This is not the place to go for careful consideration of tax policy, but we do know something here about business regulation more generally, so an observation and a reference with regard to the IRS investigation of tea party groups and their 501(c)(4) status:
- I assume that the decision to investigate the tea party applicants by the agency was an exercise of enforcement discretion; as such, it should be unreviewable by the courts under the principle that agencies cannot be reviewed for their decision to bring enforcement actions on one set of guys as opposed to another set of guys (the idea is that reviewing those sorts of decisions would enmesh the courts too much in the work of the agency). The denial of an application for 501(c)(4) status, oddly enough, would be plainly reviewable as a matter of administrative law. But doesn't appear to be what happened here. Of course, the mere fact that you can't go to court doesn't make it right, and what is happening here is supervision (pretty angry supervision, too) by the other branches of government, rather than by the judiciary. Moreover, this is tax, and tax is different; there may be special review provisions at stake in the tax code I'm not aware of.
- Kristin Hickman is your source for the administrative procedures adopted by the IRS, and one of the themes of her work, fwiw, is that the IRS rarely complies with some of the basic principles of administrative law. See, e.g., here and here and here.
JPMorgan is far too big to fail - but, then, so is Wells Fargo, Bank of America, and Citigroup. And JPMorgan is generally thought to be the safest and best run of the four of them (or at least better run than BofA and Citi). But this spring, it is JPMorgan that is getting buffeted by the press, regulators, and others. ISS is urging a vote against some directors as a result of the London Whale fiasco. Congress ripped the firm over the same thing on March 15. Mark Roe has been critical. And now the Times is discussing the "full court press of federal investigations."
It is a season of woe for JPMorgan, as it finds itself in a very uncomfortable spotlight. The Times has run 31 headlined stories on JPMorgan between today and March 1 (source). It has run none on Wells Fargo (source), 9 on BofA (source), and 10 on Citi (source) during that time period. And the London Whale trade, and subsequent defenestration of a number of JP executives, happened long ago.
Moreover, while the London Whale trade was terrible, it is by no means clear that JPMorgan has failed to manage the situation. The firm is, admittedly, too big. But it is not alone in that. This is beginning to look to me like the start of something corporations fear most, a singling out scandal, whereby one firm becomes the poster child for the shortcomings of an industry sector - it is a way that Washington works, and one that corporations find difficult to understand. Usually, those firms pay a disporportionate penalty for their celebrity; I can't help but be a little sympathetic for the bankers in this case, if it turns out that that is in their future.
a whistle-blower program is a privatization approach, not unlike hiring a private company to run a prison. But for the S.E.C., it is law enforcement that is being privatized. Rather than being able to take aim at particularly worrisome corners of the securities markets, the program leaves the S.E.C. beholden to tippees. Moreover, if Congress believes whistle-blowers, rather than the agency, are doing the work, it will have yet another justification for placing tight limits on the agency’s budget.
Do check it out, and let me know your thoughts, either down below or thataway.
The SEC just announced that it would split the post of enforcement chief between two lawyers, both alumni of the US Attorney's Office at the SDNY. I've never heard of such an arrangement outside of the Roman Empire; why do it?
Conflict of interest. One of the enforcement directors worked closely with Mary Jo White at her New York firm; the other one can handle Debevoise cases until they age out of the problem. Which means that this does not need to be a permanent arrangment, and perhaps fittingly, the conflict enforcement chief plans on leaving reasonably soon.
But it is also a statement about how such problems come up more the closer you get to the top of an agency. Mary Jo White is hardly the first appointee to bring her favorite person at her law firm along for the ride. But special assistants and assistant deputies are easy to wall off; it used to be that there was only one enforcement director.
Promontory, the consultancy firm for banks in distress, is the place you go if you are a senior regulator and you want to cash out. Eugene Ludwig, its founder and the former OCC head, makes $30 million per annum, way more than CEOs of banks with actual branches and loans and so on. His subordinates include a raft of Obama first termers confirmed by the Senate.
Felix Salmon thinks that this means that Promontory needs to be regulated. But I think that the firm's services are bought for two reasons. One - the bad old Washington lobbyist one - is to try to get the regulators to lay off. But the other - the government alumni promotes law observance one - is to concede that the regulators might lay off if you implement some reforms, and hire some people who can tell you what those reforms need to be, and how to sell them to the government.
That means that the strange thing about Promontory - and it is strange - is that it is so, so profitable. Washington lobbyists look at seven figure salaries with awe. Eight figures? Hard to even parse. The gap between SEC deputy director and Promontory executive is stunning when the competition amounts to law firms and Ernst & Young. In the next set of Promontory stories, I'd like to see more about how all of the money is made.
- If you haven't seen Steven Davidoff's discussion of the amusingly active trading in dead people walking stocks Fannie Mae and Freddie Mac, you'll want to give it a look.
- Continuing the international law theme around here, Kent Greenfield, along with Judge Nancy Gertner, have filed a brief in the shareholder suit against Hershey accusing it of tolerating child labor, and seeking inspection. They argue that
- The reality of chocolate production in western Africa, linked with the dominant role of defendant Hershey corporation in the world chocolate market, gives rise to a more-than-reasonable presumption that Hershey is toward the top end of the continuum of accountability for illegal acts, providing a more than “credible basis” for the shareholder plaintiff’s claim for inspection.
- Here's a nice wrap of the DC Circuit's resolution of the dispute between the CFTC and FERC over whether FERC could impose fines for manipulation of the energy futures market. The answer is, despite FERC's increasing efforts as a financial regulator, no.
I'm at the American Society of International Law's annual meeting, where I attended one panel in which an oil services company’s in-house counsel outlined a way that the private sector is launching its own efforts to reduce the number of bribes paid to foreign officials - the thing that has launched a huge new Washington FCPA bar.
These efforts largely amounted to recommendations as to how to engineer the regulatory process to reduce the opportunities for government officials to seek bribes from his industry. Oil service firms and importers have, for example, tried to automate as much of the customs process in Indonesia as possible, limiting the number of personal interactions between firms and officials. They have lobbied the Indonesian government to clarify whether companies must pay government inspectors per diems. They have pursued similar sorts of initiatives in India, Vietnam and other countries, with varying degrees of success.The private sector initiatives were creative, and suggest that there may be an organized private role for compliance as well as a public one. One might expect that businesses would find the anti-corruption rules to be burdensome and unrelated to their bottom lines. They might be presumed to wish to avoid engagement with the law. But the increasing corporate effort to pursue its own anti-corruption interests appeared more than a public relations effort, or an attempt to build safe harbors in light of the potential for future prosecutions. Rather, it appeared to be an effort to look to transparency to make enforcement of the anti-corruption rules simple – and therefore compliance all the easier.
I'm less exercised about the revolving door than most. But this American Banker story on Promontory Financial, the lucrative place where retired regulators go to read the riot act to banks in crisis, in an effort to get them out of the jail that is CAMELS 5, is pretty interesting. It has made Eugene Ludwig, the former Comptroller of the Currency. something like dynastic wealth, and it seems to afford other career bureaucrats, incuding Princeton economist (and Fed vice-chair) Alan Blinder, seven figure sums for post-retirement work.
I don't have problems with either of those things, and Promontory really does seem to salt the private sector with consultants who expect compliance with regualtory edicts. What does surprise me is that I can't think of a similar example of this particular sort of revolving door elsewhere, though one presumably exists for defense contractors. Does EPA have a Promontory? OSHA? It might be that the money for "tell me how I can make this right with the FDIC" sort of advice exists in finance alone. HT: Counterparties
- Here's Bainbridge on the SEC's suit against Illinois: "Why do I call this a stunt? No fine. No relief for the affected bondholders. No benefits for Illinois pensioners, although I grant that that's largely beyond the SEC's jurisdiction. And no additional changes beyond what Illinois has already done."
- Ben Walsh is right, this dodgy hedge fund manager is "hilariously ostentatious." And no master criminal, either - he got really rich doing things that were really obviously fraudulent. At the very least the SEC can catch those guys.
- The NY soda ban injunction isn't really business law, but it is a good illustration of the arbitrary and capricious standard's downside, which can undo compromised, but potentially promising regulation, which in turn might be a byword for your average SEC rulemaking. As the New York judge observed:
- The simple reading of the Rule leads to ... uneven enforcement even within a particular City block, much less the City as a whole...The loopholes in this Rule effective defeat the stated purpose of the Rule. It is arbitrary and capricious because it applies to some but not all food establishments in the city, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on refills, defeat and/or serve to gut the purpose of the Rule.
In light of the controversies surrounding two recent nominees to the SEC's paths in and out of government, I've got a piece in the NY Times/Dealbook making the case for the revolving door. Here's a taste:
the revolving door has some advantages. It may improve the caliber of applicants for government jobs, for example. It probably incentivizes them to perform well in those jobs to show off to future employers. It means that law enforcement officials have some first-hand knowledge of how the industry they regulate works. And it can salt the private sector with government alumni who have come to expect compliance with government requirements.
Moreover, there are democratic reasons to embrace a regular rotation of citizens through government positions, principles that should be familiar to any politician who has praised a part-time legislature. Banning the revolving door, by the same token, would prevent people from working for whom they choose, which is inconsistent with the strong American commitment to free labor, and may even have constitutional implications.
Love to hear your thoughts, either over here or over there.
For an upcoming project I've been delving into the public comments of an SEC proposed rule for the first time in a long time. The rule in question, implementing Section 201 of Title II of the JOBS Act is "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings" (and if anyone has thoughts about it, specifically with how the heck you take reasonable steps to verify that natural-person purchasers really are accredited investors, do let me know).
This post is about the public comments, however. Kim Krawiec has a great piece on the sausage-making surrounding Dodd-Frank's Volcker Rule, wherein she catalogs the pre-proposal comments and agency meetings, and provides a terrific empirical account of how industry voices weigh in on statutory gaps. What has struck me so far in the comments, available here, is how varied they are in terms of who is commenting (crack-pots, industry groups, JDs with an opinion), the formality of the comments (ranging from emails with typos to memos on letterhead), and their understanding of what the SEC can do.
Here are excerpts of a few comments that struck me:
- I am opposed to this. Other "deregulated" industries such as lawyers or pharmacists have resulted in worser service despite higher consumer fees. Do not try to "fix" something that is not broken.
- I just finished reading with great interest the comments of Jaimie Davis. Davis writes with great passion and eloquence and certainly has a unique experience with the loss of 2.3 million dollars which most people could not comprehend. I certainly sympathize with Davis and the road traveled. Losing 230K would be tough for most anyone. Losing 2.3 mil can be life altering in a most negative and debilitating way.
- I OPPOSE THE PROPOSED CHANGES TO RULE 506 and RULE 144A.-- A California Librarian.
What strikes me at first blush, reading these comments, is that 1) some people will just dash off a thought and send it in; 2) commenters read respond to other commenters, and 3) some commenters don't understand the role of the SEC in implementing Congress's law, or want to voice opposition anyway. It strikes me that another medium might better serve some of the purposes of the public comment, particularly given how they're being used now. Maybe something more...bloggy?
But maybe that's just my blog-bias talking.
I enjoy having my former secured transactions professor in the Senate, but I've never quite understood the appeal of bringing in agency heads and yelling at them, long though that legislative tradition is. Here's what Elizabeth Warren asked a smattering of financial regulators in her first oversight hearing, along with their answers:
Q: “If they can break the law and drag in billions in profits and then turn around and settle paying out of those profits, then they don’t have much incentive to follow the law,....The question I really want to ask is about how tough you are.”
[ED: If I was a regulator I'd be tempted to respond with a "super-duper-tough" here.]
Thomas Curry, OCC: “We do not have to bring people to trial ... to achieve our supervisory goals.”
Elise Walter, SEC: “We truly believe that we have a very vigorous enforcement program,”
Q: “Can you identify the last time you took the Wall Street banks to trial?”
Walter: ...“get back to you with the specific information,” ... “we do litigate.”I'm not sure asking someone how tough they are is a question really looking for an answer. Yes, there's a point of view here - Warren wants the agencies to file more cases against bankers. And OCC even provided some information: sounds like they will not be filing more cases. But Anne O'Connell has a paper that suggests that the more oversight hearings, the shorter the tenure of agency officials (or so I recall, it's unpublished, though referred to in note 23 of this). This sort of thing seems to me to be a bit too offten like unpleasant kabuki theater.
The Post says that international financial regulatory reform is grinding to a halt, and Mark Carney, who, as Bank of Canada supremo got so active in the subject that the Bank of England hired him to be its supremo, filed a report to the G-20 that was positive, but observed that only 8 of 27 rich jurisdictions have issued final Basel III regulations.
Dan Drezner concludes that travail and intermittent progress is all you can expect from IFR, and most things, presumably. I only sort of agree. Carney's report to the G-20 is way better than the sort of mealy-mouthed declarations that characterize much international missive-writing. Europe is going to implement something substantially stronger than Basel III - call it Basel III plus a Tobin tax - and that will add a bunch more jurisdictions to the total. And anyway, the deadline for the accord is not yet upon us.
But nobody promised you a rose garden. If you put your trust in international process, as financial regulators must, you expect backsliding, inconsistency, and progress at extremely ponderous speeds. You might even characterize is as the worst way to regulate - except for all the others that have been tried.