Why Dodd-Frank Has Little to Fear From Constitutional Challenges

One of the ways that businesses have fought back against greater financial regulation since the financial crisis has been to claim that the new oversight threatens the bedrock principle of separation of powers.

These arguments have earned some sympathy from the federal judiciary. Courts in Denver and Washington have recently declared some aspects of the 2010 Dodd-Frank Act to be unconstitutional on separation of powers grounds.

But these declarations have been almost entirely empty of content. The courts have fallen over themselves to assure everyone that the unconstitutional agency powers should continue to be exercised almost exactly as before.

It is these hollow remedies, rather than the findings of liability, that are the most interesting aspects of these challenges.

They raise one of the enduring mysteries of the federal judiciary: Why hold a government program to be unconstitutional if you aren’t going to do anything about it?

At the end of December, the Securities and Exchange Commission’s administrative enforcement strategy, bolstered by Dodd-Frank, was found by a federal appeals court to have vested too much power in agency adjudicators. The adjudicators could preside over high-profile enforcement actions, but had not been selected under the authority to appoint important government officers, which is given to “the president alone, in the courts of law or in the heads of departments,” as the Constitution’s Appointments Clause puts it.

In October, the Consumer Financial Protection Bureau, which has cracked down on various sharp practices by lenders, was found by an appeals court to be too independent from presidential oversight to be consistent with the authority vested in the White House to “take care that the laws be faithfully executed.”

As Peter J. Henning observed in his White Collar Watch column, “The idea behind the Appointments Clause is to maintain the separation of powers in the federal government by placing the authority in the executive branch that will be politically accountable, rather than creating fiefs that are beyond the reach of the president.”

The same observation might be made of the Take Care Clause. By assigning the faithful execution of laws to the president, Congress cannot give executive powers to someone else, ensuring that the buck stops in the Oval Office.

These are important values, so you would think that a group of administrative adjudicators, or an entire agency, that threatens them would get some strong medicine from the courts.

Not so. One judge emphasized that, although the Securities and Exchange Commission’s administrative adjudication scheme violated the Appointments Clause, an easy fix “portends no change to any” administrative adjudicator’s “robust protections” and independence.

As for the Consumer Financial Protection Bureau, its illegal independence could be fixed with a “targeted remedy [that] will not affect the ongoing operations” of the agency.

The courts have done this sort of thing before. The Supreme Court found that the government’s plan for overseeing accountants violated the Appointments Clause, but let the plan continue with the smallest of changes. The court concluded that the National Labor Relations Board had relied on some illegal appointments, but let it quickly redecide most of the cases that had been decided by the illegal appointees in almost exactly the same ways.

An appellate court found that a program requiring companies to certify that they were not using certain conflict minerals to make their goods violated the First Amendment, but only if the government insisted that the firms use the words “DRC [for Democratic Republic of Congo] conflict free” in their disclosures.

The problem with many constitutional law remedies is that they are too big to succeed. Taken literally, they would require dismantling vast apparatuses of the government. The Securities and Exchange Commission has to be able to tell publicly listed companies what they must put on their disclosures, even if it looks like required speech. Agency adjudicators have been around for decades and have been affirmed hundreds of times by the Supreme Court. Their independence from their agency bosses is usually thought to ensure more evenhanded decision making.

It is unrealistic to order that these programs be dismantled, even if pitiless constitutional logic suggests otherwise. The constitutional law remedies therefore cannot be taken seriously.

It’s a wonder corporations bother. They could bring other lawsuits that could actually affect government operations. Forcing agencies to conduct extensive cost-benefit analyses before passing rules really does limit regulatory power. Cost-benefit analysis challenges have hamstrung Securities and Exchange Commission rule making, and disrupted the government’s strategy for overseeing too-big-to-fail insurance companies and asset managers.

But court challenges to the separation of powers principles have repeatedly revealed themselves to be like the folk wisdom about March. They come in like a lion, purporting to hold powerful and well-established bureaucracies to be unconstitutional. But they go out like a lamb, leaving everything the way it was.

Leave a Reply

Your email address will not be published. Required fields are marked *