Secondary Liability and the Limits of SEC Independence

As the discussion continues about the SEC’s involvement in Charter and Credit Suisse, we thought we would take a few moments and discuss the inter-governmental dynamics involved in the SEC's participation in these cases.  In fact, although an independent agency, the SEC cannot represent itself at the Supreme Court but must go through the Solicitor General's Office.     

Independence when used to describe an administrative agency connotes independence from the President.  In other words, these agencies have some ability to take positions or engage in actions that do not reflect the policies and views of the executive branch. The independence generally arises from restrictions placed on the President’s ability to remove the head of an independent agency (or heads, in the case of a commission). See 4 USC 41 (creating the Federal Trade Commission and providing that “Any commissioner may be removed by the President for inefficiency, neglect of duty, or malfeasance in office.”). This means that, unlike other executive branch agencies, those running independent agencies know that the President cannot fire them over policy disputes.  This provides greater independence in making policy determinations.   

The Securities and Exchange Commission is headed by a five person commission, no more than three of which can be from the same political party. See 15 USC 78d(a). The Exchange Act provides for five year terms and otherwise provides no explicit right of the President to remove commissioners, even for neglect or malfeasance. See SEC v. Warner, 652 F. Supp. 647, 649 (SD Fla 1987)(“ Although the statute establishing the Commission is silent regarding the removal of Commissioners, members of independent agencies such as the SEC are generally removable by Congress only for impeachable offenses.”).

When it comes to litigation, the SEC has the authority to litigate its own cases, including appeals. Thus, a decision to participate as amicus in a case at the US court of appeals is something the SEC decides on its own, without any obligatory consultation with the Justice Department. This is what occurred in connection with the amicus brief filed in Simpson when it was before the Ninth Circuit.

With respect to litigation at the Supreme Court, however, the rules are different. In most instances, agencies do not have the authority to represent themselves before the Supreme Court. The general rule is that all litigation involving the US government at the Supreme Court is handled by the Solicitor General’s Office within the Department of Justice. The practices are not, however, uniform.  The Federal Trade Commission, for example, may represent itself at the Supreme Court when the Solicitor General otherwise refuses to do so. See 15 USCS § 56.  The Commission, however, has no such authority and may not, without approval, litigate before the Supreme Court.

Thus, to get its views before the Court, the SEC must convince the Solicitor General’s Office to file the certiorari petition or amicus brief. This is what is going on with respect to participation in Charter and Credit Suisse. In both instances, the Commission must determine its own position then try to convince the Solicitor General to represent those views to the Supreme Court. And, despite some history of independence, the Solicitor General is likely to watch out for the interests of the President.

The result is that the Solicitor General can refuse to promote the views of the Commission.  In some instances, this has forced the Commission to water down its views in order to get the consent of the Solicitor General.  This occurred, for example, in CTS v. Dynamics, where the Commission had to give up on its argument that the Indiana control share acquisition statute was preempted by the Williams Act (the brief specifically stated that the United States did not believe that the Williams Act preempted the statute).  A copy of the brief is at the DU Corporate Governance web site.  Finally, in rare circumstances, the Solicitor General has given the SEC permission to file its own brief where the differences were too great. This apparently occurred in Dirks v. SEC.

It is, therefore, only the first hurdle to get agreement from the five person commission on the litigation position of the SEC.  The second is to get agreement from the Department of Justice.  Now that the Commission has apparently resolved the former issue, it is the latter where all attention will focus. 

Comments

[Sam]

Hi, Interesting and informative post. I would like to link to it in my blog at : http://governancewatch.blogspot.com.

[J. Robert Brown]

Sam:

Feel free to link. We'd be happy to add you to our list of blogs if you would do the same.

Thanks

Jay

[Sam]

Will do - thanks.