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May 20, 2022

By: Allen H. Denson, Julia B. Strickland

Did the CFPB just have its wings clipped? A recent Court of Appeals decision in an SEC case suggests so.

In Jarkesy et al. v. U.S. Securities and Exchange Commission,[1] the Fifth Circuit held that the SEC’s use of agency courts violated respondents’ right to a jury trial and relied on unconstitutionally delegated legislative powers. The Fifth Circuit’s reasoning easily extends to powers routinely employed by the CFPB.

Jarkesy was a civil enforcement action brought by the SEC for securities fraud against a hedge fund manager and investment advisor, using the SEC’s discretion to file the case before an administrative tribunal presided over by an ALJ rather than in federal district court. An SEC ALJ found respondents liable and ordered various remedies. The SEC thereafter adopted the recommended decision, rejecting multiple constitutional arguments advanced by respondents, which respondents then raised before the Fifth Circuit. On appeal, the Fifth Circuit vacated the decision, finding the SEC’s adjudication powers unconstitutional on the following grounds: (1) the SEC’s use of an administrative court violated respondents’ Seventh Amendment right to a jury trial; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise its discretion to bring cases either in district court or in administrative tribunals, in violation of Article I’s vesting of “all” legislative power in Congress.[2] As explained by the Court, use of an ALJ violated respondents’ right to a jury trial because securities fraud cases are akin to common law fraud and misrepresentation cases, which at common law were traditionally triable before a jury. That the government brought the claims, rather than private plaintiffs, did not abrogate respondents’ right to have those claims decided by a jury rather than the SEC’s hand-picked ALJ. Further, because the SEC’s enforcement statute provides the agency with unfettered discretion to choose whether to bring a case in its administrative forum or in a district court, Congress had unconstitutionally delegated its legislative authority to the agency.

How does any of this relate to the CFPB? Both emphasized holdings easily apply to the Bureau’s own enforcement authority. The Bureau’s enforcement authority is modeled in part on the SEC’s authority, and the Dodd-Frank Act provides it with absolute discretion to choose whether to bring an action before its administrative tribunal or in federal district court.[3] In fact, the CFPB recently signaled that it intended to increase its use of administrative courts when it streamlined its procedural rules for enforcement actions it sends to this forum.[4] Similarly, like civil securities fraud cases, the Bureau’s UDAAP authority is heavily reliant on common law theories of fraud and misrepresentation. There simply is no principled reason why the Fifth Circuit’s analysis would not equally apply to the Bureau. In our own observation and experience, respondents in CFPB enforcement actions are increasingly willing to aggressively defend themselves against Bureau overreach, suggesting that these types of constitutional challenges, now validated by a federal appellate court, will gain traction. 


[1]  -- F.4d -- (5th Cir. 2022).

[2] The court also held that statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II, but this holding is more specific to the SEC than the court’s other, more generally applicable holdings.

[3] 12 U.S.C. § 5563-64.

[4]  87 FR 10028.

May 20, 2022

By: Allen H. Denson, Julia B. Strickland

Did the CFPB just have its wings clipped? A recent Court of Appeals decision in an SEC case suggests so.

In Jarkesy et al. v. U.S. Securities and Exchange Commission,[1] the Fifth Circuit held that the SEC’s use of agency courts violated respondents’ right to a jury trial and relied on unconstitutionally delegated legislative powers. The Fifth Circuit’s reasoning easily extends to powers routinely employed by the CFPB.

Jarkesy was a civil enforcement action brought by the SEC for securities fraud against a hedge fund manager and investment advisor, using the SEC’s discretion to file the case before an administrative tribunal presided over by an ALJ rather than in federal district court. An SEC ALJ found respondents liable and ordered various remedies. The SEC thereafter adopted the recommended decision, rejecting multiple constitutional arguments advanced by respondents, which respondents then raised before the Fifth Circuit. On appeal, the Fifth Circuit vacated the decision, finding the SEC’s adjudication powers unconstitutional on the following grounds: (1) the SEC’s use of an administrative court violated respondents’ Seventh Amendment right to a jury trial; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise its discretion to bring cases either in district court or in administrative tribunals, in violation of Article I’s vesting of “all” legislative power in Congress.[2] As explained by the Court, use of an ALJ violated respondents’ right to a jury trial because securities fraud cases are akin to common law fraud and misrepresentation cases, which at common law were traditionally triable before a jury. That the government brought the claims, rather than private plaintiffs, did not abrogate respondents’ right to have those claims decided by a jury rather than the SEC’s hand-picked ALJ. Further, because the SEC’s enforcement statute provides the agency with unfettered discretion to choose whether to bring a case in its administrative forum or in a district court, Congress had unconstitutionally delegated its legislative authority to the agency.

How does any of this relate to the CFPB? Both emphasized holdings easily apply to the Bureau’s own enforcement authority. The Bureau’s enforcement authority is modeled in part on the SEC’s authority, and the Dodd-Frank Act provides it with absolute discretion to choose whether to bring an action before its administrative tribunal or in federal district court.[3] In fact, the CFPB recently signaled that it intended to increase its use of administrative courts when it streamlined its procedural rules for enforcement actions it sends to this forum.[4] Similarly, like civil securities fraud cases, the Bureau’s UDAAP authority is heavily reliant on common law theories of fraud and misrepresentation. There simply is no principled reason why the Fifth Circuit’s analysis would not equally apply to the Bureau. In our own observation and experience, respondents in CFPB enforcement actions are increasingly willing to aggressively defend themselves against Bureau overreach, suggesting that these types of constitutional challenges, now validated by a federal appellate court, will gain traction. 


[1]  -- F.4d -- (5th Cir. 2022).

[2] The court also held that statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II, but this holding is more specific to the SEC than the court’s other, more generally applicable holdings.

[3] 12 U.S.C. § 5563-64.

[4]  87 FR 10028.

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