The Securities and Exchange Commission’s use of in-house judges suffered one more setback this week when another court ruled that it was unconstitutional, according to news reports.

The U.S. Court of Appeals for the Fifth Circuit ruled on Wednesday that the regulator’s system for using such judges violated the constitutional right of George Jarkesy Jr., a hedge fund manager, to a jury trial in federal court, Bloomberg writes.

In 2013, the SEC began in-house enforcement over allegations that Patriot28 — which Jarkes brought on as an investment advisor for two hedge funds established by him — misrepresented investment parameters and inflated assets to boost their fees, according to the news service.

Judge Jennifer Walker Elrod, in writing the majority opinion earlier this week, ruled that Jarkesy and Patriot28 are guaranteed a jury trial by the Seventh Amendment because the SEC’s “enforcement action is akin to traditional actions at law to which the jury-trial right attaches,” according to Bloomberg.

The court said the legislative power delegated to the SEC by the U.S. Congress is unconstitutional, as it failed to “provide an intelligible principle by which the SEC would exercise the delegated power,” according to the news service.

In 2018, the Supreme Court already ruled that SEC’s hiring of administrative law judges was unconstitutional and, going forward, must be appointed by commissioners rather than hired the same way the regulator employs other staff, as reported.

At the time, Jarkesy’s administrative appeal was pending, Bloomberg writes. After the Supreme Court ruling, the SEC offered to hold new hearings before a properly appointed administrative law judge, but Jarkesy waived this right, according to the news service.

Earlier this week, meanwhile, the Supreme Court agreed to consider another, narrower, case in which a Certified Public Accountant also challenged rules on removal of SEC’s in-house judges, Bloomberg writes.

An SEC spokesperson tells the news service that the regulator was reviewing the decision and working with the Department of Justice on the next steps.

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