In the arena of domestic affairs, there has been a lot of separation-of-powers debate surrounding the attempts of Congress to reform the financial system. In Free Enterprise Fund v. Public Company Accounting Oversight Board (2009), the Court struck down an arrangement in Title I of the Sarbanes-Oxley Act. Here’s a quick summary of the act from the SEC’s website:
“On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.”
In a 5-4 decision, the Court held that the Act violated the separation of powers doctrine. This is because it gave broad powers to the PCAOB (an entity of the executive branch) while simultaneously keeping the President from appointing or removing the members of the PCAOB. Read this CS Monitor article decribing the separation of powers issue in Free Enterprise Fund v. PCAOB.
As a 2012 article in Compliance Week explains, the most recent attempt at financial sector regulation, known as “Dodd-Frank”, is facing a similar legal challenge. The suit’s main points are that the CFPB was established with too much independence—that Congress cannot set the CFPB budget (its funding is determined as a total portion of the Federal Reserve’s budget); that the president cannot remove the CFPB director except in special circumstances; and that the courts must give CFPB decisions extra deference.
“As a whole, Dodd-Frank aggregates the power of all three branches of government in one unelected, unsupervised and unaccountable bureaucrat,” said former White House Counsel C. Boyden Gray, attorney for the plaintiffs and founder of Boyden Gray & Associates.
“Dodd-Frank is to financial reform like a tsunami is to a slightly dry lawn—all-enveloping, hugely destructive, and pretty much unaccountable to whoever unleashed it,” said Sam Kazman, CEI’s general counsel. (The rest of the article is here.)
Part of the problem with Dodd-Frank, according to its critics, is that it violates the nondelegation doctrine in much the same way that Sarbanes-Oxley did. Read this short analysis by Professor Bainbridge.
Indeed, a lawsuit challenging the constitutionality of Dodd-Frank on separation of powers grounds is in the works. As one conservative analysis explains,
“The challenge to Dodd-Frank is … serious. As former White House Counsel C. Boyden Gray and his co-author, Adam White, wrote in a recent Weekly Standard cover story: “Dodd-Frank is a gift to big banks,” and “Even if we take President Obama, Sen. Dodd, Rep. Frank, and the rest of Dodd-Frank’s supporters at face value when they protest that they actually intended to rein in Wall Street banks, the laws they passed accomplish the opposite result. Intentional or not, a kiss is still a kiss.”
“Dodd-Frank’s kiss is intensified by an unconstitutional regulatory structure. The Consumer Financial Protection Bureau grants its director czar-like power, combining the authority with little legislative, executive or judicial oversight. Similarly, Dodd-Frank’s Orderly Liquidation Authority authorizes unaccountable corporate death panels, which are unrestrained by meaningful judicial scrutiny, while the Financial Stability Oversight Council has unchecked power to define “too big to fail.” In each instance, Dodd-Frank ignores our Constitution’s mandate for separation of power into three branches of government, housing it instead in one unaccountable agency.” (The rest of the article is here.)
The case State National Bank of Big Spring v. Mnuchin is currently at the U.S. Supreme Court awaiting a decision on a petition for a writ of certiorari. Here is a summary of the case and links to relevant court documents from the perspective of one of the challengers of Dodd-Frank, the Competitive Enterprise Institute.
The decision to keep the new agencies independent from the Fed and other executive agencies accountable to the President was a conscious one. As this HuffPo article explains:
“Specifically, Dodd’s bill takes away the Fed’s regulatory power in some key areas. “I really want the Federal Reserve to get back to its core enterprises,” Dodd said. “We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure. So the idea that we’re going to go back and expand those roles and functions at the expense of the vitality of the core functions that they’re designed to perform is going in the wrong way.” …
“Dodd said that despite removing a fair amount of regulatory authority from the Federal Reserve, the bill shouldn’t be seen as a criticism of Chairman Ben Bernanke himself. “This is not about ego,” he said. “It’s about putting together an architecture that works.” …
“Dodd’s bill protects the independence of financial accounting standards …”
Topic #11: Given what we know about the Supreme Court’s separation of powers and nondelegation jurisprudence, will these independent agency provisions from Dodd-Frank survive judicial review? Is it even possible for the Congress to develop a mechanism for creating truly independent watchdog groups?
- Hills Jr, R. M. (2013). Exorcising McCulloch: The Conflict-Ridden History of American Banking Nationalism and Dodd-Frank Preemption.
- Steinmeyer, D. J. (2014). Does State National Bank of Big Spring v Geithner Stand a Fighting Chance. Chi.-Kent L. Rev., 89, 471.
- State National Bank of Big Spring v. Lew (2015) [No. 13-5247, D.C. Circuit].