About two months ago, the Securities and Exchange Commission (SEC) announced it had “identified a control deficiency related to the separation of its enforcement and adjudicatory functions within its system for administrative adjudications.” From what I can tell, the SEC’s admission has attracted scant commentary from journalists and academics; I recently learned of it only by accident. In fact, this is a bombshell disclosure that undermines the integrity of the agency’s in-house courts.

To understand why, it is necessary to first appreciate some historical context. When the SEC enforces its rules through an administrative adjudication, the agency plays the role of both prosecutor and judge. Alas, this “combined function” model has been a common institutional design for regulatory agencies since the dawn of the administrative state.

And, for just as long, critics have argued that the combined function model exists in considerable tension with the constitutional separation of powers. After all, in Federalist 47, Madison wrote (quoting Montesquieu) that, “Were it joined to the executive power, the judge might behave with all the violence of an oppressor.”

In the 1930s, during the adolescence of the administrative state, these constitutional criticisms reached a crescendo. In 1937, for example, a government study warned that regulators were “obliged to carry on judicial functions under conditions which threaten the impartial performance of that judicial work [because] the discretionary work of the administrator is merged with that of the judge.”

These concerns led to legislation. In 1940, Congress passed a law that would have removed the judicial function from regulatory agencies, and instead placed it in an entirely new, independent body of impartial tribunals. But President Roosevelt vetoed the bill. After World War II, lawmakers tried a new strategy. Rather than separating out the judicial function from agencies, the idea with the 1946 Administrative Procedure Act was to achieve “internal separation” between prosecutors and judges at agencies. The Act passed unanimously in Congress and was signed into law by President Truman.

So, what is “internal separation”? In the words of former Supreme Court Justice William Brennan, it involves “safeguards to assure [the prosecutorial and judging functions’] insulation from one another and to further the independence of personnel engaged in judging.” Simply put, internal separation entails building institutional firewalls—within agencies—between the work of prosecutors and judges.

Fast forward to the present. Over the years, Congress has significantly expanded the SEC’s authority to prosecute on its home turf. During its first three decades of existence, the SEC could bring administrative enforcement actions only against businesses that had to register with the agency as a condition of doing business; furthermore, in terms of penalties, the commission was limited to denying or revoking the wrongdoer’s registration. Today, by contrast, the agency can bring home-court prosecutions against any person, regardless of whether they’re registered with the agency, and the agency can seek a spectrum of penalties, including disgorgement, professional bars, and steep civil penalties.

The upshot is the stakes at the SEC’s in-house courts are much higher than they were in the 1930s. Now more than ever before, our constitutional principles demand the structural protections afforded by the internal separation of prosecutorial and judging functions at the SEC.

Which brings us to the purpose of this post: On April 5th, the SEC announced that the wall between prosecutors and judges had broken down. The announcement first outlines the agency’s system for internal separation:

While the law assigns the Commission both investigatory and adjudicatory responsibilities, the Administrative Procedure Act contemplates the separation of those functions among the agency staff who assist the Commission in each. That is, the agency employees who are investigating or prosecuting an adjudicatory matter before the Commission generally may not participate in the Commission’s decision-making in that or a factually related matter. The Commission has promulgated rules intended to ensure that, in administrative proceedings, enforcement and adjudicatory functions are handled by different sets of agency employees. Staff members from the Commission’s Division of Enforcement (“Enforcement”) investigate and prosecute these actions, while staff within the Office of the General Counsel’s Adjudication Group (“Adjudication”) advise and assist the Commission in issuing adjudicatory opinions and orders. In general, any party to an administrative enforcement proceeding, whether Enforcement or a respondent, files motions and briefs with the Office of the Secretary and does not communicate directly with the Commission about the proceeding. Adjudication staff, by contrast, submit internal memoranda to the Commission to aid in the Commission’s decision-making.

After explaining how the system is supposed to work, the SEC concedes that the system failed:

[I]n a number of adjudicatory matters, administrative support personnel from Enforcement, who were responsible for maintaining Enforcement’s case files, accessed Adjudication memoranda via the Office of the Secretary’s databases. Those individuals then emailed Adjudication memoranda to other administrative staff who in many cases uploaded the files into Enforcement databases.

Upon learning of the breach, the SEC says that it conducted an “internal review,” which “found no evidence that the Enforcement staff investigating and prosecuting this matter accessed the Adjudication memoranda or took any action based on those memoranda.” So, the agency absolved itself. How convenient!

For my part, I have many remaining questions that were left unaddressed by the SEC’s announcement. My foremost question is, why were administrative personnel in the enforcement office snooping around in the judicial files? How often did they do so? For what purposes? Not one of these elementary investigative queries was raised by the agency’s “internal review.” Again, how convenient!

Now, ask yourself, “what would an Article III judge do if someone on the prosecution team accessed the court’s internal files?” Do you think the judge would take the prosecutor at his word that there was no harm, no foul?