The Dodd-Frank Wall Street Reform Act allowed the Securities and Exchange Commission (SEC) to bring almost any claim that it can file in federal court to its own administrative law judges (ALJs). The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all. This Article evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication— the term for the sort of adjudication over which ALJs preside—works today. It argues that the suits challenging the SEC’s administrative proceedings are without merit; agencies have almost absolute discretion as to whom and how they prosecute, and administrative proceedings, which have a long history, do not threaten the Constitution. The controversy illuminates instead dueling traditions in the increasingly intertwined doctrines of corporate and administrative law: the corporate bar expects its judges to do equity; agencies and their adjudicators are more inclined to privilege procedural regularity.
You can find the article here or here. The constitutional claims against SEC ALJs are coming fast and furious, so it's worth taking a step back and seeing how the program actually works. So do give it a look!
This is very out of time, but I've been reading the very good dissent on the designation of MetLife as systemically significant by the independent member of the committee that does those designations - the Financial Stability Oversight Council. I disagree with the dissent because I think it requires too much of financial regulators, who want to avoid catastrophe, not encourage scientific rationality about it. But still, plenty of fine arguments. One that caught my eye, given that I've written about it, the international influence on the decision, emphasized by the decision of the global Financial Stability Board to designate MetLife as risky before the FSOC did:
Although it may be technically accurate to say that the FSB’s declaration is not legally binding on the Council, the FSB explicitly acts in collaboration with the standard-setters and national authorities with the expectation that the intended effects will be achieved by FSB member countries. The FSB’s framework for the identification of systemic risk in the financial system is clear about this intended influence: “The FSB’s decisions are not legally binding on its members – instead the organisation operates by moral suasion and peer pressure, in order to set internationally agreed policies and minimum standards that its members commit to implementing at national level.” As the FSB continues to consider other U.S. financial firms for designation as G-SIFIs, I encourage my fellow Council members whose agencies are members of the FSB to not again allow the FSB to “front-run” or pressure decisions that must be made first by the Council as a whole.
In my view, delegating policymaking to an international body is not that consistent with American administrative law principles, and entirely necessary in financial regulation. It will be fascinating to see how the courts grapple with the problem.
There's a lot of DPAs out there, and it looks like two swallow spring of judicial supervision of them is about to come to an end, thanks to icy appellate courts. I think it's bad! And I wrote something about it over at the Times:
something must change in the world of deferred prosecution agreements. They are increasing in number every year. The threat of punishment for noncompliance with a deferred prosecution agreement is a court order. Professors who have looked at the way prosecutors supervise deferred prosecution agreements do not like what they see. Prosecutors, moreover, have little experience with the oversight of a bureaucratic effort, even a little one.
It is no way to run an oversight process. If the government is going to set up compliance programs with the specter of a court order looming at the end, then it should not expect that courts will stay out of the process from the beginning. That is how regulation works in this country, and if prosecutors are going to fashion themselves as regulators, then they are going to have to take the bitter with the sweet.
MetLife successfully appealed its designation as a SIFI to the district court in Washington, which took an awfully searching review of the factors used by the FSOC to make the determination. The court, in the end, concluded that the council's designation was arbitrary and capricious, which means it was illegal. The most interesting part of the opinion is the part requiring the FSOC to do a cost benefit analysis before designating.
FSOC has refused to do a quantified cost benefit analysis, which is a departure for the executive branch. The White House requires agencies to conduct one before they promulgate expensive rules. That a financial regulator, where excel spreadsheets and quantified stress tests are part of the job, would refuse to do one in making a determination about the riskiness of a financial institution is a pretty interesting rebuke to those who believe that cost benefit analyses are essential components of effective regulation. But perhaps the FSOC has been listening to John Coates.
Here's what the court had to do to require a cost benefit analysis - most, um, interestingly it relied on the word "appropriate" while ignoring the word "deems" in Congress's guidance about how to do SIFI designations. Most administrative lawyers would conclude that it was up to the Council to decide whether to take costs into account in designations if the statute provides that the FSOC “shall” consider a number of factors and also “in making a designation, any other risk-related factors that the Council deems appropriate.”
But the court thought differently:
FSOC, too, has made the decision to regulate—by designating MetLife. That decision intentionally refused to consider the cost of regulation, a consideration that is essential to reasoned rulemaking. Cf. [Michigan v. Environmental Protection Agency, 135 S. Ct. 2699 (2015)] at 2707 (“Consideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions.”) (emphasis in original). In light of Michigan and of Dodd-Frank’s command to consider all “appropriate” risk-related factors, 12 U.S.C. § 5323(a)(2)(K), FSOC’s position is at odds with the law and its designation of MetLife must be rescinded.
I'm pretty unpersuaded by that reasoning. Cost benefit analysis may be a good idea, or it may not be, but I don't see how the courts should go around requiring it on the basis of a catch-all clause awarded discretion to the agency to add factors to an already long list of factors to be considered in SIFI designations.
I trust you all enjoyed our symposium on The Power And Independence of the Federal Reserve. There's another one starting on the (excellent) Notice and Comment blog, so do head over there for more takes on Peter Conti-Brown's book, and on assessing the place of the Fed and how it works.
I've got an article on the constitutionality of the SEC's administrative proceedings (bottom line: they are clearly constitutional), and Chris Walker has a take on the issue, and the paper, over at Notice and Comment.
And they are doing well. They - implausibly, by my reading - got a judge not to dismiss claims that Anthony Chiasson's business partner had suffered due process violations, based on the taking of his property, on the fact that their hedge fund was searched based on a misstatement in an affidavit that the business partner knew about the alleged insider trading, and that the supervisors of the lawyers and investigators who brought the claim failed to rein in the unconstitutional conduct of their subordinates. The judge wants discovery.
To me, this order looks bound for a quick reversal, and, as it is a qualified immunity claim that is being rejected, it should be immediately appealable. I'm no expert on searches and seizures. But it would be reasonable to assume that the government, with reason to believe that one of the co-founders of a hedge fund was engaging in insider trading, would search the papers of the hedge fund, including those of the hedge fund's other co-founder, and if the government made a mistake in one of the affidavits supporting the search, that mistake would be immaterial. The defendants in the case are all but absolutely immune prosecutors and law enforcement officials, and the court doesn't even address that issue.
I don't think the interesting thing about the decision is the legal analysis. Instead, it's interesting:
- because Manhattan judges and its US Attorney are in a repeat-player relationship. In this order, one of those judges basically instructed the US Attorney to prepare to be deposed, which is apocalyptically out of the ordinary. It suggests that the judges are really angry about prosecutorial overreaching, or at least that one of them is.
- because this is the sort of relief that judges can uniquely order in business law enforcement. I doubt that the government will ever have to pay Level Global's owners a penny for essentially shutting it down because it thought one of its principals was an insider trader. But courts can force the government to worry about that prospect with intrusive injunctive relief like this, and angered scolding. That's a real remedy, even if the usual remedy - money damages - won't work!
Over at DealBook, I've got a column on international insurance regulation and its discontents. A taste:
The globalization of the rules that govern insurance companies has been extremely quick — too quick for the tastes of many American insurers. They are fighting back by asking for process, process and more process.
I think that the protections sought would be unnecessary, and even counterproductive. But they are classics. The insurers are asking for more notice and comment and more trial-type procedures. Administrative process, and how much of it someone should get, lacks a bit of glamour. But it is something that the government and the financial industry will always fight about.
Go give it a look!
Noted financial institutions professor and friend of the Glom Chris Brummer has been nominated to the CFTC, something that just keeps happening to people in and around this blog. He'd be an excellent commissioner, and we all hope he gets confirmed quickly.
I testified yesterday before the House Financial Services Committee on the increasingly internationalized subject of insurance capital requirements, about which Congress and the more modestly sized firms in the insurance industry, have some concerns. If that's the sort of thing that interests you, you can download the testimony here.
Justin Fox thinks that the answer may be yes:
Some of the biggest names in U.S. business are particularly dependent on overseas markets. Apple, for example, got 59.8 percent of its revenue and 62.8 percent of its operating income from outside the Americas in its 2015 fiscal year. In the most recent fiscal year for which numbers are available, Exxon Mobil got 67.3 percent of revenue from outside the U.S., Alphabet 57.3 percent, Microsoft 54.1 percent, Facebook and General Electric 52.5 percent.
Overall, corporate earnings have become less dependent on the health of the U.S. economy. The big question is whether this also means that the U.S. economy has become less dependent on them.
It's an interesting thesis, if true. Many American regulators have expanded their efforts to coordinate with their foreign counterparts because of the idea that globalization means that things that happen abroad can have real effects at home. But if Fox is right, the fact of globalization could reduce the influence of foreign shocks on the domestic economy. I think the jury's out on this, but file it under food for thought.
How should we regulate the derivatives markets? Dodd-Frank gave the CFTC (and SEC, for securities derivatives) the power to act. But how should they act? Again, Dodd-Frank offered guidance, but the terms of regulation, in particular of the clearinghouses that are supposed to centralize derivatives trading has been set not by statute, or by CFTC rule, but by a just-concluded agreement with European regulators on how to oversee the market. That's increasingly how capital markets regulation works, given the mobility of capital and need for standardization. But it is certainly idiosyncratic, both as a method of domestic regulation and international governance, because it constitutes rule by agreement, not by law, which is something I've written about in the past.
Today the Fed issued a $131 million penalty against HSBC for playing fast and loose with some of the evidence designed to support its mortgage foreclosure documentation, which it amped up in the wake of the financial crisis. It got the bank to agree to a consent order to stop doing that in 2011, and took its sweet time in assessing a fine. But don't worry, it wasn't just HSBC:
The terms of the monetary assessment against HSBC are similar to those that were part of the penalties issued by the Board in February 2012 and July 2014 against six other mortgage servicing organizations that reached similar agreements with the U.S. Department of Justice and the state attorneys general.
Matt Levine observed only yesterday that "The supply of pre-crisis mortgage misconduct seems limitless, the statutes of limitations are flexible, and the mortgage-lawsuit industry may be too large and lucrative ever to really end." It turns out that we are still in business on post-crisis foreclosure dodginess, too.
I wrote an article that was meant to serve as a pretty comprehensive overview of the way that the crisis has played out in the courts. And I still like the article. But it turns out that I wrote it in media res.
There's talk in the Senate of imposing new rulemaking restrictions on the SEC, and over at DealBook, I take a look:
The legislation would require more math and permit less flexibility by those regulators. But it would also limit Congress’s own ability to require the government to embrace good governance values like “transparency” and “honesty,” if the S.E.C.’s most recent rule-making is any guide.
The senators have suggested that they would impose cost-benefit analysis requirements on America’s financial regulators. No important rule could be passed without establishing that the dollar impositions on the financial industry would not be outweighed by the dollar benefits created by the rule.
The S.E.C. has, because of a series of adverse court decisions, grudgingly embraced a version of this sort of cost-benefit analysis in its rule-making proposals.
Now you can take a look too!