A federal appeals court says the S.E.C.’s use of an in-house judge violates defendants’ rights.

The Securities and Exchange Commission's administrative proceedings can violate a person's constitutional rights, according to a divided federal appeals court panel.

The Fifth Circuit ruled that the S.E.C. violated a hedge fund manager's right to a jury trial when it allowed an in-house judge to decide a civil fraud case. Administrative proceedings are used by regulatory agencies to decide enforcement actions.

The Fifth Circuit, one of the nation's most conservative federal appellate courts, is challenging the S.E.C.'s growing reliance on administrative law judges. The ruling is limited to federal courts in the jurisdiction of Texas, Louisiana and Mississippi.

The jury-trial right is attached to the S.E.C.'s enforcement action because of the Seventh Amendment.

Judge Elrod said that the S.E.C. did not have the authority to bring such a case because it did not involve public rights.

The majority opinion said that the in-house judge's ruling against George Jarkesy should be thrown out. The case must be refiled in federal court because the court said the S.E.C. must act in accordance with the appellate court's ruling.

The majority misinterpreted the Supreme Court's definition of public rights, according to Judge W. Eugene Davis.

An S.E.C. spokesman said the agency was assessing the decision to determine the next steps.

The Supreme Court said this month that it would take up another Fifth Circuit ruling that raised a challenge to a different aspect of the S.E.C.'s administrative proceeding process. The Supreme Court ruled that administrative law judges at the S.E.C. were appointed to office in an unconstitutional manner.