For years, there have been efforts to chip away at the Securities and Exchange Commission’s (SEC) administrative enforcement powers. In particular, in 2024, the Supreme Court ruled in SEC v. Jarkesy, 603 U.S. 109 (2024), that when the SEC seeks civil monetary penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial, foreclosing the use of the SEC’s in-house courts in such instances. That same year, the Supreme Court ended Chevron deference;[1] and the following year, the U.S. District Court for the District of Columbia heard a challenge to the constitutionality of an SEC follow-on action in which the U.S. Department of Justice indicated it would no longer defend the tenure protections of SEC and other agency administrative law judges against claims that they violate separation-of-powers principles and Article II of the Constitution.[2] Notwithstanding these cases, in a more recent challenge to the constitutionality of an SEC follow-on action brought in the U.S. District Court for the District of Columbia, that Court refused to curtail the SEC’s administrative enforcement powers in connection with industry bans.
Specifically, the SEC sued a father-son investment advisor team (the Sztroms) for fraud in the U.S. District Court for the Southern District of California. The Sztroms settled the case with the SEC for $25,000 each without admitting liability. Several months later, the SEC initiated an in-house follow-on proceeding against the Sztroms seeking to bar them from working in the securities industry. The Sztroms subsequently sued the SEC in the U.S. District Court for the District of Columbia arguing that the SEC’s attempt to ban them from the securities industry violated (1) the Due Process Clause of the Fifth Amendment because the same agency that adjudicates the charges investigated and prosecuted them; (2) Article III because only federal courts have the authority to adjudicate “cases and controversies” of this kind; (3) the Fifth and Seventh Amendments by depriving them of a jury trial, in line with Jarkesy; and (4) the Advisers Act and Administrative Procedure Act by depriving them of a hearing. The SEC, in turn, moved for dismissal for lack of subject matter jurisdiction and failure to state a claim.
The Sztrom Court agreed with the SEC on all four counts. It dispensed with counts three and four on the grounds that Congress intended for only courts of appeals to have jurisdiction over challenges to rules and orders pursuant to the Advisers Act.[3] With regard to count one, the Sztrom Court reasoned that none of the cases raised by the Sztroms addressed the issue of “combining of adjudicative and prosecutorial functions in an agency”[4] and, as a result, held that those cases did not — expressly or by implication — overrule D.C. Circuit precedent that procedures by which “members of administrative agencies receive the results of investigations, approve the filing of charges or formal complaints instituting enforcement proceedings, and then participate in the ensuring hearings do not violate due process of law.”[5] The Sztrom Court acknowledged Jarkesy but distinguished it and other cases because the holdings in those cases concerned “at most, ancillary issues” to the Sztroms’ challenge.[6] Finally, in terms of count two, the Sztrom Court held that at issue were public rights, not private rights, such that “no involvement by an Article III court in the initial adjudication is necessary.”[7]
The Sztrom opinion is instructive because although SEC in-house courts, and administrative enforcement powers more generally, have been under attack the last few years, courts seem to be reticent to entirely upend the system. Such in-house courts can serve a legitimate purpose. It then becomes a matter of defining what those legitimate purposes are, and the SEC acting within that defined scope. With the SEC not being the only federal agency that utilizes in-house administrative proceedings, however, it would be prudent for other such federal agencies to take note as well.
[1] See Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024).
[2] See Lemelson v. SEC, 793 F. Supp. 3d 1, 17-18 (D.D.C. 2025).
[3] While questioning the need for further assessment, the Sztrom Court nonetheless underwent a Thunder Basin[3] analysis, finding that it too supported the SEC’s position. See Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994). The Thunder Basis analysis is a three-factor test focused on foreclosure of all meaningful judicial review, proceedings “wholly collateral to the statutory review scheme, and claims outside the agency’s expertise. Id. at 212-13.
[4] Sztrom v. SEC, No. 24-cv-3548 (CRC) (D.D.C. Jan. 8, 2026), ECF 21, at 7.
[5] Id (quoting Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1106 (D.C. Cir. 1998) (quotation modified)).
[6] Id. at 7.
[7] Id. at 8 (quoting Jarksey, 603 US at 127-28).
