Rule of Law

Talking Conservative Courts and the Constitution; McHenry for Speaker?; SEC’s Enforcement Overdrive

It was certainly a consequential week in Washington. The ousting of Kevin McCarthy, of course, overshadowed all. While we don’t really cover Republican party fights, this one had a (slight) financial regulation angle. Patrick McHenry, the acting speaker, runs the House Financial Services Committee. Many on Wall Street, and K Street, would like to see him get the permanent gig. On the legal front, the CFPB had its day at the Supreme Court — and its supporters were pretty happy with how things went. We also took a look at the SEC’s effort to boost corporate penalties in enforcement cases. Fines are up, and a few firms are starting to fight back. For our Friday interview, we went deep into the law with a progressive attorney who was involved in the consumer bureau case.

Friday Q and A: As we saw from this week’s oral arguments on the constitutionality of the CFPB’s funding, the federal courts – and the Supreme Court in particular – are increasingly playing a central role in financial regulation.

With the judiciary moving to the right, conservatives have brought a slew of cases that could handcuff agencies and their ability to set new rules. Companies and trade groups have become a lot more litigious, as well. Just ask SEC Chair Gary Gensler, who is already facing several lawsuits over rules that were adopted on his watch. And many more have been promised.

Much of the action has been fueled by the 6-3 conservative majority on the Supreme Court, which has been reliably pro-business and suspicious of the so-called administrative state. Last year, the justices laid out the major questions doctrine which says agencies need clear direction from Congress when they adopt rules of great economic or political significance. Many see it as dealing a big blow to regulators. This term, the high court will consider a case that could overturn a longstanding precedent that gives agencies latitude in interpreting statutes. It could have even bigger consequences.

We sat down this week with Brianne Gorod, chief counsel of the Constitutional Accountability Center, to help us sort this all out. The CAC believes that the Constitution is “an inherently progressive document” – and argues that its text and history prove that point. The group wrote a key amicus brief in the CFPB case. Gorod, who clerked at the Supreme Court, is an appellate specialist and deep thinker on these wonky, but important, issues. Read on to learn why she came away pretty happy about the fate of the consumer bureau and why she thinks the major questions doctrine may be overhyped. What follows is our (lightly edited and condensed) discussion.

Capitol Account: What is the Constitutional Accountability Center?

Brianne Gorod: We are a nonprofit law firm and think tank based in D.C., dedicated to the progressive promise of the Constitution’s text and history.

CA: That sounds oxymoronic. Wasn’t Justice Antonin Scalia a textualist? He was no progressive.

BG: We take a methodological approach to interpreting the Constitution and federal laws that is traditionally associated with conservatives – I’ll call it originalism for shorthand – and show how originalism done right actually leads to progressive outcomes. If you look at the text and history of the Constitution as a whole, not just the original document that was ratified in 1789 but the document as it’s been amended over time to become more egalitarian and more inclusive and more democratic, it leads to progressive outcomes across a wide range of issue areas.

CA: How does history come into play?

BG: It’s important when trying to understand what a particular constitutional provision means, to start with the text – but also to look at the history. Why did the founders put that provision into the Constitution? What work was it seeking to accomplish? What was the context against which it was adopted? The Supreme Court has made clear that in separation of powers cases, for example, historical practice is also really important. How did the first Congress and other early Congresses understand the meaning of the terms in the Constitution?

CA: Is this your group’s strategy for dealing with the judiciary’s rightward shift?

BG: CAC was founded about 15 years ago. But I think the arguments that we make, and the approach we take, has only become more important since then, as the courts and Supreme Court have become even more conservative. They’ve become more populated by judges and justices who profess to be committed to following the text and history of the Constitution.

CA: Tell us about your work.

BG: We do amicus briefing in the Supreme Court and the courts of appeals on a wide range of issues – from environmental and criminal justice to access to the courts and civil rights. And we do a lot of work on structural constitutional questions. I’ve been very involved in cases involving the Consumer Financial Protection Bureau…and others that really go to the heart of what we call the administrative state – the ability of the federal government and its agencies to do the work that they’re tasked to do on behalf of the American people.

CA: What was your take on the CFPB arguments?

BG: They went very well. We saw real skepticism of the payday lender’s arguments – from many different corners of the bench. We saw Justice [BrettKavanaugh repeatedly rejecting the idea that the CFPB has a permanent appropriation, because as he noted, Congress can always change the way the bureau is funded. We saw Justice [Amy ConeyBarrett really struggling to find in the text of the Appropriations Clause the requirements and restrictions that the payday lenders want the court to impose, and really struggling to understand what standard the payday lenders want the court to apply.

CA: What about the case’s implications for other regulators, like the Fed or the FDIC?

BG: That’s a really important thing, as the solicitor general pointed out. What [the payday lenders] are really asking for is kind of a gerrymandered result where the court says the CFPB’s funding is unconstitutional, but somehow doesn’t touch any of the other important federal financial regulators that are funded outside of the annual appropriations process. And the payday lenders’ counsel just couldn’t offer any explanation of how you get there and draw that line, so the CFPB  is not okay, but everyone else is.

CA: The case came up from the U.S. Court of Appeals for the Fifth Circuit. We see a lot of business groups challenging regulations there. What’s the deal?

BG: They bring them there because that is the court where they think they have the greatest chance of success. The Fifth Circuit is showing that it is incredibly conservative, and that it is willing to go further than the Supreme Court is willing to go, on issue after issue. I think it is a real outlier at this point.

CA:  There are a lot more cases challenging the administrative state. What’s happening on a broader level?

BG: There has been a longstanding, multifaceted conservative attack…We’re seeing opponents of regulatory action, opponents of the federal government being able to, frankly, do its job effectively, bringing lots of different types of challenges…They’re not winning these fights in Congress. They’re not winning them in agencies. So they’re trying to get the courts to give them the results that they can’t get through the political process. And we do have both at the [Supreme] Court and in the lower courts, lots of really conservative judges. Opponents of the administrative state [are] seeing an audience that they think might be receptive.

CA: You clerked for Justice Stephen Breyer. What did you learn about the court that others may not know?

BG: There was more conversation, and cross-ideological conversation, than folks might expect. Justice [AnthonyKennedy and Justice Breyer had chambers next to each other, and we would see Justice Kennedy coming over to talk to Justice Breyer and vice versa. Particularly given how contentious and charged many of the issues the court confronts are, and how obviously divided the court often is, particularly in some of the biggest cases it decides, that might surprise people…(Friday)

McHenry’s Moment: The Financial Services Committee chairman is suddenly presiding over a much larger circus. His job as House speaker pro tempore is designed to be temporary, but it has put the somewhat wonky bow-tie wearing lawmaker squarely in the national spotlight. And many of the executives, lawyers and lobbyists who regularly deal with McHenry would like him to stay there. Is that likely? No. But is it possible? Of course.

Much of the finance industry sees McHenry, 47, as the adult in the room, someone who knows policy and how to get things done. As speaker, they argue, he could be a steady hand in a very chaotic time – something that Republicans especially need now. “McHenry would be a dream candidate,” notes one person. Nor is this the first time establishment Republicans have had him on their wish list. When McCarthy was losing vote after vote for the speakership in January, McHenry’s name was also bandied about.

The North Carolina lawmaker didn’t want the job then, and he’s told people he doesn’t want it now (his office didn’t respond to a request for comment). The race is starting to heat up: Steve Scalise, the majority leader, and Jim Jordan, chairman of the Judiciary Committee, have already announced bids and others may raise their hands. It’s not clear when the situation will be resolved, but many in the GOP predict it could take a while for any candidate to nail down the 218 votes needed to win the job.

That could leave an opening that some see as perfect for McHenry, as a compromise pick who would accept the post out of a sense of duty (or hidden ambition). It’s the “help me Obi-Wan Kenobi, you’re my only hope” scenario, another source adds. And despite McHenry’s professed inclinations, being speaker of the House isn’t really a gig that people turn down. Ask Paul Ryan.

Frank Kelly, a policy analyst who runs Fulcrum Macro Advisors, says there’s a “medium to high potential” that McHenry gets drafted. But there are some roadblocks. “The question is, will the House Republican rebels see him as being too close to McCarthy — and that’s not clear yet,” Kelly notes. He also says “all indications” are that McHenry isn’t amenable.

While a Speaker McHenry may turn out to be wishful thinking from Wall Street, the one thing Washington seems to like better than a political crisis is gaming out solutions to that crisis. While everyone, of course, has an opinion, we reached out to sources on and off Capitol Hill who are at least in a better position to speculate about the current morass. What follows are their thoughts on McHenry, both pro and con. And as a bit of a bonus, we look at what might happen to the financial services panel if he is no longer chairman…(Wednesday)

How Much is Too Much? Gensler’s ambitious rules agenda has prompted no shortage of complaints from Wall Street firms and congressional Republicans. Less talked about, but just as frustrating to many companies, is how enforcement fines have soared under his leadership. Evidence of the increase was on full display last week, as the agency closed out the government fiscal year with a flurry of settlements that brought in more than $300 million.

Boosting penalties has been a priority of the SEC chair and Enforcement Director Gurbir Grewal – and they’ve been successful. Fines hit a record $6.4 billion in fiscal 2022 (this past year’s total hasn’t been released). The division chief has been very open about his push; he laid out his philosophy that fines “must be adequate to both punish and deter wrongdoing” in a major speech last year. That applies both when a company commits fraud and instances when a company is negligent, he added. But Grewal has also offered a carrot with the stick: firms that provide “meaningful cooperation” may not have to pay anything at all.

To a growing number of companies, however, that promise seems pretty hollow – and arbitrary. And a few are stepping up to fight the agency rather than just write a big check to make the problem go away. It’s a trend worth watching, particularly if it gains steam, because the SEC’s enforcement program relies heavily on settlements. It’s easy to see why: the commission often has a tough time in court when facing off with high-powered defense lawyers and it’s not easy to explain complicated securities cases to a jury.

While enforcement is often the least political of the SEC’s jobs, there are some policy choices involved. Corporate penalties tend to rise steadily in Democratic administrations where holding big business accountable is often a mantra. Republicans generally argue that big fines ultimately harm the shareholders; they also point out that it’s the executives, rather than a company itself, that engage in wrongdoing. (There are also exceptions, like the big accounting scandals that arose during the George W. Bush administration.) There’s a general view among Gensler’s opponents, and even his supporters, that he and Grewal have taken things to another level.

Though it is still unusual for a publicly traded company to fight an enforcement action, Virtu Financial decided to take that route last month – setting up a major battle with the SEC that will be closely followed by securities lawyers and market participants alike. One major sticking point was the large size of the proposed fine, which the trading firm felt didn’t reflect its cooperation. Virtu had even notified the agency of the potential violation.

Nick Morgan, a former SEC enforcement lawyer, understands the company’s complaint – and has some sympathy. “It seems like they have been treated unfairly,” he says.

Now a partner at Paul Hastings in Los Angeles, Morgan notes that self-reporting is “usually a huge factor” in lowering a fine. But the agency’s attorneys have a lot of flexibility in how they calculate penalties – and that means that settlements often vary. “The SEC has almost total discretion in figuring out the top number and then it goes down from there,” Morgan says. “I have clients who regret self-reporting because they still got run through the wringer.”

The SEC filed its case against Virtu last month, contending that the company made “false and misleading statements” about walling off confidential trading information from some of its employees. There was no allegation that the data was used improperly – another factor that could augur a smaller fine.

Nevertheless, a big point of contention in the talks, according to people familiar with the matter, was the roughly $25 million penalty that SEC enforcers wanted to levy. To Virtu, the proposed sanction seemed unreasonably high – especially since it felt it had provided the kind of assistance that Grewal has said should be rewarded.

Here’s Virtu CEO Doug Cifu on the enforcement case:

“The SEC is alleging that our policies and procedures were not reasonably designed and our public statements to the contrary on these matters were therefore misleading. We strongly disagree. Virtu has consistently maintained a robust, multi-layered approach to its protection of client data. The hypothetical vulnerability, which we identified, enhanced, and self-reported to the SEC, was limited to one of our many data protection layers and did not impact other measures. The SEC ignores that fact. It’s obvious to any impartial observer that there is a political bias to the SEC under Gensler, and sadly enforcement is not immune to this stain.”

An SEC spokesperson responds: “No, the charges were driven solely by Virtu’s alleged materially false and misleading statements and omissions regarding information barriers to prevent the misuse of sensitive customer information.”…(Thursday)