Redefining Agency Power: The Impact of Loper Bright and Jarkesy on the Administrative State

Executive branch administrative agencies in the U.S. are facing increasing scrutiny and opposition. The U.S. Supreme Court is currently grappling with constitutional challenges to administrative agencies powers and procedures through landmark cases Loper Bright Enterprises v. Raimondo, No. 22-451 (U.S. May 1, 2023) and SEC v. Jarkesy, No. 22-859 (U.S. Oct. 30, 2023). These cases reflect the ongoing debates regarding the scope and limits of administrative power in the U.S. This article delves into the cases of Loper Bright and Jarkesy and illustrates how challenges to the current power exercised by administrative agencies may impact the regulatory landscape for public companies, the Securities and Exchange Commission (“SEC”), and market integrity.  

Loper Bright and Jarkesy share a common theme in challenging the extent of the administrative state’s authority. In Loper Bright, the heart of the dispute lies in what is known as “Chevron deference,” a judicial principle established in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984) which mandates courts to defer to an agency’s reasonable interpretation of an ambiguous statute. (Alexander Talel, Time). In Loper Bright, a group of commercial fishermen (“Fishermen”) sued the National Marine Fisheries Service (“Agency”) after the Agency implemented a regulation that required the Fishermen to pay the salaries of those who prevent and regulate overfishing. (Charlie Savage, The New York Times). The Agency passed this regulation based on its broad interpretation of the Magnuson-Stevens Fishery Conversation and Management Act of 1976 (“Act”). (Oyez; Alexander Talel, Time). The Fishermen argued that the Act did not allow the Agency to promulgate “industry-funded monitoring requirements.” (Oyez). The D.C. Circuit Court of Appeals ruled in favor of the Agency, holding that the Agency’s interpretation of the Act was reasonable and therefore the regulation was valid. (Alexander Talel, Time). On appeal to the Supreme Court, the Fishermen seek to overturn the Chevron deference precedent and eliminate judicial deference to federal agencies in interpreting ambiguous statutes. (Jeevna Sheth & Devon Ombres, The Center for American Progress).

In contrast, Jarkesy focuses on the SEC’s use of administrative law judges (“ALJs”) in enforcing securities laws. In this case, the SEC accused George Jarkesy (“Plaintiff”) of securities fraud. (Devon Ombres, The Center for American Progress). The SEC chose to pursue these claims through an ALJ rather than a traditional jury trial, prompting the Plaintiff to challenge the constitutionality of this decision. (Cameron Bonnell, The Georgetown Environmental Law Review). The crux of this case is whether the agency’s adjudication of fraud claims using ALJs infringes upon individuals' Seventh Amendment right to a jury trial. (Alexander Talel, Time). The U.S. Court of Appeals for the 5th Circuit ruled in favor of the Plaintiff finding that the SEC's actions violated Mr. Jarkesy’s Seventh Amendment right. Id. Jarkesy and Loper Bright are currently pending review by the U.S. Supreme Court.

Both cases illustrate a broader narrative of increasing skepticism toward the administrative state. This skepticism stems from concerns about unchecked regulatory power, lack of accountability, and potential violations of constitutional rights. Opponents of the administrative state argue that too much power is delegated to executive branch agencies and the courts are abandoning their authority to interpret the law. (Charlie Savage, The New York Times). There are also concerns that agencies are not “faithfully executing Congress’ instructions” and that they are finding ways to accomplish their own agendas. (Lawrence Hurley, NBC News). Lastly, as seen in Jarkesy, there is a legal argument that some of these agency’s practices, like the use of ALJs, may infringe upon constitutional rights, particularly in regard to due process and the right to a fair trial. (John Kruzel, Reuters).

The decisions in Loper Bright and Jarkesy may have significant implications for the SEC. While Jarkesy directly threatens the SEC’s enforcement powers, Loper Bright could threaten the SEC’s basic ability to function. (Alexander Talel, Time). If the U.S. Supreme Court ruling in Jarkesy limits the SEC's authority or changes how it enforces regulations, this could lead to a substantial restructuring of the agency's procedures. Such a ruling could potentially curtail the SEC's ability to expedite securities fraud proceedings using its internal ALJs. (Ed Pilkington & Nick Surgey, The Guardian). The agency would likely be required to rely more on federal courts for enforcement actions, which could slow down the process and potentially reduce its effectiveness in regulating the securities market. (Alexander Talel, Time). This is because administrative agencies have specialized knowledge and resources tailored for regulatory enforcement within their specific areas of expertise. Diminishing agency authority could require less specialized entities, such as the judiciary or other governmental bodies, to address matters that they are not equipped to handle. Looking ahead, the decisions in Loper Bright and Jarkesy could also have a profound impact on public companies and the markets. A weakened administrative state could mean less regulatory oversight, potentially leading to more freedom for businesses in terms of operations and financial practices. While this could foster innovation and growth, it also raises concerns about the adequacy of investor and consumer protection, as well as market integrity.

Further, a ruling against the SEC might significantly diminish not only the SEC’s enforcement powers but also various other federal agencies’ enforcement powers in areas such as environmental regulation and other standards. (Ed Pilkington & Nick Surgey, The Guardian). If the administrative state is weakened, it will be easier to challenge various regulations that help to ensure that the air and water are kept clean and that consumer products such as food, drugs, and cars are safe. (Charlie Savage, The New York Times). In addition, the Supreme Court and district court judges nationwide might increasingly overturn agency decisions, and regulations could become subject to several interpretations due to circuit splits. (Jeevna Sheth & Devon Ombres, The Center for American Progress; Brooke Masters, Financial Times). While the current anti-regulatory approach might seem attractive to numerous businesses, such businesses could eventually find themselves questioning such decisions that weaken independent financial policies and uniform national standards. (Brooke Masters, Financial Times).

Loper Bright and Jarkesy reflect the growing debate over the role and power of the administrative state. The outcomes of these cases could redefine the landscape of regulatory oversight, impacting not only the SEC and other federal agencies but also public companies and financial markets. As these cases progress, significant changes could be in store regarding regulatory oversight in the U.S. and the implementation and enforcement of federal regulations.