Supreme Court's Review of SEC Disgorgement Authority and Its Impact on Enforcement and Investor Protection

The Supreme Court's 2024 ruling in SEC v. Jarkesy has reshaped the Securities and Exchange Commission's (SEC) enforcement landscape, triggering a seismic shift in how the agency adjudicates securities fraud cases. By holding that the Seventh Amendment requires jury trials in cases where the SEC seeks civil penalties, the decision has curtailed the agency's use of in-house administrative proceedings, forcing it to litigate such matters in federal courts. This shift has introduced regulatory uncertainty, with cascading effects on market integrity, capital formation, and investor confidence.

Regulatory Uncertainty and Enforcement Constraints

The Jarkesy decision effectively ended the SEC's ability to pursue civil penalties through administrative tribunals led by Administrative Law Judges (ALJs), a process that had long been criticized for lacking procedural safeguards like jury trials and adherence to the Federal Rules of Evidence. The Court emphasized that civil penalties-unlike equitable remedies such as disgorgement-are punitive in nature and historically required jury trials. This distinction has left the SEC in a procedural limbo: while it can still seek equitable remedies like disgorgement in administrative proceedings, its ability to impose civil penalties is now contingent on federal court litigation, a process that is slower, costlier, and less predictable.

The practical implications are stark. In 2025, SEC enforcement actions fell to 313, the lowest in a decade, as the agency grappled with the logistical challenges of transitioning to federal court proceedings. This decline reflects not only the procedural hurdles but also a strategic recalibration under Chairman Paul Atkins, who has prioritized "cases of genuine harm and bad acts" over technical violations. While this approach may reduce the frequency of enforcement actions, it risks creating a perception of regulatory leniency, potentially undermining the deterrent effect of SEC enforcement.

Capital Formation and Corporate Compliance Costs

The Jarkesy ruling has also influenced capital formation dynamics. By limiting the SEC's ability to enforce civil penalties through administrative proceedings, the decision may reduce the perceived regulatory risks for companies seeking to go public. According to a report by Singer Lewak, the shift could revive IPO activity among venture-backed and private equity-backed firms, as the regulatory environment becomes more predictable. However, this optimism is tempered by concerns that reduced enforcement could erode market discipline.

Corporate compliance budgets have also been affected. The transition to federal court litigation has increased the costs and duration of enforcement actions, prompting companies to allocate more resources to legal defense and regulatory compliance. For instance, the SEC's reliance on federal courts has made negotiated settlements less feasible, leading to prolonged litigation that strains corporate legal teams. While this may encourage more robust compliance frameworks, it also raises the cost of doing business, particularly for smaller firms with limited resources.

Investor Confidence and Market Integrity

Investor confidence, a cornerstone of market integrity, has been a mixed bag post-Jarkesy. On one hand, the decision's emphasis on procedural fairness-such as jury trials-could bolster trust in the regulatory system. On the other, the SEC's perceived shift toward facilitating capital formation over investor protection has raised alarms. As Better Markets notes, the agency's strategic realignment under Trump-appointed leadership has sparked concerns about reduced disclosures and weaker enforcement, potentially eroding investor trust.

The circuit split over disgorgement further complicates the picture. The Ninth Circuit's 2025 ruling in SEC v. Sripetch affirmed that the SEC can seek disgorgement without proving investor harm, aligning with the First and Fifth Circuits but diverging from the Second Circuit's requirement of demonstrable financial loss. This inconsistency creates forum shopping opportunities for defendants and undermines the uniformity of enforcement, which is critical for investor confidence. The SEC's advocacy for Supreme Court review of this split underscores the need for clarity, as unresolved circuit conflicts threaten to fragment enforcement standards.

Broader Implications for the Administrative State

The Jarkesy decision has broader implications beyond the SEC. By narrowing the "public rights" exception to Article III jurisdiction, the ruling challenges the constitutional validity of administrative proceedings across federal agencies, including the Commodity Futures Trading Commission and Federal Trade Commission. This skepticism of the administrative state could lead to a proliferation of federal court cases, increasing the workload of an already overburdened judiciary and delaying regulatory actions.

Conclusion

The Supreme Court's review of the SEC's disgorgement authority has introduced a new era of regulatory uncertainty, with profound implications for enforcement efficacy, capital formation, and investor trust. While the Jarkesy decision reinforces procedural safeguards, it also highlights the tension between regulatory efficiency and constitutional constraints. As the SEC navigates this evolving landscape, the resolution of circuit splits and the agency's enforcement priorities will be critical in determining whether market integrity and investor protection can coexist with a more constrained regulatory framework.