Shifting Legal Standards in Regulatory Enforcement: Implications for Corporations and Legal Teams

According to an article by the Paul Hastings firm, recent rulings in SEC v. Jarkesy and Alpine Securities v. FINRA are reshaping the regulatory enforcement landscape, offering corporations new opportunities to challenge agency and SRO actions. These decisions highlight growing judicial skepticism toward administrative enforcement processes that impose punitive measures without constitutional safeguards.

In Jarkesy, the Supreme Court ruled that securities fraud defendants have a Seventh Amendment right to a jury trial. The Court emphasized that civil penalties, which are punitive and deterrent, are “legal in nature” and therefore warrant a jury trial. This ruling provides a powerful precedent for corporations facing enforcement actions by federal agencies like the SEC.

Similarly, in Alpine Securities v. FINRA, the D.C. Circuit Court enjoined FINRA’s internal disciplinary proceedings, citing likely constitutional violations under reasoning aligned with Jarkesy. The decision questions the authority of private actors like FINRA to impose significant penalties without judicial oversight. The Commodity Futures Trading Commission (CFTC) has acknowledged the potential ripple effects on self-regulatory organizations (SROs), including the National Futures Association (NFA) and major exchanges like CME and ICE.

These rulings strengthen legal defenses for corporations but also introduce challenges. For example, enforcement mechanisms tied to contractual agreements or novel rules may still pass judicial muster. Legal teams must carefully assess these nuances.

To adapt, corporations should revisit compliance programs, analyze ongoing enforcement actions for vulnerabilities, and proactively align legal strategies with evolving constitutional standards. These cases signal a critical shift in regulatory enforcement, making it essential for corporations and their advisors to stay ahead of this changing legal landscape.