SEC

The World of Financial Regulation Gets Weird…Again

There’s yet more strangeness afoot in the world of financial regulation.  No, it’s not the CFPB this time.  It’s the generally more staid Securities and Exchange Commission (SEC).  Earlier this week, the Department of Justice weighed in on Lucia v. SEC, a case challenging the constitutionality of the SEC’s in-house judges, known as Administrative Law Judges (ALJs).  What is strange is that the DOJ sided with Raymond Lucia and against the SEC.  Seemingly in response, the SEC took action and ratified the appointment of its ALJs, a move it had been resisting for some time. 

The case is currently with the Supreme Court where the Court is considering whether it will hear and decide the matter.  The question is whether ALJs are “mere employees” or are instead “inferior officers.”  If the latter, their appointment is subject to the appointments clause in the Constitution, which permits Congress to “vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.”  Since the process for appointing ALJs has (until recently) not been done by any of these, if they are indeed inferior officers, their appointment would be unconstitutional. 

Cato has filed an amicus brief in support of Lucia.  Given the great discretion that ALJs wield – hearing and ruling on both the admissibility and credibility of evidence, presiding over hearings, and issuing opinions – it is strange to say they are not inferior officers.  Resting on the finality of the decisions alone seems insufficient.  And indeed in another case arguing the same issue, whether SEC ALJs are inferior officers, a federal appeals court in Colorado ruled that they are.  Since there is now a circuit split, with appeals courts in two circuits issuing opposite rulings, it seems likely the Supreme Court will hear the case to decide the issue.

The appeal to the Supreme Court is of a decision by the federal court of appeals in D.C., which ruled that, because ALJs’ opinions are not final and can be reviewed by the SEC commissioners, the ALJs are not in fact inferior officers.

The problem for the D.C. Circuit Court of Appeals is that it already ruled on this question.  In Landry v. FDIC, the D.C. Circuit found that ALJs at the FDIC are not inferior officers because their opinions are not final.  This is the case on which the D.C. Circuit relied in Lucia.  Landry was also appealed to the Supreme Court, but the Court did not take it up. 

Speaking of Landry. When Landry was pending before the Supreme Court, just as Lucia is now, the Department of Justice weighed in on that case, just as it did recently in Lucia.  But that time, the DOJ sided with the FDIC, arguing that the lack of finality in ALJ decisions makes them mere employees and not inferior officers.  Exactly the opposite of what DOJ is now arguing in Lucia.

Back to the IPO Doldrums?

After initial public offerings (IPOs) had a robust 2014, it looks like 2015 has been a bit quieter, according to a recent article in the Wall Street Journal.  But not because companies aren’t growing.  The companies are doing fine; they’re just not going public, opting instead to court buyers and quietly sell themselves.  The trend away from IPOs isn’t a new one; it’s been in the works at least since the late 1990s.  While some celebrated 2014 as a return to vibrant public capital markets in the United States, it may be that the year was simply an anomaly. 

The question, of course, is whether this trend is a bad one.  The answer depends on the cause.  For any one company, the decision to sell may be exactly the right one, no matter what the IPO environment.  Some business models may work better as a business line within a larger organization, or the two companies may be able to exploit synergies and create a new company that is greater than the sum of its parts.  But it’s not clear that these motives are what’s driving the current trend. 

The Journal found that at least 18 companies that had filed papers with the SEC abandoned their IPOs due to acquisition.  This suggests that companies that are otherwise interested in going public nonetheless find acquisition the more attractive option.  The process of going public and maintaining good standing as a public company has been increasingly difficult (and expensive) over the last several years, due to increasing the regulatory requirements imposed by Sarbanes-Oxley and other follow-on regulation.  Increased regulatory compliance imposes both direct and indirect costs.  Direct costs include the expense of paying internal and external experts (mostly accountants and lawyers) to provide guidance and prepare disclosures.  Indirect costs include the risk of facing either litigation or an enforcement action (or both) due to a misstep in the compliance process. 

ALJs in Limbo

A number of cases have been filed recently against the Securities and Exchange Commission (SEC), challenging its use of in-house administrative law judges (ALJs).  As I discussed in my earlier post on this topic, the SEC’s use of ALJs has come under close scrutiny lately because of concerns that, in the wake of a provision in Dodd-Frank expanding ALJs’ power, the SEC has elected to use its in-house procedures more frequently and that this use may have increased the SEC’s ability to prevail in enforcement actions.  Of particular concern is the fact that administrative proceedings lack many of the protections for defendants that litigation in federal courts provide, including: the option of having the case decided by a jury; access to the government’s evidence; and the ability to exclude certain evidence traditionally believed to be unreliable (such as hearsay).    

While a number of these cases have been dismissed, Monday finally garnered a win: Charles Hill succeeded in getting a federal court to issue an injunction that prohibits the SEC from continuing its case against him using its in-house ALJ.  Having been charged with insider trading and brought before an SEC ALJ, Hill filed suit against the SEC in federal court claiming the administrative proceeding was unconstitutional on three different grounds.  Although the court disagreed with two of his arguments, it found in his favor on the third – that the ALJs’ appointment violates the appointments clause because ALJs are “inferior officers.”

Free Speech? What’s Free Speech?

Internet site Gawker says that Ashton Kutcher’s editorship of Details magazine was “a brazenly self interested and highly misleading act of journalism.” He helped produce a special online version of the mag that featured tech companies he’s invested in without disclosing that fact.

SEC Incompetence

There has been much speculation that the Securities and Exchange Commission (SEC) released its charges against Goldman Sachs on the eve of a Senate vote on new finance regulation in order to help Democrats win that vote.  Perhaps that theory is wrong: It now looks more likely that the SEC timed its Goldman case in order to divert attention away from two SEC inspector general (IG) reports criticizing the commission.

Big Out-of-Control Government Has Had Better Days at the Supreme Court

This morning at the Supreme Court, the federal government argued for the continued existence of the Public Company Accounting Oversight Board (PCAOB, pronounced peek-a-boo) – and by extension the nefarious financial regulatory scheme known as Sarbanes-Oxley.  Cato filed a brief supporting a free market advocacy group and an accounting firm, who sued PCAOB for violating both the Appointments Clause and general constitutional separation-of-powers principles.

Geithner Ignores Bailout History

Perhaps the biggest problem with the Obama plan to “reform” our financial system is the impact it would have on the market perception surrounding “too big to fail” institutions.  In identifying some companies as “too big to fail” holders of debt in those companies would assume that they would be made whole if those companies failed.  After all, that is what we did for the debt-holders in Fannie, Freddie, AIG, and Bear.  Both former Secretary Paulson and Geithner appear under the impression that moral hazard only applies to equity, despite debt constituting more than 90% of the capital struc

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