By Dawn Causey, Thomas Pinder and Andrew DoersamThe Supreme Court’s term was already shaping up to be a blockbuster when it kicked off in October last year. Yet the Court electrified its docket even more by deciding to hear two cases on the Consumer Financial Protection Bureau’s leadership structure and the Securities and Exchange Commission’s enforcement power. One of the big questions is whether the Supreme Court will take an expansive or narrow approach to decide these cases.
In Seila Law LLC v. CFPB, the Court agreed to hear a challenge to the constitutionality of the CFPB’s structure. After getting hit with a civil investigative demand by the agency over its debt-relief services, Seila objected to the request. Seila argued that the CFPB’s structure is unconstitutional, because the agency is headed by a single director who has significant power, and the President can only remove the director “for cause.” The Ninth Circuit rejected this argument, siding with the D.C. Circuit’s en banc (full panel) decision in PHH Corp. v. CFPB. In PHH, the D.C. Circuit held that the CFPB’s structure does not violate Article II of the Constitution.
In an interesting twist, the CFPB and DOJ filed a brief in the Supreme Court supporting Seila’s certiorari petition. The agencies noted that Director Kathy Kraninger reconsidered the bureau’s position and decided that the removal restriction is unconstitutional. Seila and the CFPB both argue that the CFPB’s structure violates the separation of powers, but they take opposite positions on remedy. Seila argues that the for-cause removal provision is not severable, while the CFPB argues that severance is the correct solution.
The Court heard oral argument on March 3, 2020, but unless Justice Brett Kavanagh has undergone a legal metamorphosis, he may have tipped his hand. While sitting as a judge on the D.C. Circuit, Kavanaugh wrote a blistering dissent in the PHH case. Kavanaugh described the CFPB director’s authority as “power that is massive in scope, concentrated in a single person, and unaccountable to the President,” and opined that the CFPB’s structure is “a gross departure from settled historical practice.”
Although the SEC’s leadership structure is not being challenged, the agency’s enforcement power is under attack. In Liu v. SEC, the Court will review whether the SEC has the authority to require disgorgement as a means of enforcing the federal securities laws. For decades, the SEC has relied on disgorgement of ill-gotten gains as a powerful tool in its enforcement arsenal. In 2018, the SEC obtained orders imposing $2.51 billion of disgorgement, compared to $1.44 billion in civil monetary penalties.
The SEC sued Charles Liu and Xin Wang for violations of securities laws, alleging Liu and Wang defrauded the government’s EB-5 Immigrant Investor Program. The district court granted summary judgment to the SEC, finding that Liu and Wang violated Section 17(a)(2) of the Securities Act. The court issued an injunction, imposed civil monetary penalties, and ordered disgorgement of $26.4 million that Liu and Wang collected from investors. Following the district court’s decision, the Supreme Court decided Kokesh v. SEC, which set the stage for the Liu appeal. In Kokesh, the Supreme Court unanimously held that disgorgement is a penalty, but declined to address whether federal district courts have the authority to order disgorgement in the SEC enforcement proceedings.
On the heels of the Kokesh decision, Liu and Wang appealed to the Ninth Circuit, arguing the district court lacked statutory authority to order disgorgement. The Ninth Circuit rejected this argument, finding that Kokesh refused to reach this issue. On appeal to the Supreme Court, Liu and Wang argued that disgorgement falls outside the scope of permissible equitable relief. In response, the Solicitor General and the SEC argued that both the Securities Act of 1933 and the Securities Exchange Act of 1934 authorize a federal court to enjoin violations of the federal securities laws, and this authority includes the power to order disgorgement. The Court heard oral argument on the same day as the CFPB case.
The stakes are high. If the Supreme Court strikes down the “for cause” removal provision as unconstitutional, it would allow the president to exert more influence over the CFPB’s activities. Similarly, a Court decision ending the SEC’s ability to obtain disgorgement from district courts may have profound consequences for the agency’s enforcement program. It is difficult to predict how the Court will rule on these cases, but it is clear that regulatory power is under strict scrutiny.
Dawn Causey is general counsel at ABA, where Thomas Pinder is deputy general counsel and Andrew Doersam is a paralegal.