(Article from Securities Law Alert, October 2015)
For more information, please visit the Securities Law Alert Resource Center On September 29, 2015, the D.C. Circuit held that respondents in pending SEC administrative enforcement proceedings may only “secure judicial review” in federal court “when (and if) the proceeding[s] culminate[ ] in [an adverse] resolution.” Jarkesy v. SEC, 2015 WL 5692065 (D.C. Cir. 2015) (Srinivasan, J.). The D.C. Circuit determined that even if respondents assert constitutional or other challenges to the SEC’s authority, they may not “‘jump the gun’ by going directly to [a] district court to develop their case.’” Earlier this year, the Seventh Circuit reached the same conclusion in Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015).
Background
When enforcing the federal securities laws in civil proceedings, the SEC may either “bring a civil action against the alleged violator in federal district court, or it can initiate an administrative enforcement proceeding.” See 15 U.S.C. § 78u(d) et seq. Respondents in SEC enforcement proceedings may appeal adverse agency resolutions in federal court. See 15 U.S.C. § 78y(a)(1).
In the case before the D.C. Circuit, the SEC had commenced administrative enforcement proceedings against an unregistered investment adviser and its manager. Before the SEC hearing began, respondents filed suit in federal district court raising constitutional challenges to the SEC’s authority to bring enforcement proceedings. The district court dismissed respondents’ complaint for lack of subject-matter jurisdiction. Respondents appealed.
Applying the Thunder Basin Test, D.C. Circuit Finds Congress Implicitly Precluded Federal Court Jurisdiction Over Constitutional Challenges Brought by Respondents in Pending SEC Enforcement Proceedings
The D.C. Circuit applied the two-part test set forth in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) to assess “whether Congress [had] implicitly precluded [respondents’] district-court suit by channeling [respondents’] challenges through the securities laws’ scheme of administrative adjudication and judicial review in a court of appeals.” Pursuant to the Thunder Basin test, a court can “determine that Congress intended that a litigant proceed exclusively through a statutory scheme of administrative and judicial review when (i) such intent is ‘fairly discernible in the statutory scheme,’ and (ii) the litigant’s claims are ‘of the type Congress intended to be reviewed within [the] statutory structure’” (quoting Thunder Basin, 510 U.S. 200). Courts must also consider “whether the claims can be afforded meaningful [judicial] review” under the statutory scheme. Thunder Basin, 510 U.S. 200.
Court Finds It “Fairly Discernible” That Congress Intended Appellate Review of Final SEC Resolutions to Be the Exclusive Means for Respondents in Pending SEC Enforcement Proceedings to Obtain Judicial Review
The D.C. Circuit found that it could “fairly discern Congress’s intent to preclude suits by respondents in SEC administrative proceedings in the mine-run of cases.” Jarkesy, 2015 WL 5692065. In light of the “‘painstaking detail with which’ Congress set forth the rules governing the court of appeals’ review of [SEC] action,” the D.C. Circuit concluded that “‘Congress intended to deny [aggrieved respondents] an additional avenue of review in district court’” (quoting Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012)). The D.C. Circuit reasoned that “Congress granted the choice of forum to the [SEC], and that authority could be for naught if respondents . . . could countermand the [SEC]’s choice by filing a court action.”
Court Concludes That the Statutory Scheme Will Ultimately Allow for “Meaningful Review” of Respondents’ Constitutional Claims
The D.C. Circuit determined that “’a finding of preclusion’ would not ‘foreclose all meaningful judicial review’ of [respondents’] claims.” The court found it immaterial that “the [SEC] lack[ed] the authority to rule on” respondents’ constitutional claims. The D.C. Circuit explained that the Supreme Court’s recent decision in Elgin “reiterated that, so long as a court can eventually pass upon the challenge, limits on an agency’s own ability to make definitive pronouncements about a statute’s constitutionality do not preclude requiring the challenge to go through the administrative route.” “Because [respondents’] constitutional claims . . . [could] eventually reach ‘an Article III court fully competent to adjudicate’” those claims, the D.C. Circuit concluded that it was “of no dispositive significance whether the [SEC] ha[d] the authority to rule on them in the first instance during the agency proceedings” (quoting Elgin, 132 S. Ct. 2126).
Court Rejects Respondents’ Contention That the Constitutional Claims at Issue Were Not of the Type Congress Intended to Be Reviewed within the Statutory Scheme
Respondents contended that their constitutional challenges were “‘wholly collateral’ to the securities laws’ scheme” and were “not of the type Congress intended to be reviewed within this statutory structure’” (quoting Thunder Basin, 510 U.S. 200). The D.C. Circuit found this argument “simply incorrect.” The court determined that respondents’ “constitutional . . . claims [did] not arise ‘outside’ the SEC administrative enforcement scheme — they [arose] from actions the [SEC] took in the course of that scheme.” The court found “the fact that [respondents’] claims attack[ed] the process rather than the result [did] not mean [their] claims should receive preemptive resolution in a district court.”
The D.C. Circuit reasoned that creating “an exception to an otherwise exclusive scheme for constitutional challenges in general, or facial attacks on a statute in particular, or some other as-yet-undefined category of constitutional claims, would encourage respondents in administrative enforcement proceedings to frame their challenges to the [SEC’s] actions in those terms and thereby earn access to another forum in which to advance their arguments.” The court found it doubtful that “Congress intended that result.”
The D.C. Circuit concluded that “the securities laws provide an exclusive avenue for judicial review that [respondents] may not bypass by filing suit in district court.” The court affirmed dismissal of respondents' claims for lack of subject-matter jurisdiction.