Secret Laws for the Powerful

The Office of Management and Budget issued a memo recently reminding all federal administrative agencies that “the Constitution vests all Federal legislative power in Congress.” That may seem obvious, but agencies often regulate Americans beyond their lawful authority and without accountability. Our organization—the New Civil Liberties Alliance—has petitioned 18 agencies to adopt a permanent rule prohibiting such unconstitutional regulation.

One agency head, Hester Peirce of the Securities and Exchange Commission, outlined the problem in a bracing speech she delivered days before the OMB statement. She faulted the commission’s staff for abusing tools like “no-action letters” and “guidance” to create “secret law,” free from judicial or legislative review.

No-action letters are meant to clarify to the addressee if its behavior is subject to regulation, but too often agency staff use them to craft law at will. Ms. Peirce noted that when these letters—which are publicly available—are issued in tandem with
nonpublic guidance, all the issuances can start to constitute their own obscure and ever-changing body of law.

No-action letters are drafted by unelected, politically unaccountable agency staff and even on their own can have wide reaching, deleterious impacts. No-action letters issued in 2004 cleared financial corporations of regulatory liability as long as they cast their clients’ shareholder proxy votes on corporate governance issues according to recommendations from purportedly independent, third-party advisers. Those letters helped create a cottage industry in proxy-advisory firms, which themselves had glaring conflicts of interest, exerted undue influence over corporation policies and governance, depressed returns to shareholders and eviscerated informed voting. These letters were withdrawn last fall, but the damage was extensive and long lasting.

Guidance—which refers to a variety of documents that can be issued publicly or privately—can be dangerous on its own. The most notorious example is the Education Department’s 2011 “Dear Colleague” letter, which mandated that universities use a lower burden of proof in sexual-misconduct investigations. Another is the Federal Trade Commission’s use of consent-decree guidance to go after businesses victimized by data-security breaches. Congress has never passed a law to give the FTC this power, and the FTC has never adopted a formal rule outlining data-security duties. Yet for all intents and purposes, the FTC’s consent decrees are binding.

The harder rules are to navigate and understand, the easier it is for staff to expand them lawlessly and capriciously. SEC staff members adjust minimum capital requirements for broker-dealers on an ad hoc, unaccountable basis through phone calls and emails. Bureaucrats even delegate some of their power to private third parties—such as the Financial Industry Regulatory Authority and the Sustainability Accounting Standards Board—that lack any rule- or lawmaking power at all. Regulators have in effect created a market for private lawmaking. With enough money, private citizens can pay a cadre of lawyers to convince agencies and quasi-private regulators like FINRA to establish bespoke regulations that neither Congress nor an agency has formally approved.

This isn’t a government of laws but a body of men making secretive rules for the favored few. “For the sake of integrity,” Ms. Peirce calls for the SEC to examine and reform its practices. Other agencies should follow her advice too.

July 24, 2019

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Originally Published in The Wall Street Journal