Talking Administrative Law Abuses; Capital One Deal Energizes Bank Opponents; OCC's Hsu Wants More Scrutiny of PE and Hedge Funds
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Bank merger mania dominated the holiday-shortened week. Capital One’s $35 billion acquisition of Discover, however, is a still long way off. Our initial analysis looked at the political and regulatory hurdles. Opposition on the left saw the deal as a gift that will help in another fight — their public campaign to shame banks that sued over the revamp of a rule that targets discriminatory lending. Meanwhile, the acting head of the OCC had some provocative ideas on how the government can keep better tabs on systemic risks posed by hedge funds and private equity. For our Friday interview, we talked to a lawyer who has been on a mission to rein in the power of the SEC, especially when it comes to enforcement.
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Friday Q and A: The issue of federal agency power has become one of the hottest topics in financial regulation. And it’s an area where the Supreme Court increasingly seems to want to make a mark. See the major questions doctrine or the current cases over CFPB funding and Chevron deference. There is a lot going on – and plenty of uncertainty about how it all may shake out.
We sat down with Peggy Little, who has been a big player in some of the legal battles against the so-called administrative state, particularly when it comes to the SEC. She is a senior litigation counsel at the New Civil Liberties Alliance, a non-profit that works to “tame the unlawful power of state and federal agencies” and “foster a new civil liberties movement that will help restore Americans’ fundamental rights.”
Little’s cases have wreaked havoc on the SEC’s in-house judicial system, and taken aim at a bedrock agency policy that requires people who settle enforcement actions to keep mum about the allegations. Just this week, the full U.S. Court of Appeals for the Fifth Circuit agreed to rehear a challenge Little has spearheaded against the SEC’s approval of a Nasdaq board diversity rule. So we had plenty to talk about. What follows is our (lightly edited and condensed) conversation.
Capitol Account: Tell us about NCLA.
Peggy Little: NCLA was founded in 2017 by [Columbia Law Professor] Philip Hamburger, who had written a book a few years earlier called “Is Administrative Law Unlawful?” It received a lot of attention, not just in the academy. Judges were reading and talking about it. Philip decided that rather than just write about a problem that he perceived to be a great threat to American freedoms, he would found a public interest law firm and litigate these questions, with several goals in mind – civil liberties being the main theme.
CA: Why did you join?
PL: I had a small practice in Connecticut and I wanted to do something different. I love constitutional law and I got wind of this. I interviewed, and I was the first attorney they hired…I had over 30 years of experience representing Fortune 50 companies, so I knew my way around a courtroom and a court of appeals. That was important to Philip. He did not want young lawyers who would be learning as they went along. He was looking for a pretty senior group of people. Until recently, we had a rule that you had to have about 10 years of practice under your belt before you could even apply.
CA: We’ve noticed that you’ve recently had a pretty big run of victories.
PL: We had some successes right from the beginning. The first thing I did was an amicus brief in Lucia [v. SEC], which was a watershed case in terms of the Supreme Court recognizing that there were problems with the SEC system of adjudication – including that its administrative law judges had not even been constitutionally appointed. So our first amicus was a win at the Supreme Court, and we've kind of been on a roll ever since.
CA: NCLA says that it is working to protect Americans from the administrative state, an issue that seems to be a real focus of the federal courts now. Why is it a hot area?
PL: I think because it has expanded to the point that ordinary Americans are waking up and realizing that this is affecting every aspect of their lives. I didn't even realize as a practicing attorney how pervasive and intrusive administrative law is to the lives of ordinary Americans until I took this job and started studying the problem. I had my eyes opened.
CA: How so?
PL: It was not just studying scholarship and articles. It was the calls that would come in from people about the intrusions on their liberties and the complete denial of rights so fundamental that I was shocked at how high handed – and for how long administrative abuses of power had gone on.
CA: Give us an example.
PL: The SEC gag rule.
CA: How does it work?
PL: If you settle with the SEC, you have to sign a consent – you have to sign it, the consent is really not a consent – that says you'll never speak critically about the SEC's case against you. For the rest of your life, you cannot question those allegations. That's insane. Every other person charged by the government has full liberties of free expression about their cases, whether they've been found guilty or exonerated or settled.
CA: But the SEC regularly makes statements when it settles an enforcement action.
PL: Well, it's worse than that. First of all, when they bring the case against you, they are notorious for these inflammatory press releases. And it's a moment that changes that person's entire life journey…Ray Lucia [a financial adviser with a national radio show who was known for his “Buckets of Money” investment strategy] has talked about when he got hit with charges…His reputation was ruined. No radio station would carry him, no TV program. His business was harmed to the tune of millions and millions of dollars, plus the cost of the defense depleted all of his assets. It is a very, very troubling thing that the first press release brands you a fraudster. And then when you settle, they also do a press release that tends to be pretty inflammatory, too. Those are the only two documents that can exist in the world that tell the public about your case.
CA: How does this benefit the agency?
PL: They don't want people having the impression that the SEC prosecutes people when there's no case against them. So they're going to silence you from saying, `The charges against me, I settled them, but it was not a strong case.’ Or, `They were operating on a new theory of enforcement that was dubious, so we reached a settlement.’ They don't want you to have your opinion ever in the public sphere. That is so contrary to the First Amendment.
CA: You filed a petition at the SEC calling for the rule to be amended so people could speak about their settlements. It was pending for more than five years until last month when the commissioners, somewhat unexpectedly, took action and rejected it. Maybe that is because the gag is being challenged in a growing number of cases, including one by Elon Musk.
PL: We were not at all surprised the petition would be denied, given their litigating posture in so many courts. But we're delighted they denied it because that means that we can now take them to court…And we will. We also have a beautifully written dissent by Commissioner Hester Peirce.
CA: Let’s talk about your work involving the SEC’s in-house court system. The Lucia case, where you filed an amicus brief, found that the agency’s judges are subject to the Appointments Clause. And you represented Michelle Cochran, a CPA, who took her constitutional claims about ALJs to the high court. Should the SEC stop bringing cases administratively?
PL: Absolutely. There's absolutely no reason why you shouldn't be taken to a real court of law. That's why there are separated powers. This idea that they can have their own little mini court where the judge is employed by the prosecutor? And your first court of appeal is the commission that charged you in the first place? That's something out of Kafka…(Friday)
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Critics Come Out: Banks always knew that suing over the Community Reinvestment Act could bring some serious blowback, especially from civil rights groups and affordable housing advocates who have long championed tougher rules against discriminatory lending. But the industry probably didn’t anticipate that the opposition would be quickly supercharged – by a banking mega-merger.
This week’s announcement of Capital One’s purchase of Discover Financial Services, however, has done just that. And the critics say they plan to make the acquisition a focal point in a very public campaign to shame banks for bringing the lawsuit. It’s a gift that is even better, they add, because Capital One was one of the main firms pressing trade associations to take the Fed, FDIC and OCC to court. (An assertion that several industry sources confirmed to Capitol Account.)
“Boy, it looks like a strategic blunder to have done these two things at once,” notes National Community Reinvestment Coalition President Jesse Van Tol.
A lot of scrutiny of the merger, which is already getting outsized attention in Washington, is sure to center on the consequences for customers and local communities – fewer banks can mean prices go up and loans are more difficult to obtain. That attention will help boost one of the left’s main arguments about the CRA lawsuit: that the industry is trying to shirk its responsibility to lend to underserved borrowers.
In a bit of a win-win, the fight could also influence the regulators and antitrust authorities that are reviewing the Capital One-Discover deal, which most of the CRA activists are dead set against.
“To the extent they are trying to demonstrate that their merger will benefit customers – particularly their low- and moderate-income customers – the lawsuit over CRA totally undercuts those arguments,” Van Tol says.
A Capital One spokeswoman stresses that it’s “patently untrue” the firm especially pushed for the suit. “Capital One is unequivocally committed to a strong and vibrant CRA program and that commitment is reflected in our long track record of outstanding CRA performance, and the fact that we have ranked first or second in community development lending among all banks – regardless of size – since 2015,” she says.
It’s no secret that banks are engaged in a delicate dance on CRA. The industry wants to be seen as very supportive of the landmark law, which Congress passed in 1977 to ensure that banks lend to the neighborhoods where they accept deposits, especially in poorer communities. But firms contend that the overhaul is so onerous that it will actually prompt a lot less lending.
Given the obvious reputational risks, executives and their lawyers deliberated extensively over whether to sue before seven trade groups, including the American Bankers Association, the U.S. Chamber of Commerce and the Independent Community Bankers of America, took the plunge earlier this month. Ultimately, according to people involved in the decision, there was pretty broad agreement that the the agencies had overstepped their authority.
The ABA, which represents banks of all sizes, stresses that the decision to sue wasn’t made lightly. The new rule “unlawfully exceeds what Congress authorized and fails to recognize banks’ demonstrated commitment to fully serving their communities,” says a spokesman. He also emphasizes that the association’s members were unified. “We have been gratified by the strong support from across our membership for this legal action, and we look forward to presenting our arguments in court,” he says.
But others say that a few big lenders were skeptical. These banks became even less inclined to sue after the final rule was toned down in several ways. Ultimately, the Bank Policy Institute, which represents some 40 of the largest banks, declined to join the case. “The reason BPI didn’t join the lawsuit was due to a division of labor, not a difference of opinion,” a spokesman said.
However, sources say that a number of BPI’s member banks and the group’s executives were concerned that big firms wouldn’t make the most sympathetic plaintiffs. A broader worry, the sources add, is that the court battle could prompt a public relations backlash – or, worse, aggravate the regulators.
"There’s a strong sentiment in the industry of getting this done and moving on,” Warren Traiger, a senior counsel and CRA expert at the Buckley law firm, says. “And the lawsuit might do the opposite – it has the potential to cause further disarray.”
Thus far, that seems to be the case. The lawsuit represents “a retrenchment and a retreat” from banks’ post-George Floyd commitments to lend more in minority communities “as well as their many public statements and representations to Congress, shareholders, customers, and regulators,” National Urban League President Marc Morial says.
He adds that civil rights activists are outraged that they never got a heads up that the case was coming, even though many serve as advisers to lenders. “We received no notice or forewarning of this challenge,” he says. “This is an affront to the kind of relationship we have sought to build.”…(Thursday)
Trip Wires? Acting Comptroller of the Currency Michael Hsu continued his streak of stirring the regulatory pot – this time floating a novel approach for identifying private equity firms, hedge funds and other non-banks that could threaten the financial system. Just like his recent comments on mergers and beefing up rules to prevent bank runs, the OCC chief’s remarks are sure to spur debate – and perhaps a bit of confusion as well.
Speaking at Vanderbilt University, Hsu argued that FSOC could establish a set of metrics – or as he called them “trip wires” – to flag risks in particular corners of finance. For example, the trip wire for a payments-focused fintech firm could be the amount of cash managed for customers. If a certain level is breached, the council would start a review to determine whether the company should be deemed a systemically important financial institution.
“By design, the trip wires would be several steps removed from any formal action by the FSOC,” Hsu said, perhaps trying to assuage industry fears that his speech should be taken as a sign that the group is getting more serious about designations. “The sole purpose and consequence of the trip wires would be to prompt an assessment.”
Hsu’s idea, in theory, would bring a more formal process to something that has been top of mind at several agencies in recent months: how to keep better tabs on lightly regulated non-banks that are so big, complex and interconnected that their failure could spill over into the entire financial system. FSOC took a first step in November when it eliminated Trump-era guidance that had made it challenging for the council to designate asset managers and payment firms. ..(Wednesday)
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