Two U.S. Supreme Court Decisions Will Affect the Securities Industry

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The Supreme Court of the United States (SCOTUS) issued two opinions in the past week that are likely to have a longer-term effect on the way securities industry matters are handled.

Juries, not the Securities Exchange Commission (SEC), should decide legal issues like fraud.
In Sec. & Exch. Comm’n v. Jarkesy, No. 22-859, 2024 WL 3187811 (U.S. June 27, 2024) the SEC was investigating an advisory firm for alleged fraud in connection with a hedge fund investment for the purpose of increasing its management fees. The SEC imposed on the firm civil penalties and disgorgement following an in-house proceeding. The firm appealed, and the Fifth Circuit found in its favor, stating that defendants had a right to a jury trial. The Supreme Court agreed with the Fifth Circuit, holding that defendants are entitled to a jury when confronted with claims that are deemed “legal in nature” and reflective of common-law doctrines as opposed to equitable remedies. The key consideration was that the SEC’s antifraud provisions mirrored common-law concepts of fraud, both of which were recognized as having been developed to deter and penalize material misrepresentations.

Fishermen end a 40-year-old doctrine of agency deference.
In Loper Bright Enterprises. v. Raimondo and Relentless, Inc. v. Dep’t of Com., Nos. 22-1219 and 22-451, 2024 WL 3208360 (U.S. June 28, 2024), the Court reversed its decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984), that required courts to defer to an administrative agency’s interpretation of the federal statutes that it administers. It all started when several family fishing businesses challenged the application of a federal law to their fishing operations by the National Marine Fisheries Service. The NMFS, in its administration of the law in question that called for the use of fishery management plans, had required the fishermen to surrender up to 20% of their earnings to help fund the use of observers on their boats to gather data for conservation and management of the fishing industry. The fishermen challenged the requirements and funding for the observers to their types of operations, which Congress had not detailed in the law. Under the Chevron doctrine, when reviewing an agency’s action under a federal law, if Congress had not spoken to “the precise question at issue”, the reviewing court would uphold the agency’s interpretation of the law so long as that decision was “reasonable.” Under the approach established in the Loper Bright decision, “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the [Administrative Procedure Act] requires.”  This new approach eliminates deference to a regulating agency’s interpretation of federal law when analyzed by a reviewing court. Courts can still refer to agency interpretations to inform their analysis of a law, but courts “need not and under the APA may not defer to an agency interpretation of law simply because a statute is ambiguous.”

While Congress could choose to expressly delegate Chevron-like authority to regulatory agencies in the future, until that happens, it will be up to the courts to interpret statutes and fill in the gaps when faced with any ambiguity.

What does that mean for the securities industry landscape in the near term?
Either opinion on its own would have a great affect on how securities matters are handled. Combined, these two opinions are likely to result in the following:

• Increased litigation with the SEC, as defendants will now have the option to demand a jury trial and the SEC’s interpretation of key rules may not be set in stone;
• Increased costs of litigation with the right to seek a jury trial and more issues subject to litigation (rather than deference);
• Quicker resolutions for smaller matters as pressing for a federal court jury trial may result in the SEC being more selective about the cases it takes to trial; and
• Possible difficulties for the SEC’s enforcement of the fraud rules, which ultimately may be bad for investors.

Steptoe & Johnson’s Securities Litigation, Enforcement, and Compliance Team handles regulatory matters and enforcement actions from initial inquiry through trial and, if necessary, appeal. For more information, reach out to the authors of this alert or other members of the Securities team.