The first Court of Appeals to rule in the recent round of challenges to the Securities and Exchange Commission’s administrative enforcement mechanism has held courts lack authority to consider the matter. The US Seventh Circuit yesterday affirmed the district court’s earlier dismissal for lack of subject-matter jurisdiction.

The Seventh Circuit held it was “fairly discernible” from statute that Congress intended the internal SEC administrative process (then followed by judicial review) to be the norm, unless a party can demonstrate that her constitutional challenge meets the three-factor Thunder Basin test, recently set out in Free Enterprise Fund, 561 U.S. 477, 489 (2010). That requires a party seeking early judicial review to demonstrate that:

  1. Precluding early review could foreclose all meaningful judicial review;
  2. Her suit is wholly collateral to statute’s review provisions; and
  3. Her claims are outside agency expertise.

The Seventh Circuit opined that the Supreme Court’s later decision in Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012) demonstrated:

  1. One can’t sue just because it’s a facial constitutional challenge;
  2. It doesn’t turn on whether the SEC can hold Dodd-Frank’s § 929P(a) (expanding its jurisdiction to non-registered persons) unconstitutional; and,
  3. SEC fact-finding is sufficient for meaningful judicial review.

Those holdings deflated most of Bebo’s argument. Overall, then, the Seventh Circuit held that judicial review under the statute is “meaningful” – even if it comes only after years of administrative litigation.

The opinion went on to posit distinctions among the existing rulings. The Court wondered whether the “wholly collateral” requirement is substantive (i.e. substantive claims are different) as held in the Hill (USDC NDGA) and Duka(USDC SDNY) case which allowed judicial challenges or procedural (i.e. already involved in the administrative process) as in Bebo. Nevertheless, the Court ultimately admitted those musings were dicta that “do[] not affect the outcome in this case.”

The Hill decision is pending appeal before the Eleventh Circuit and you can expect that Duka will be appealed to the Second Circuit.

The opinion in Bebo v. SEC, No. 15-1511 (7th Cir. August 24, 2015) can be found on the Court’s website, here.