous constitutional challenges, thereby encouraging defendants ex ante to carefully consider whether to raise a constitutional challenge at all.
Concern that allowing district courts to exercise subject matter jurisdiction allows wealthy defendants to deflect meritorious SEC prosecutions is not unreasonable. However, this Note takes the position that this concern is misguided. As Judge Rakoff explained in another recent case:
To be sure, it would not be prudent to allow every subject of an SEC enforcement action who alleges “bad faith” and “selective prosecution” to be able to create a diversion by bringing a parallel action in federal district court. But such diversionary tactics can be quickly disposed of in the ordinary case through dismissal for failure to plead a plausible claim.
Moreover, it is certainly not inconceivable that the SEC, emboldened by the current hands-off approach of the circuits addressing the issue, could become even more aggressive about prosecuting in-house and in so doing, cross the line into the unconstitutional, thus calling for more aggressive prophylactic measures.
3. The Cost of Duka. — Implementing injunction analysis in keeping with Duka would not be without cost. Dodd-Frank, the spark behind the recent backlash toward SEC behavior, was enacted with the purpose of tightening regulation on the financial industry in the aftermath of one the worst financial crises the United States has experienced since the Great Depression.
Indeed, one could argue with little difficulty that Dodd-Frank was passed with the express purpose of placing a thumb on the scale in favor of entities like the SEC.
Were Article III courts to adopt the approach in Duka and exercise subject matter jurisdiction, even cursorily to determine feasibility of a claim before returning the matter to the SEC, this would no doubt interrupt the SEC’s enforcement actions, imposing costs on the SEC resulting from having to halt the in-house action and litigate in an Article III court before potentially returning in-house.
Still, the countervailing costs may be even more troubling. In dismissing Tilton’s claims, the Second Circuit noted: “The litigant’s financial and emotional costs in litigating the initial proceeding are simply the price of participating in the American legal system.”
On this view, the requirement to endure an SEC in-house administrative action prior to reaching an Article III court acts as a kind of tax on such challenges. This cost is compounded, as already argued, by the reputational damage, litigation expense, and risk (particularly for public companies) entailed by seeing an action through the many layers of SEC review before reaching a court of appeals. These costs, in turn, strongly incentivize settlement prior to Article III adjudication.
If this is an accurate picture, challenges based in constitutional and administrative law may never reach an Article III hearing, threatening to stunt the growth of both areas of law with respect to the administrative state at a time when the administrative state is heavily relied upon.
Just as it may be excessively dire to suggest that the entire SEC apparatus is unconstitutional, it may be too dismissive to suggest that the SEC, given sufficient insulation from Article III court review, will not be tempted to push the envelope into the realm of unconstitutional behavior.
The post-Dodd-Frank SEC operates in a climate that simultaneously demands rigorous regulation of financial actors and is characterized by widespread attacks, both meritorious and otherwise, on the administrative state itself. As such, it has become increasingly important for the SEC to clearly articulate a reasoned and diligent enforcement strategy while maintaining its legitimacy as a fair and apolitical body. The increased enforcement capabilities of the SEC combined with the move to prosecute more frequently in-house has generated a mutual antipathy that undermines the legitimacy of the SEC and has materialized in challenges to the SEC that could destabilize the Commission.
This climate has only been exacerbated by the refusal of Article III courts to exercise subject matter jurisdiction over constitutional challenges to the nature of SEC administrative proceedings and the failure of the SEC to articulate clear forum selection guidelines.
Allowing Article III courts to exercise subject matter jurisdiction over constitutional challenges to the SEC’s in-house proceedings—whether achieved doctrinally via Thunder Basin or legislatively through forum selection guidelines—has the potential to reduce the temperature of the controversy surrounding SEC in-house proceedings, bolster the SEC’s legitimacy as an enforcement body, and ensure that Article III courts remain independently capable of developing administrative and constitutional law.