Financial regulators should begin planning now for the risk that the post-Trump era Supreme Court could eventually trigger a financial crisis. We often think of systemic risk as coming from war, plagues, or other disruptive events causing problems to cascade through the financial system.1Steven L. Schwarcz, Systemic Risk, 97 GEO. L.J. 193, 204 (2008). In Supreme Risk, an article forthcoming in the Florida Law Review, I explain how the Supreme Court may also significantly disrupt markets and keystone institutions.2Edwards Benjamin, Supreme Risk, Flo. L. Rev. (forthcoming Aug. 2021). This could happen with a decision invalidating some self-regulatory organization (SRO) or some other decision causing markets to suddenly collapse. As financial crises cause enormous and widespread damage, policymakers should prepare to mitigate even seemingly remote risks if the risk materializing would result in enormous damage.
Although the risk cannot be precisely quantified, the conservative majority Supreme Court continues to signal its interest in limiting the reach of the administrative state. Consider, for example, the Court’s recent decisions. The Supreme Court recently limited the Occupational Safety and Health Administration’s ability to impose widespread vaccination requirements.3Nat’l Fed’n of Indep. Bus. v. Dep’t of Lab., Occupational Safety & Health Admin., 142 S. Ct. 661 (2022). The Per Curiam decision declared that Congress should make a decision with such widespread impact because OSHA had sought to respond to a public health risk instead of an occupation-specific risk.4Id. at 666. In a concurrence penned by Justice Gorsuch and joined by Justices Alito and Thomas, the trio called for recognizing the major questions doctrine and the nondelegation doctrine.5Id. at 668-69.
Their calls were soon answered. In West Virginia v. EPA, the Court fully embraced the major questions doctrine, allowing it to strike down administrative rulemaking on issues of “economic and political significance,” where the Court doubts whether Congress truly intended for an administrative agency to address such an issue.6West Virginia v. EPA, Nos. 20-1530, 20-1531, 20-1778, 20-1780, 2022 U.S. LEXIS 3268, at *35 (June 30, 2022) (internal quotation and citation omitted) In announcing its formal recognition of the new doctrine, the Court rooted it in “separation of powers principles and a practical understanding of legislative intent.”7Id. at *38. Although the decision addressed the scope of the EPA’s authority to regulate carbon emissions, the Supreme Court made clear that the doctrine could apply within “all corners of the administrative state.”8Id. at *35.
Continuing to expand these and other doctrines increases the likelihood that the Supreme Court will declare administrative actions and certain administrative agencies themselves unconstitutional.
The Supreme Court’s resurgent nondelegation doctrine aims to ensure “democratic accountability” by limiting what Congress may delegate to administrative agencies.9Id. Historically, the Supreme Court has allowed Congress to delegate matters to administrative agencies so long as Congress included some “intelligible principle” to guide the agency as it regulated.10J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394, 409 (1928). As the Supreme Court rapidly trends toward more searching reviews and requirements for administrative agencies, the risk of the Supreme Court invalidating some crucial rules increases.
Financial markets may be particularly vulnerable because SROs wielding delegated power play an outsized role in facilitating and regulating markets. Although absent from ordinary civics classes, SROs operate stock exchanges, oversee brokerage firms, regulate bond and futures markets, and frequently serve as key financial market utilities. A Supreme Court decision interfering in their operations or suddenly invalidating the self-regulatory model could drive enormous market disruption.
As this risk may be difficult to appreciate in the abstract, consider the potential harms from a decision invalidating some SRO or SRO rule facilitating significant market activity. If a court decision made it impossible for brokerages to trade equity securities for American public companies until Congress passes a statute, over $90 trillion in wealth within our securities markets would be suddenly inaccessible. This is not the only way the Supreme Court could cause enormous damage. A decision inhibiting bond issuances could make it impossible for corporations and municipalities to access capital. Without the ability to conduct debt offerings, paychecks could not go out. Bills would go unpaid. Ultimately, the real economy depends on a steadily functioning financial system. My point is not to predict which gear the monkey wrench might wreck but to highlight the risk of disruption.
SROs also deviate significantly from traditional administrative agencies, situating them in an uneasy place within our constitutional structure. Although not funded directly by the federal government, SROs serve as the primary beat cops for many financial markets and enforce federal law. Whether to classify them as within or outside the government remains controversial. Court decisions have dismissed actions against them on the theory that they remain absolutely immune from suit when acting in a regulatory capacity.11Standard Investment Chartered, Inc. v. National Association of Securities Dealers, 637 F.3d 112, 114 (2d Cir. 2011). At the same time, courts have not required SROs to provide due process on the theory that they are simply private bodies.12United States v. Solomon, 509 F.2d 863, 869 (2d Cir. 1975).
SROs embrace a variety of governance structures. In many instances, industries elect their own leadership to an SRO board to sit alongside other board-appointed members. Although many SROs operate under some oversight from the Securities and Exchange Commission or Commodities Futures Commission, no public official accountable to the President selects their leadership. In some instances, for-profit SROs take shareholder votes to elect leadership while simultaneously operating as a regulator and a market participant. For example, Nasdaq, Inc., a for-profit corporate SRO, prominently warns investors that the business model contains a significant risk factor because Nasdaq owes “self-regulatory obligations and also operate[s] for-profit businesses.”13Nasdaq, Inc., Annual Report 25 (Form 10-K) (Feb. 23, 2021). It explains that “these two roles may create conflicts of interest” and that it has “obligations to regulate and . . . ensure compliance with applicable law and the rules of our markets.”14Id.
Putting to the side whether the Supreme Court would be right or wrong to meddle with the critically important SRO model, the risk continues to grow. The post-Trump era Supreme Court now pursues its own objectives, and the possibility that the Supreme Court may disrupt some significant SRO in the future must be carefully considered. In Supreme Risk, I highlight four different doctrines posing escalating threats to the SRO model: (i) nondelegation; (ii) separation of powers; (iii) appointments clause; and (iv) state action. Any of these doctrines could cause significant problems for SROs.
This is not to say that the Supreme Court will deliberately try to trigger a financial crisis. It may cause one by failing to appreciate market reactions or the consequences of invalidating some significant SRO rule. The possibility of some significant financial market problems may not be a valid concern for a Supreme Court fixated on fidelity to its view of the constitution. Indeed, Justice Gorsuch recently indicated that he disagreed with a majority decision not to award relief simply because “affording a more traditional remedy here could mean unwinding or disgorging hundreds of millions of dollars that have already changed hands.”15Collins v. Yellen, 141 S. Ct. 1761, 1799 (2021) (Gorsuch, J., concurring in part).
Ultimately, policymakers must plan for how to maintain orderly markets if the SRO system were to suffer a major interruption. I suggest approaching Congress now to seek explicit emergency authority for federal regulators to take over SRO operations should the Supreme Court declare the model unconstitutional. Having a contingency plan and authority in place could greatly limit potential damage.