Volume 34, Issue 2
John Patrick Hunt, Constitutionalized Consent: Preemption of State Tax Limits in Municipal Bankruptcy, 34 Yale J. on Reg. 391 (2017). [PDF]
Many states impose absolute limits on municipal taxes, such as a one percent maximum property tax. States also commonly require electoral approval of municipal taxes. California’s Proposition 13 is the best-known example of such state-imposed requirements. Such restrictions reduce municipal flexibility in dealing with financial distress and may contribute to municipal financial distress.
This Article argues that Congress may constitutionally preempt such rules in the exercise of its bankruptcy power. Preemption of state tax limits in bankruptcy should be found to lie within Congress’s power under the Bankruptcy Clause. The Clause has been interpreted to provide expansive authority to legislate on the subject of insolvency—that is, a person’s general inability to pay debts. Taxation is intimately bound up with municipal ability to pay debts. Indeed, taxation occupies a position in municipal debt collection roughly analogous to that of property in non-municipal debt collection. The Supreme Court’s understanding of the scope of the Bankruptcy Clause has consistently evolved in the direction of finding broader authority under the Clause to meet novel conditions, such as the unprecedented potentially impending municipal debt crisis brought on by a squeeze between pension obligations that cannot be changed and taxes that cannot be increased.
The most serious objection to the Article’s thesis may be that preempting state tax limits would violate the Tenth Amendment. This Article argues that the requirement that states consent to their municipalities’ bankruptcies cures any Tenth Amendment problem. Perhaps somewhat surprisingly, the power of state consent to municipal bankruptcy is such that it authorizes municipalities to propose bankruptcy plans that would otherwise violate state law, including the state constitution. The landmark decisions in Detroit and Stockton, which held that municipal bankruptcy trumped state constitutional protections for municipal retirees, are recent and prominent cases that embrace this proposition.
Alexander I. Platt, Unstacking the Deck: Administrative Summary Judgment and Political Control, 34 Yale J. on Reg. 439 (2017) [PDF].
The Administrative Procedure Act’s provisions on formal adjudication give individuals charged in administrative enforcement actions the right to an in-person oral hearing. But not always. Agency prosecutors can circumvent formal hearing procedures without the consent of the defendant by resolving cases on “administrative summary judgment.” A 1971 Harvard Law Review Article endorsed this procedure as a way for agency prosecutors to avoid “futile” hearings, and courts have upheld it based on the same technocratic justification. Yet administrative procedure is not merely an instrument to be expertly calibrated by administrators; it is a mechanism of political control. When Congress assigns enforcement of a given program to a formal adjudication regime, it is exercising its authority to “stack the deck,” giving defendants access to elaborate procedural protections and limiting or channeling the enforcement program. Administrative summary judgment “unstacks the deck”—it unwinds Congress’s procedural controls and allows an agency to recalibrate its enforcement priorities.
At the Securities and Exchange Commission, many administrative proceedings are now resolved on “summary disposition” without any in-person hearings. The recent expansion of summary dispositions has facilitated a broad shift in the agency’s enforcement priorities toward easy-to-prosecute offenses, enabling the agency to show Congress a “record number of enforcement actions” year after year. That figure has (apparently) significant political value, but does not indicate anything about the effectiveness of the SEC’s enforcement program.
Setting enforcement priorities is a critical function for agencies like the SEC that are charged with enforcing a vast and complex array of legal obligations, but which have resources to pursue only a relatively small number of possible violations. Securities scholars have long debated the SEC’s enforcement priorities, but have overlooked the role administrative adjudication procedure plays in shaping those priorities—as both a vehicle for congressional control and administrative rebellion.
Alex Raskolnikov, Probabilistic Compliance, 34 Yale J. on Reg. 491 (2017). [PDF]
Uncertain legal standards are pervasive but understudied. The key theoretical result showing an ambiguous relationship between legal uncertainty and optimal deterrence remains largely undeveloped, and no alternative conceptual approaches to the economic analysis of legal uncertainty have emerged. This Article offers such an alternative by shifting from the well-established and familiar optimal deterrence theory to the new and unfamiliar probabilistic compliance framework. This shift brings the analysis closer to the world of legal practice and yields new theoretical insights. Most importantly, lower uncertainty tends to lead to more compliant positions and greater private gains. In contrast, the market for legal advice tends to reduce compliance over time—a trend that a regulator may counter either by clarifying the law or by reiterating the law’s continuing ambiguity. If detection is uncertain, the probabilistic compliance framework reveals why, contrary to the prevailing view, the standard damages multiplier should be used to counter detection uncertainty but not legal uncertainty. The Article also reconciles economists’ and lawyers’ understanding of probabilities, highlights the challenges of modeling risk-bearing costs resulting from uncertain legal commands, and provides theoretical support for gain-based sanctions beyond the limited settings where the complete deterrence theory has justified their use thus far.
Richard L. Revesz, Cost-Benefit Analysis and the Structure of the Administrative State: The Case of Financial Services Regulation, 34 Yale J. on Reg. 545 (2017). [PDF]
The viability and desirability of conducting cost-benefit analysis of financial regulation is a subject of intense academic debate. Opponents claim that such analysis is feasible for environmental regulation but not for financial regulation because of the difference in the benefits that require monetization in the respective areas. This Article argues that the recent debate misses an important part of the problem. In large part, cost-benefit analysis of financial regulation cannot currently be performed successfully because of institutional shortcomings, not analytical difficulties. Compared to Executive Branch agencies, independent agencies, like the major financial regulatory agencies, lack the capacity to do cost-benefit analyses of acceptable quality.
Fortunately, there are good Executive Branch models that could be exported to the financial regulatory agencies. In particular, the Financial Stability Oversight Council could implement a robust coordinating role diffusing macroeconomic expertise, learning from the experience of the Interagency Working Group set up to estimate the damage of one ton of carbon dioxide emissions. Moreover, the President could extend to independent agencies his Executive Order vesting in the Office of Information and Regulatory Affairs the responsibility to review significant federal regulations. Though no President has yet taken this step, in part because of fears of a congressional backlash, the time might now be ripe to do so. And, the financial regulatory agencies could learn from the experience of the Environmental Protection Agency in building significant economic expertise to aid the preparation of cost-benefit analyses.
The Article also considers the role of judicial review. It takes issue with the influential argument that OIRA review can serve as an alternative to judicial review, showing that such an outcome would be inconsistent with settled principles of administrative law. But OIRA review can lead to more deferential judicial review, by serving as a signal that reviewing courts are likely to find reassuring.
Paolo Saguato, The Ownership of Clearinghouses: When “Skin in the Game” Is Not Enough, the Remutualization of Clearinghouses, 34 Yale J. on Reg. 601 (2017). [PDF]
A central question for corporate law scholarship has revolved around the ownership structure of enterprises. Why are some businesses owned by employees, some by customers, and some by investors? Until now, the question has centered on the relative benefits offered to these stakeholders by one form or another. This Article explores how ownership structure can be a matter of public importance for financial stability, and proves that it is so by delving into an institution of immense importance and timeliness: the clearinghouse, a critical financial market infrastructure.
Clearinghouses process, settle, and guarantee the performance of several trillion dollars in securities and derivatives trades daily. By operating as central counterparties, they act as private stability mechanisms, reducing counterparty credit risk and sharing default risk among their members. Clearinghouses achieve this result via a unique economic structure, which includes a double layer of capital: the traditional equity capital and the so-called mutual guaranty fund (the clearinghouse’s loss sharing fund).
Historically, clearinghouses have been mutual enterprises owned by their members (users), who contributed to the firm’s mutual guaranty fund. But most clearinghouses have recently demutualized their ownership structure, opening their equity capital to external investors and transforming into for-profit public corporations, while keeping members on the hook for losses. This structural evolution has catalyzed new agency costs between the now coexisting and “competing” stakeholders: members and external shareholders. These costs, which have been further exacerbated by the post-crisis systemic role of clearinghouses, are exemplified by shareholders with control and economic rights but limited “skin in the game,” and members who bear the final risk and losses if things go south, but who have no control or monitoring rights. This Article identifies how the agency costs between members and shareholders threaten the financial stability of clearinghouses and argues that aligning control and monitoring rights with final risk-bearing costs is the path clearinghouses should follow to achieve a more resilient ownership and governance structure.
Theodore Rostow, What Happens When an Acquaintance Buys Your Data?: A New Privacy Harm in the Age of Data Brokers, 34 Yale J. on Reg. 667 (2017). [PDF]
Data brokers have begun to sell consumer information to individual buyers looking to track the activities of romantic interests, professional contacts, and other people of interest. The types of data available for consumer purchase seem likely to expand over the next few years. This trend invites the emergence of a new type of privacy harm, “relational control”—the influence that a person can exert on another in their social or professional networks using covertly acquired private information.
U.S. privacy laws do not protect consumers from the possibility of relational control. Moreover, few scholars have proposed reforms broad enough to address this problem. This Note surveys two frameworks which provide at least a starting point, and considers several other doctrinal shifts that might limit consumer vulnerability.