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!
Call for Papers
AALS Section on Securities Regulation - 2017 AALS Annual Meeting
January 3-7, 2017, San Francisco
The AALS Section on Securities Regulation invites papers for its program on “Securities Regulation and Technological Change” at the 2017 AALS annual meeting.
TOPIC DESCRIPTION: This panel discussion will explore the intersection of securities regulation and technology. The Executive Committee welcomes papers on a broad range of related topics, including technology in financial markets, high frequency trading, crowdfunding, transactional and financial innovation, securities offering reform, and information overload.
ELIGIBILITY: Full-time faculty members of AALS member law schools are eligible to submit papers. Pursuant to AALS rules, faculty at fee-paid law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit. Please note that all faculty members presenting at the program are responsible for paying their own annual meeting registration fee and travel expenses.
PAPER SUBMISSION PROCEDURE: Up to four papers may be selected from this call for papers. There is no formal requirement as to the form or length of proposals. However, more complete drafts will generally be given priority over abstracts, and presenters are expected to have a draft for commentators three weeks prior to the beginning of the AALS conference.
Papers will be selected by the Section's Executive Committee in a double-blind review. Please submit only anonymous papers by redacting from the submission the author's name and any references to the identity of the author. The title of the email submission should read: "Submission - 2017 AALS Section on Securities Regulation."
Please email submissions to the Section Chair Verity Winship at: firstname.lastname@example.org on or before August 19, 2016.
Glom readers, it has been a busy semester! I am trying to get back to blogging, and will start with some happy news. I've been obsessing about the politics of securities regulation for some time--specifically, why did we get the JOBS Act, and more generally what explains why and when Congress intervenes in securities law. Between teaching and associate deaning I've also been writing, and I'm proud to report I now have a draft posted on SSRN and accepted at the Indiana Law Journal. Abstract below; comments welcome.
When Congress undertakes major financial reform, either it dictates the precise contours of the law itself or it delegates the bulk of the rulemaking to an administrative agency. This choice has critical consequences. Making the law self-executing in federal legislation is swift, not subject to administrative tinkering, and less vulnerable than rulemaking to judicial second-guessing. Agency action is, in contrast, deliberate, subject to ongoing bureaucratic fiddling and more vulnerable than statutes to judicial challenge.
This Article offers the first empirical analysis of the extent of congressional delegation in securities law from 1970 to the present day, examining nine pieces of congressional legislation. The data support what I call the dictation/delegation thesis. According to this thesis, even controlling for shifts in political-party dominance, Congress is more likely to delegate to an agency in the wake of a salient securities crisis than in a period of economic calm. In times of prosperity, when cohesive interest groups with unitary preferences can summon enough political will to pass deregulatory legislation on their behalf, the result will be laws that cabin agency discretion. In other words, when industry can play offense, Congress itself engages in the making of governing rules and does not punt to an agency—even on issues that would seem the logical province of administrative technocrats. In contrast, following a crisis, industry is forced to play defense rather than offense. Its goal is to minimize the deleterious impact of inevitable legislation by shifting regulation as much as possible to the agency level, where it has time to regroup and often delay regulation until the political pressure for reform abates.
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!
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!
Daniel Gallagher has announced that he will be joining Patomak Partners, a company that is going to do the same thing that Promontory and PWC does - accumulate regulators who can get banks and broker-dealers out of regulatory trouble, partly by relying on the expertise and contacts of their principals, who tend to have run the agencies regulating the banks. It's a huge growth industry in banking regulation, sometimes dubbed shadow regulation, and a controversial one, because revolving door etc. I, however, am all in favor of the revolving door, and see nothing particularly wrong with this one.
However! Patomak is new and young and small, but what it represents is the politicization of these sorts of firms. Promontory invented the genre, and it was started by Democrats, but it reads as relatively non partisan. A review of the masthead of Patomak reveals a litany of Republican former political appointees at the SEC and CFTC, starting with the president and CEO, Gallagher, and Paul Atkins, probably the most aggressively conservative SEC commissioners ever, surely at a cost to their standing with the agency staff.
It makes you wonder what the play is. Trent Lott successfully created a Republican K Street, annoyed at the liberal dominance of lobbying firms, and thinking that the existence of a parallel more conservative DC ecosystem would benefit his party. Those firms do fine, I think, but being able to seriously negotiate with enforcement officials usually requires a vaguely non-partisan hue; that's one reason why law firm white collar practices generally don't sort into liberal and conservative. I'm not sure that a right wing financial regulation consultancy makes a ton of sense from a business perspective. So maybe you think this is like a think tank - a place where politicians hang out and make a little money before accepting their next appointment. Except that the next appointment for SEC and CFTC commissioners, other than chair, never usually happens. Instead, they go to law firms or academia, and become wise old people of capital markets regulation.
I suspect that the assumption is that even independent agency work is getting increasingly politicized, and so the next time there's a Republican presidency, the SEC and CFTC appointees are going to listen to Patomak, and aren't going to listen to anyone else. That will make for some feast and famine years for the business, and isn't an entirely appetizing prospect for regulation in general. It's also a big bet by Atkins and Gallagher, et al, on President Trump, or whoever. But maybe they were having a hard time getting hired by less partisan firms.
If you missed it, Lucian Bebchuk and Robert Jackson are in the Times today decrying the budget bill's one year prohibition on the SEC's issuance of political spending disclosure requirements rules. That's pretty micro-managey, and you can't imagine the legislature getting so involved in the details of banking regulation. Bebchuk and Jackson are, as proponents of regulation here, displeased:
The rider also undermines the standing of the S.E.C. It reflects a judgment that the commission and its staff, which have served the investing public well for generations, cannot be trusted to reach an appropriate decision about whether and how to develop rules in this area. Legislators should not tie the hands of independent and expert regulators and prevent them from doing their job.
And the rider undermines the critical premises on which the Supreme Court has relied in its Citizens United decision. In this consequential decision, the court reasoned that “the procedures of corporate democracy” would ensure that political spending by public companies does not depart from shareholder interests. Without disclosure to investors, however, such procedures cannot be expected to limit or prevent such departures.
Under a Carolene Products theory, this would be the sort of case that could call for judicial involvement; it involves legislators legislating for opacity about who gives to their own campaigns - a self interested effort that undermines the democratic process.
Via Corp Counsel, I enjoyed this talk by outgoing SEC Commissioner Luis Aguilar on "(Hopefully) Helpful Tips for New Commissioners." Indeed, some of the people associated with this site might find it particularly interesting. Aguilar makes being a commissioner sound a little like being a judge. There's a staff of five, four counsels, and one confidential assistant, and you spend all your time talking to them, so they have to be good. I also found these quotes - quotes from which Aguilar took inspiration - to be somewhat dark and foreboding:
“You have enemies? Good. That means you’ve stood up for something, sometime in your life.” — Sir Winston Churchill
“The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.” — Vince Lombardi
If you set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.” — Margaret Thatcher
I would have thought that being a commissioner would be much more like being the deputy secretary of an agency than a judge, but perhaps for nonstop meetings with a dizzying array of underlings, it's the chair or nothing.
The conflict between the SEC and Congress over its investigation of a tip from a committee staffer on Medicaid reimbursement regulations has resulted in an opinion requiring the House and the staffer to respond to an agency subpoena. Matt Levine has the opinion and a review of it (meh, he says), here. Here's a wrap.
I'm not sure I agree with the opinion. On the one hand, Congress could not have more clearly waived sovereign immunity for insider trading in the STOCK Act, which applied that doctrine explicitly to itself. On the other hand, the Speech and Debate Clause is meant to prevent the executive branch (for which read the SEC, although it less in the sway of the executive than is, say, the Department of Justice) from intimidating the legislative one when it is legislating, and there's lots of good precedent applying the protections enjoyed by members of Congress to their staffers, and applying them to investigations as well as prosecutions. The tip in question in this case went from a staffer to a lobbyist, and I can't think of a more legislative thing to do than to have those conversations - indeed, the court acknowledges that Congress was legislating at the time.
It could be that there is no good reason to protect insider tipping by staffers, but that's not clear to me, at least under the facts of this case. Staffers are going to want to talk to lobbyists about how to get things done, and that could easily involve discussions about what Congress is likely to do next, and that could easily be seen as market moving information. It would make it hard to legislate if staffers had to worry about these conversations.
So maybe Congress is standing up for its staffers as a true matter of principle. I don't quite follow the political economy here, though. If Congress is upset about this, I'm surprised the agency is willing to take it to litigation, but maybe they take the STOCK Act especially seriously over there.
With this terse order by the D.C. Circuit, it is official, the SEC's conflict minerals rule is unconstitutional ... but only to the extent that it requires public issuers who did make use of conflict minerals to state on their disclosures that their products have “not been found to be ‘DRC conflict free.’”
The idea is that this was forcing firms to declare that they had blood on their hands, and I find it all pretty unconvincing. The SEC can require firms to make disclosures in particular ways, it can require firms to make climate change disclosures, and it can tell them to identify, say, risk factors of participating in a securities offering that make the issuer look bad. This is all forced speech, and a disclosure based agency couldn't function if it couldn't require disclosures, including uncomfortable disclosures, permitting an inference that the issuer is incompetent, naive, whatever, and that the speaker would rather not say.
There may be a line that can be drawn - the SEC can require firms to say uncomfortable things, but it can't require them to say an exact set of words that make them look bad. I guess that would be a rule, but it wouldn't be much of a rule.
For example, consider the conflict minerals rule itself, which is both unconstitutional and very much in effect. Although companies do not have to attest that the products they make are not DRC-conflict free, they do have to do everything else: investigate their supply chains, describe their investigation, and report on the results of that investigation, including whether it revealed that they make products involving conflict minerals.
Anyway, Congress hasn't lost its taste for conflict minerals, and bills have been introduced in the House and Senate to add to the SEC's policing in this area. That's something that will not overjoy those in the agency who never thought of it as the tip of the spear in the spreading of human rights values.
The final rule is 686 pages long, which Corp Counsel describes, reasonably, as "humongous." I'm generally fine with lengthy statues, and have no problem being opposed to arguments like "they wrote the Constitution on an index card and last year's budget on a pallet of A4, and look which one is better!"
But still, that's quite a long release for a rule that shouldn't be all that technical. I think I'll wait for some law firm memos before I dive in.
Rep. Scott Garrett has introduced a bill that would make administrative proceedings optional for all defendants, and also change the standard of proof for them. It would basically kill things for SEC ALJs, and the enforcement division's new policy of directing cases their way (with one caveat that I bring up below). The bill's introduction suggests that not everyone is happy with the agency's attempt to hold onto its discretion to bring enforcement actions administratively or judicially by lengthening the time for proceedings to eight months (from four), and permitting a smidgen of discovery.
Check out the language of the bill:
“(a) Termination Of Administrative Proceeding.—In the case of any person who is a party to a proceeding brought by the Commission under a securities law, to which section 554 of title 5, United States Code, applies, and against whom an order imposing a cease and desist order and a penalty may be issued at the conclusion of the proceeding, that person may, not later than 20 days after receiving notice of such proceeding, and at that person’s discretion, require the Commission to terminate the proceeding.
“(b) Civil Action Authorized.—If a person requires the Commission to terminate a proceeding pursuant to subsection (a), the Commission may bring a civil action against that person for the same remedy that might be imposed.
“(c) Standard Of Proof In Administrative Proceeding.—Notwithstanding any other provision of law, in the case of a proceeding brought by the Commission under a securities law, to which section 554 of title 5, United States Code, applies, a legal or equitable remedy may be imposed on the person against whom the proceeding was brought only on a showing by the Commission of clear and convincing evidence that the person has violated the relevant provision of law.”.
I've never heard of another place where a defendant has the discretion to insist that an enforcement action against her be dismissed - not move for it, just send notice that the defendant will be dismissing the action. And I've never heard of this clear and convincing stuff before - the argument has been that the SEC has advantages before ALJs, but not particularly because of the burden of proof. In one way, the bill would make the defendant's decision a bit more difficult. On the one hand, she can have court whenever she wants, but on the other, administratively, she gets the benefit of a clear and convincing standard, more demanding (in theory) than a preponderance of the evidence standard. Decisions, decisions.
Our own Lisa Fairfax has been nominated to fill an opening on the Securities and Exchange Commission. Congratulations, Lisa! Well done, President Obama! Now Senate, do your part.
See the story here.