August 1, 2012

Private: The Wobbly Legal Arguments Against Dodd-Frank

C. Boyden Gray, Dodd-Frank, Kent Greenfield, non-delegation doctrine, The Wall Street Journal

By Kent Greenfield. Greenfield is a Professor of Law, and Law Fund Research Scholar at Boston College Law School.

Before the end of the latest SCOTUS term, flush with the excitement of the right’s anticipated victory in the ACA case, a small bank in Texas and a few additional plaintiffs sued to contest the constitutionality of the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOB), two new agencies created by the Dodd-Frank legislation in 2010. 

Few would have noticed except that the main lawyer for the plaintiffs is C. Boyden Gray, the White House counsel for George H.W. Bush. The Wall Street Journal printed an op-ed the day they filed suit, and several other right-leaning media outlets gave it mention. One commenter on the WSJ page said the lawsuit is more important for the future of the country than the presidential election.

If the lawsuit were to be victorious, it would disembowel the most important innovations of the Dodd-Frank legislation, which, even with its numerous flaws, was an important legislative victory during Obama’s first term. [image of president signing legislation in summer 2010] 

Should progressives worry? 

I read through the complaint, and I don’t think we should. 

If you separate out all the sturm und drang, the main focus of the constitutional claim is that Dodd-Frank created independent agencies that have too much discretion to regulate, especially using post-hoc adjudication. While the arguments against such independence, discretion, and post-hoc adjudication could occupy several hours of discussion in an introductory constitutional law class, they are hardly questions of first impression in the courts. On the contrary, the questions of whether administrative agencies (1) may be insulated from political control by the president, (2) may define operative regulatory terms, and (3) use adjudication to make law have been answered in the affirmative for decades. 

So this lawsuit is not like the suits brought against the ACA that arguably raised new arguments about the scope of the commerce clause (action versus inaction, broccoli, and all that). This is a lawsuit wanting to re-litigate decades of settled law. 

The complaint tries to make hay from the argument that the CFPB is granted “vast authority” (para. 33) over financial firms, and may take “any action” to prevent “unfair,” “deceptive,” or “abusive” practices (para. 34). The worry, says the complaint (para. 36), is that the Act provides “no definition” of these terms, leaving the CFPB to enforce them through “ad hoc litigation or … regulation.”  The argument is that it is unconstitutional to give agencies the power to define what is unlawful, especially when such definition is to occur after the fact.

Though the complaint does not say so, this is simply a non-delegation doctrine argument, arguing that Congress cannot constitutionally delegate to an agency the power to make law.  Of course, as anyone who has taken an introductory constitutional law course is well aware, the non-delegation doctrine was first and last used by the Supreme Court to strike down a law in 1936.  As I tell my con law class, it is the Eagle Eye Cherry of constitutional doctrines – it had one good year. 

The last time a non-delegation doctrine argument made it to the Supreme Court, in the 2001 case of Whitman v American Trucking, it lost big.  The question was whether the Environmental Protection Agency had been given too much discretion in determining air quality standards. The statute said that the EPA should set standards “requisite to protect the public health.”  This may not seem to be very precise, but the Court said it compared with a multitude of other statutes that contained the required “intelligible principle,” for example the FCC’s power to regulate in the “public interest.” The Court said “requisite” meant “not lower or higher than is necessary” – hardly a paragon of exact definition.

The author of the opinion for the unanimous Court? Antonin Scalia.

As for the questions of independence and post hoc adjudication, neither is powerful.

Independent agencies may or may not be a constitutional innovation, depending on which scholar you believe has the better of the argument.  (Hamilton himself wrote in Federalist 77 that the president should not be able to remove even cabinet level officials without the consent of the Senate.) But as a matter of Supreme Court jurisprudence, this is hardly an open question. Since Humphrey’s Executor in 1935, Congress has been able to create nominally executive agencies but limit the president’s removal power. 

The argument about post-hoc adjudication is not a winner either. It is routine for administrative agencies to use both legislative-like processes to promulgate regulation and to use adjudicative processes to decide concrete disputes between the agency and regulated entities. It is also routine for adjudication to create law in the context of those concrete disputes, just as it is for courts to create law in the context of deciding court cases. This is not a constitutional problem, as long as the underlying statute provides enough clarity to meet due process “void for vagueness” requirements, and that is a pretty low standard.

Compare the operative words here: “Unfair,” “deceptive,” and “abusive” with the operative terminology in 1934 Securities Exchange Act giving the SEC the power to regulate against fraud:

It shall be unlawful …To use or employ, in connection with the purchase or sale of any security … any manipulative or deceptive device … in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Notice what this clause does: it makes unlawful whatever the SEC says is unlawful. And the SEC has been using this clause to regulate – using both regulation and adjudication – for over 75 years.  If this meets constitutional requirements – and there is no question that it does – then Dodd-Frank is an easy case.

Moreover, it actually is a good thing for statutory words not to be precisely determined ex ante.  The world of finance moves quickly. Regulation moves slowly. It is better, in my view, for agencies and courts to have statutory terms to govern financial improprieties that are flexible enough to respond to the latest in financial scams and gimmickry. 

Indeed, this is simply one iteration of the age-old “rules versus standards” debate in law. It is an interesting one, and reasonable people can disagree about it. But it rarely has a constitutional dimension, and it doesn’t have one here, either.

Constitutional Interpretation, Financial Regulation