Dictation and Delegation in Securities Regulation

Prominent scholars have descried a pattern of boom and bust in securities laws: after financial crisis comes “bubble law,” “quack” regulation that is a misguided populist reaction with little empirical support. [1] In other words, crisis leads to reactionary legislation. But what about when Congress legislates in the absence of a precipitating crisis—most recently, in the JOBS Act? In Dictation and Delegation in Securities Regulation, forthcoming in the Indiana Law Journal, I articulate a more nuanced theory of congressional action in the securities field, one that accounts for differences not only in when Congress intervenes in securities law, but also how it does so.

Most members of Congress work for reelection, and reelection requires the financial support of constituents—particularly industry. These groups logically favor writing their preferences directly into the law—that is, dictation—over delegation because legislation can be largely self-executing. Put simply, in times when the political climate allows for successful industry-sponsored legislation, Congress will tend to enact laws directly through dictation, leaving little for the SEC to do.

However, when a securities-related crisis arises, public pressure for reform sometimes impels Congress to act. In these cases, industry must play defense, and its best strategy for doing so is to channel key decision-making to the agency level. There, regulation can be delayed, diluted, and, if all else fails, disputed in court. Agency action is subject to inevitable delay because of the lengthy notice-and-comment rulemaking process agencies must follow. What’s more, industry groups have the time and money to lobby regulators during the rulemaking process to shape agency choices in ways favorable to their own interests, often in practice diluting the legislation that tasked the agency with the details of reform. Finally, the validity of any agency rulemaking can ultimately be disputed in court, whereas direct congressional action is relatively immune from judicial second-guessing.

Thus, the dictation/delegation thesis proposes that in non-crisis conditions when an industry has unitary preferences, it will favor self-executing legislation. Moreover, it hypothesizes that industry interest groups will in non-crisis times succeed in persuading Congress to enact their preference for legislation that dictates the details of law, rather than leave them to vagaries of agency action. In response to crisis, in contrast, Congress may act, but will delegate far more to an agency. Rather than a simple binary, I suggest that statutes exist along a continuum of dictation and delegation, and that salient crises play a significant role in determining where along that continuum individual enactments fall.

I conduct an original empirical study of the extent of delegation of legislation over a forty-five year period, from 1970 to 2014, a period that includes three post-crisis enactments: The Paperwork Crisis of 1967–70, which spawned the Securities Investor Protection Act of 1970 (SIPA) and the Securities Amendments of 1975; [2] the financial fraud uncovered in the wake of the dot-com crash of 2000, which prompted the Sarbanes-Oxley Act of 2002 (SOX); and the financial crisis of 2008, which produced the Dodd-Frank Act of 2010 (Dodd-Frank). [3] The non-crisis securities legislation group includes the Small Business Investment Incentive Act of 1980 (SBIIA), National Securities Markets Improvement Act of 1996 (NSMIA), Private Securities Litigation Reform Act of 1995 (PSLRA), Securities Litigation Uniform Standards Act of 1998 (SLUSA), and the Jumpstart Our Business Startups Act of 2012 (JOBS Act). [4] Notably, Silicon Valley players strongly backed four of these five non-crisis acts. [5]

The data support the dictation/delegation thesis: even controlling for shifts in political-party dominance, post-crisis Congress is nearly twice as likely to delegate as when there is no crisis. One potential critique is that Congress delegates in times of crisis because it has much less time to educate itself. But, with the exception of 1970’s SIPA and SOX, all of the “crisis” legislation is more accurately characterized as “post-crisis” in nature. Each was in a state of recovery rather than rescue, seeking not to resolve a current crisis, but instead to address the root problems of the precipitating crisis so that it would not happen again. [6] Thus, there was ample time for dictating specific policies—if Congress had wished to do so.

A more granular analysis of legislative acts reveals the limitations of the thesis. Most notably, the JOBS Act contains extensive delegations, even though it was not passed in response to a salient financial crisis. Because no scholar has yet examined the political economy of the JOBS Act, the article looks closely at that subject, and the results are revealing. Three of the JOBS Act’s titles were backed by Silicon Valley or by sophisticated financial institutions. [7] These titles contain minimal delegation. [8] In contrast, relative political novices backed Title II (General Solicitation) and Title III (Crowdfunding), and Title IV’s initial advocates signaled an assent to delegation to the SEC—perhaps because of formidable adverse interests in the form of state securities law administrators. [9] These titles contain more substantial delegation than Titles I ,V and VI which concern the IPO On-Ramp and raising the Section 12(g) threshold, and collectively contain only one delegation.

In sum, Dictation and Delegation in Securities Regulation offers a nuanced explanation of Congressional intervention in securities law, both in boom and bust times.

The full article is available for download here.