Thursday, June 24, 2021

Broader Implications from Seila Law and Collins for Self-Regulatory Organizations

Yesterday, the Supreme Court released its opinion in Collins v. Yellen.  As one observer predicted, the result followed from last year's decision in Seila Law v. CFPB.  In Seila, the Supreme Court declared that the for-cause removal protection afforded to the head of the CFPB was unconstitutional.  In Collins, the Supreme Court reached the same conclusion, also finding that the for-cause removal protection was unconstitutional.  

Writing for ScotusBlog, Amy Howe succinctly described the facts:

The Supreme Court on Wednesday had mostly bad news for shareholders of mortgage giants Fannie Mae and Freddie Mac in their lawsuit seeking to unwind a 2012 agreement that required the companies to transfer profits to the federal government. The justices unanimously agreed that one of the shareholders’ claims could not go forward. And although the court agreed, by a vote of 7-2, that the structure of the federal agency that regulates Fannie and Freddie is at least in part unconstitutional, the court stopped short of ordering that the money be returned to the shareholders as a result of that constitutional defect. Instead, the case now goes back to the lower courts, which will determine whether the shareholders are entitled to any relief.

Beyond the shareholders’ lawsuit, the decision is the second time in the past year that the court has rejected congressional efforts to limit the president’s ability to remove the heads of federal agencies. Last June, the court struck down the removal limitations for the head of the Consumer Financial Protection Bureau. Wednesday’s decision did the same for the director of the Federal Housing Finance Agency, and a White House official indicated within an hour of the ruling that President Joe Biden intends to replace Mark Calabria, the Trump appointee currently heading the FHFA, “with an appointee who reflects the administration’s values.”

I'm interested in what that 7-2 vote on the structure of the federal agency may signal for future challenges.  While it's going to take me a bit to digest the opinion and construct a scorecard for it, I expect that the reasoning holds significant implications for self-regulatory organizations.   Justice Alito's opinion on the merits of the constitutional argument begins on page 26 in part III.B.  It's divided into four parts.  I'll take each in turn.

Alito first rejects the argument that the FHFA should be treated differently than the CFPB because of its narrower scope.  This may foreclose arguments that SROs should be treated differently simply because they regulate a narrow industry.  Alito also rejected a distinction related to the FHFA's funding source.  While the CFPB obtains funds directly from Treasury, the FHFA raises a substantial portion of its funds from the companies it oversees.  This strikes me as similar to SROs which raise their funds from their "members."

Alito's second subsection rejects the argument that the FHFA sometimes acts as a private party and not as part of the government.  He explains:

Amicus next contends that Congress may restrict the removal of the FHFA Director because when the Agency steps into the shoes of a regulated entity as its conservator or receiver, it takes on the status of a private party and thus does not wield executive power. But the Agency does not always act in such a capacity, and even when it acts as conservator or receiver, its authority stems from a special statute, not the laws that generally govern conservators and receivers.

This may make it difficult for SROs enforcing federal statutes to argue that they should escape scrutiny.  Of course, the FHFA director is appointed by the President and SRO leadership (PCAOB aside) is generally not appointed by a public agency.  

The third subsection considers whether the FHFA should be treated differently because it oversees only special government-sponsored entities.  Alito rejects this contention as well, declaring that "the President’s removal power serves important purposes regardless of whether the agency in question affects ordinary Americans by directly regulating them or by taking actions that have a profound but indirect effect on their lives."  This language seems to capture the reach of SROs indirectly and profoundly affecting Americans.

Alito's fourth subsection rejects the argument that FHFA's removal protection should be upheld because it only modestly restricts the executive's removal power.  He finds that "the Constitution prohibits even 'modest restrictions' on the President’s power to remove the head of an agency with a single top officer."  At present, the President often has no clear power to influence the composition of SRO leadership.  To be sure most have governing boards instead of single directors, but this distinction may not matter.

Section III.C. goes on to remand to lower courts to determine whether the unconstitutional removal protection for the FHFA director somehow harmed the plaintiffs.

Roberts, Kavanaugh, Thomas, and Barrett joined the opinion in full.  Gorsuch joined as to all except III.C.  Thomas concurred.  

Gorsuch concurred with all save Part III.C.  He would rather have declared the FHFA's head's action's unconstitutional because of the unconstitutional removal restriction and awarded real relief.  He argued:

As strange as the Court’s remand instructions are, the more important question lower courts face isn’t how to resolve this suit but what to do with the next one. Today, the Court sounds the call to arms and declares a constitutional violation only to head for the hills as soon as it’s faced with a request for meaningful relief. But as we have seen, the Court has in the past consistently vindicated Article II both in reasoning and in remedy. E.g., Seila Law, 591 U. S., at ___ (opinion of ROBERTS, C. J.) (slip op., at 36); Lucia v. SEC, 585 U. S. ___, ___–___, n. 5 (2018) (slip op., at 12–13, n. 5); NLRB v. Noel Canning, 573 U. S. 513, 557 (2014); Ryder v. United States, 515 U. S. 177, 182–183 (1995); Bowsher, 478 U. S., at 736. These cases—involving appointment and removal defects alike—remain good law. So what are lower courts faced with future removal defect cases to make of all this? The only lesson I can divine is that the Court’s opinion today is a product of its unique context—a retreat prompted by the prospect that affording a more traditional remedy here could mean unwinding or disgorging hundreds of millions of dollars that have already changed hands. Ante, at 32–33. The Court may blanch at authorizing such relief today, but nothing it says undoes our prior guidance authorizing more meaningful relief in other situations.

For my part, rather than carve out some suit-specific, removal-only, money-in-the-bank exception to our normal rules for Article II violations, I would take a simpler and more familiar path. Whether unconstitutionally installed or improperly unsupervised, officials cannot wield executive power except as Article II provides. Attempts to do so are void; speculation about alternate universes is neither necessary nor appropriate. In the world we inhabit, where individuals are burdened by unconstitutional executive action, they are “entitled to relief.” Lucia, 585 U. S., at ___ (slip op., at 12).

The big question I'm left with is what will happen with this court when the constitutional status of some large financial SRO comes before the Supreme Court.  Will they be declared unconstitutional?  If they are, what will happen to the markets they regulate?

https://lawprofessors.typepad.com/business_law/2021/06/broader-implications-from-seila-law-and-collins-for-self-regulatory-organizations.html

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