Two pivotal Supreme Court cases—SEC v. Jarkesy and Loper-Bright Enterprises, Inc. v. Raimondo—are poised to reshape the regulatory landscape for financial services companies, presenting significant implications for the industry. As the full impact of these rulings unfolds, understanding their key effects is essential for navigating the evolving legal environment.
In SEC v. Jarkesy, the Supreme Court ruled that the Securities and Exchange Commission’s (SEC) use of administrative proceedings to impose civil penalties for securities fraud violates the Seventh Amendment right to a jury trial. As a result, the SEC must now adjudicate these cases in federal court instead of through its internal processes.
This shift presents mixed outcomes for financial services companies. On the one hand, federal court litigation may increase costs and extend case durations, as federal courts might not handle securities law cases as efficiently as SEC judges. This could strain resources for the industry. On the other hand, shifting cases to federal court may require the SEC to allocate more of its own resources, which could, in turn, reduce the overall number of enforcement actions the agency pursues.
Moreover, Jarkesy may level the playing field for defendants and reduce the SEC's historically high success rate in enforcement actions. Defendants in federal courts gain standard legal rights absent in SEC proceedings, including the Federal Rules of Evidence that exclude hearsay and allow for discovery. The transition from private to public litigation also enhances transparency, subjecting previously confidential cases to public scrutiny and promoting accountability in the regulatory process.
Ultimately, while the ruling may lead to higher litigation costs, it also offers an opportunity for a more balanced legal landscape where the industry can effectively contest SEC actions. Consequently, companies in this sector should enhance their compliance protocols and prepare for a legal environment characterized by increased scrutiny.
As Jarkesy redefines enforcement mechanisms, Loper-Bright Enterprises, Inc. v. Raimondo further clarifies the limits of agency power, creating a more cohesive regulatory environment across the financial services sector. In this case, the Court determined that under the Administrative Procedure Act, courts must independently evaluate whether an agency has operated within its statutory authority, rather than deferring to an agency's interpretation of federal laws solely due to ambiguity without relying on the agency’s reading. If the Court’s interpretation of an ambiguous federal law differs from the agency’s, the agency's regulation will be struck down.
This decision effectively ends the era of Chevron deference, a doctrine that previously allowed courts to defer to an agency’s reasonable interpretation of ambiguous statutory language. Under the Loper-Bright ruling, courts are no longer bound to defer to an agency’s interpretation when faced with ambiguity. Rather, courts must independently determine the law’s meaning. However, when the law is clear, both the Court and the agency must follow the statute, as there has never been deference when an agency’s interpretation conflicts with a clear statutory directive.
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The impact of this decision is far-reaching for the financial services industry. With agencies like the SEC and the Commodity Futures Trading Commission (CFTC) constrained to their statutory authority, their ability to interpret laws in broad or ambiguous ways will be diminished. This creates a clearer and more predictable regulatory environment, which can help companies comply with regulations and reduce the risk of arbitrary or inconsistent actions. At the same time, this limitation could reduce agencies’ flexibility to quickly adapt to new developments or respond to emerging challenges in the financial markets.
In summary, Loper-Bright and Jarkesy may herald a significant shift for financial services firms by redefining regulatory authority and compliance standards. While Jarkesy reshapes the enforcement landscape for defendants, Loper-Bright clarifies the limits of agency authority. Together, these cases offer a more balanced regulatory framework for financial services firms. Therefore, companies can navigate this landscape by adopting proactive compliance strategies. Remaining informed and agile will be essential for sustained success.
For more insights into the future of financial services regulations, join me for Saifr's next webinar, Decoding the Regulatory Landscape: What you need to know for 2025.
The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Fidelity and any other third parties are independent entities and not affiliated. Mentioning them does not suggest a recommendation or endorsement by Fidelity.
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