Friday, June 16, 2017

Sometimes, Financial Market Predictions Are Correct By Jonathan D. Glater


The price of shares of for-profit higher education provider Apollo Education Group, owner of the University of Phoenix, rose nearly 7 percent the day after the election of Donald Trump, and kept rising in the following weeks.  The price had been trending downward in 2015. 

Various news organizations have written about similar post-election, upward bumps in the sector.  Now comes the announcement on Wednesday from the Education Department that the Trump Administration intends to delay implementation of Obama-era rules aimed at curbing misconduct in the for-profit sector. 

So we have some evidence that investors’ expectations were accurate. 

Betsy DeVos, the education secretary, in a statement described the move as part of a “regulatory reset.” She did not explain precisely the reason for the reset, but more on that in a moment.

The rules, slated to take effect on July 1st, were already the product of a negotiated rulemaking process.  The Education Department announced a new negotiated rulemaking on the regulations, which addressed borrower defenses to repayment and the “gainful employment” requirement. 

The defense to repayment regulations sought to incorporate student borrowers’ ability to repay in the assessment of institutional eligibility for participation in federal student aid programs.  The idea was, if a significant share of student borrowers struggled with their debts, perhaps the educational program should not be eligible to participate.  A description of the rules is here.

What was wrong with these rules?  They were “overly burdensome and confusing for institutions of higher education,” according to the Education Department statement.

The borrower defense to repayment rules create a procedure for student borrowers to contest the obligation to repay, if they can show the education provider made a misrepresentation or that the provider failed to perform on its contract with a student.  The description is here

On these, Secretary DeVos cited college and university concerns about the “excessively broad definitions of substantial misrepresentation and breach of contract, the lack of meaningful due process protections for institutions and ‘financial triggers’ under the new rules.” 

Basically, it seems that neither set of rules was popular with the regulated industry, hence the “reset.” 

Prior to the election, there was good reason to believe that a Trump Administration might be sympathetic to the for-profit education sector.  After all, then-candidate Trump was associated with Trump University, which shortly after the election last fall settled civil lawsuits filed on behalf of former students.  That settlement was approved by a court a few months ago.

But this week’s announcement is public executive action explicitly beneficial to the for-profit sector.

All of this is putting aside the question of whether the Education Department can unilaterally put the brakes on the rules.  In its press release, the Department cites section 705 of the Administrative Procedures Act –  do not worry, that is not a rabbit hole this post will explore in depth.  But note the language of that provision, 5 U.S.C. §705, here in full:

When an agency finds that justice so requires, it may postpone the effective date of action taken by it, pending judicial review. On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on application for certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.

Postponement is discretionary, not mandatory, under this provision.  (The “pending judicial review” is a challenge to the defense to repayment rules filed less than a month ago by an association of private postsecondary schools, including for-profits; a link to the complaint is here.) 

Unfortunately for Apollo Group shareholders, they voted way back in May 2016 to take the company private, in a transaction completed in February.  Perhaps they should have held on.

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