May 24, 2022

ALJ Drama Could Spell Trouble for SEC Rulemaking

Dave blogged last week about a Fifth Circuit decision that ruled against the SEC’s use of Administrative Law Judges to conduct civil trials without a jury. As he noted, the opinion went a step further and also said that the ALJ system relies on unconstitutionally delegated legislative power.

Some people are saying that’s a big deal, because it could lay the groundwork for challenges to actual SEC rulemaking. In this column, Bloomberg’s Matt Levine explains:

But the panel is making a broader point here. The broader point is Justice Gorsuch’s point about political accountability, an excess of lawmaking, etc.; the opinion talks about those principles at length and cites Justice Gorsuch’s Gundy dissent. The point is that the nondelegation doctrine is alive again, and the Fifth Circuit is making a bet that the next time it goes before the Supreme Court it will win. The point is that the SEC’s actual legislative actions — writing rules about stock buybacks or swaps disclosure or climate change — are now in danger. It used to be accepted as a routine matter that the SEC could make rules under a very broad grant of power from Congress to regulate securities markets in the public interest. I am not sure that is true anymore.

This may not be a particularly big deal. Two judges on one panel of one appeals court found that one small part of what the SEC does is an unconstitutional delegation of power. It is possible that this decision is fairly narrow: Congress did delegate this decision — about whether to bring cases in federal courts or its own forums — to the SEC, fairly recently, without any guidance at all, which is unusual. Perhaps the “intelligible principle” standard allows the SEC to do all of its other rulemaking (because Congress has mostly given it some broad guidance about protecting investors in the public interest, and because SEC rules do help to fill in a fairly detailed statutory system), but not to make this particular decision. Still. I think the Fifth Circuit went out of its way to find a nondelegation problem because the Supreme Court has changed and now there will be a lot more courts finding a lot more nondelegation problems. I think this might be a sign of where things are going.

John blogged a couple months ago that the non-delegation doctrine could be a key part of challenges to the Commission’s climate change disclosure rule. Now, there is precedent.

Liz Dunshee