The SEC recently prevailed in a challenge by Patriarch Partners to its in-house administrative court proceedings.  In a 2-1 decision, the 2nd Circuit Court of Appeals found that Patriarch Partners cannot challenge the constitutionality of the SEC’s administrative proceedings in federal count until after the administrative proceedings have concluded. 

The SEC had previously filed an administrative enforcement action against affiliated Patriarch Partner firms, SEC registered investment advisers, alleging fraud and breach of fiduciary duties as a result of improper valuations of loan assets in collateralized loan obligation funds and the misreporting of such valuations to investors in quarterly reports. In response to the SEC’s enforcement action, the defendants filed a complaint in federal court asserting that the enforcement action should have been filed in federal court before a federal judge instead of as an SEC administrative proceeding. Patriarch Partners further argued that SEC administrative law judges’ appointments are unconstitutional and have no legal authority under Article II of the Constitution.

Immediately following its victory, the SEC filed notices of the 2nd Circuit Decision in similar matters pending before the 4th Circuit and the 11th Circuit.  To date, the 2nd Circuit, the 7th Circuit and the DC Circuit have ruled that defendants may not challenge the constitutionality of SEC administrative proceedings until after they have concluded.