Barack Obama’s biggest second-term challenge isn’t guns or immigration. It’s saving his biggest first-term achievements, like the Dodd-Frank law, from being dismembered by lobbyists and conservative jurists in the shadowy, Byzantine “rule-making” process.
In one section, for instance, the judges ask why the SEC would have dismissed public comments suggesting that proxy access could exact a significant economic cost to corporations. Judge Ginsburg writes, “One commenter, for example, submitted an empirical study showing that ‘when dissident directors win board seats, those firms underperform peers by 19 to 40% over the two years following the proxy contest.’ ” But hold the phone. Or, better yet: WTF? Ginsburg fails to note here that the “one commenter” in question is one of the plaintiffs, the Business Roundtable. And as for that “empirical study”? It was conducted by an economic consulting group hired by that same plaintiff. In the rest of the decision, Ginsburg appears to ignore the precedent set by the foundational 1984 Chevron case, which, among other things, stressed that judges must afford “deference” to an agency’s interpretation of a statute, especially when it’s “evaluating scientific data within its technical expertise.”
Questionable judicial behavior aside, the Business Roundtable decision marked “the culmination of a trend empowering regulated entities to strike down regulations almost at will,” wrote Bruce Kraus, a former counsel at the SEC, in a subsequent report. For one, it established an inherent bias—reformers cannot, after all, challenge a rule in court to make it stronger. For another, it opened up the floodgates for future suits. If two of the industry’s most powerful organizations could sue the SEC and overturn a rule on such grounds, it was suddenly feasible for industry groups to sue any agency and overturn any new Dodd-Frank rule using the same arguments.
It was a point that did not go unnoticed by industry. “I would hope the agencies are taking to heart the potential consequences for Dodd-Frank rules,” said lead counsel Eugene Scalia, after the case was decided. (Scalia was also lead counsel on the case that overturned the CFTC’s rule on position limits a year later.) Industry groups have since brought a half-dozen more cases against agencies on practically identical grounds.
The Business Roundtable decision had the immediate effect of adding a whole new lethal section to the regulatory gauntlet, this time complete with flypaper and trapdoors. In the months following, the SEC’s progress through the Dodd-Frank rule making is estimated to have slowed by half as they struggled to “bulletproof” their rules from future lawsuits. (“They have to be more than bulletproof,” Chilton told me, when I asked him if that was a factor for the CFTC, too. “They have to be layered in Kevlar. We go way beyond the requirements of the law.”)
The decision also had the effect of tipping the balance of power at independent agencies. By making an agency’s cost-benefit analysis the centerpiece of the litigation, economic models now hold disproportionate weight. If a single economist at an agency produces a report, based on a single model, and “demonstrates” that a rule would exact steep costs from a given industry, it acts like a trump card, according to former staffers at the SEC and the CFTC. Even if the majority of that economist’s colleagues disagree with him, his report will enter the public record, where it can be cited in a subsequent lawsuit and end up determining if a rule is implemented or not. And economic models are like statistics; you can always find one that supports your position.
Along those same lines, in the wake of Business Roundtable a single commissioner—one of five on a bipartisan panel—now has the de facto power to torpedo a rule simply by questioning its economic impact in a public forum. For example, if a Republican commissioner disagrees with a rule, he will, under normal circumstances, be required to compromise with his fellow commissioners, or risk being simply outvoted. If at least three of his colleagues disagree with him, the rule will pass. The Business Roundtable decision seemed to suggest that a single commissioner’s verbal expression of disapproval could be used later as grounds for litigation and as evidence in court. Indeed, a year after the Business Roundtable decision, in the CFTC’s position limits case, part of Scalia’s argument rested on the fact that former CFTC Commissioner Michael Dunn has expressed misgivings about the rule.
“When a commissioner says publicly, ‘I’m concerned about the economic impact of this rule,’ that’s enough to lay the groundwork for a future case,” said Chilton. Several former rule makers and staffers at the CFTC and the SEC told me they would “not be surprised,” given the wording of these public expressions of disapproval, if these commissions were getting their language directly from industry lawyers.
The most profound weapon the Business Roundtable decision introduced into the regulatory gauntlet is stupefying uncertainty. “It has been paralyzing for the agencies,” the former CFTC rule maker told me. How extensive must their cost-benefit analyses be? What kind of costs must be measured? And costs to whom—the industry or the investors? What were the criteria? “It’s like going into a class and not having any idea how your professor grades,” he said. “Everyone is trying to figure out how to move forward without getting sued.”
In the past, when an agency has been sued over a rule, that litigation has often marked the end of the rule altogether. Most are never re-proposed, and those that are often emerge pitifully weak. It also has the effect of sending an agency back to the starting line, where it must run the gauntlet yet again, only this time with more attention from Congress—which is often the most lethal weapon
The Gauntlet, Stage 3: Congress’s retroactive attacks
Many of us think of Congress as passing a law, shunting it off to the agencies, then wiping its hands of the matter. Not the case. Lawmakers, and particularly those who voted against Dodd-Frank to begin with, have a number of tools up their sleeves, which they’ve been using consistently since 2010 in an attempt to retroactively weaken the act.
One way has been to go after the regulators personally, lambasting them publically, smearing their reputations, and wasting their time. In the wake of the Business Roundtable decision, for example, the House Financial Services Committee summoned former SEC Chairwoman Mary Schapiro to testify before Congress about why the SEC had failed in its cost-benefit analysis. The Senate Banking Committee, obliquely questioning her competency as a leader, also requested a series of investigations into why her agency’s cost-benefit analyses were falling short. While lawmakers have a legitimate right to ask the heads of regulatory agencies to testify, in the past few years Congress has seemed to blur the line between inquiries and something more akin to the Inquisition. All told, since 2009 Schapiro has been called to testify before Congress forty-two times.
“On one hand, those attempts to create a scandal don’t mean anything,” said Lisa Donner, the executive director of Americans for Financial Reform, referring to Congress’s harassment of Schapiro late last year. “But on the other hand, those performances waste an enormous amount of time. It plays a role. It’s intimidating.”
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