ProfessorBainbridge.com

The SEC and the Election

My latest TCS column opines:

With Bush having won a decisive majority of the popular vote and the GOP having gained seats in both the Senate and House of Representatives, 2005 should be a very good year for the conservative agenda. The markets certainly seem to be in a celebratory mood. As of 10 AM PST on the day after the election, all of the major market indices were up.

"Clearly, we're seeing a Bush victory rally," said Michael Sheldon, chief market strategist at Spencer Clarke. (Link)

But what does this decisive Bush victory mean for regulation of the capital markets? It's hard to say with any confidence, because President Bush did not campaign on issues of corporate governance or securities regulation. If the President is now looking for suggestions, however, here are two top priorities to which he should give prompt attention:

1. Fire Securities and Exchange Commission Chairman William Donaldson. Chairman Donaldson was brought in to pour oil on the troubled waters stirred up by his well-meaning but politically incompetent predecessor Harvey Pitt. Donaldson did that task reasonably well. Although at one point it looked like Enron and the other corporate scandals could dent President Bush's image, Donaldson's tenure at the SEC saw those issues disappear from the front pages.

Yet, even though Donaldson has several years left on his term, it is rumored that he is contemplating stepping down after the election. If so, Bush should encourage him; if not, Bush should give him a shove out the door. Although nominally a Republican, Donaldson has consistently sided with the two Democrats on the Commission rather than fellow Republican Commissioners Atkins and Glassman in a series of highly contentious 3-2 votes, all of which significantly increased the regulatory burden on securities firms and markets.

In particular, Donaldson has let Democrat Commissioner Harvey Goldschmid wield an unusual degree of influence for a minority member. Goldschmid is a very smart guy and a highly experienced securities lawyer and academic, but he is also highly partisan with a strongly pro-regulatory outlook. Goldschmid has been a driving force behind a number of the SEC's most controversial regulatory efforts. The next SEC Chairman must be somebody who can relegate Goldschmid to the usual nonentity status of minority Commissioners.

2. Get a replacement for Donaldson on board in time to block the SEC from adopting its shareholder access proposal. As I've explained in my TCS columns Does the SEC Know When Enough Is Enough?, and The SEC: From Bad to Worse?, this proposal to let selected shareholders nominate directors under certain circumstances is fundamentally inconsistent with both federalism and sound corporate governance.

The federalism implications are particularly significant, because the SEC proposal would mark a substantial intrusion of the federal government into an area of corporate law traditionally reserved for the states. The corporation is a creature of the state, "whose very existence and attributes are a product of state law." States have an interest in overseeing the firms they create. States also have an interest in protecting the shareholders of their corporations. Finally, a state has a legitimate "interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs."[1] In other words, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law.

According to the Supreme Court's decision in CTS Corp. v. Dynamics Corp., the country as a whole benefits from state regulation in this area, as well. As Justice Powell explained in that case, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country."[2] So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead leads to more efficient corporate law rules.

Federal preemption cuts off that process of experimentation. Congress and the SEC rarely revisit their rules, leaving many controversial provisions carved in stone. By blocking the SEC's shareholder access proposal, President Bush would draw a line in the sand in defense of competitive federalism and state rights.

The SEC and the Election

My latest TCS Daily column

With Bush having won a decisive majority of the popular vote and the GOP having gained seats in both the Senate and House of Representatives, 2005 should be a very good year for the conservative agenda. The markets certainly seem to be in a celebratory mood. As of 10 AM PST on the day after the election, all of the major market indices were up.

"Clearly, we're seeing a Bush victory rally," said Michael Sheldon, chief market strategist at Spencer Clarke. (Link)

But what does this decisive Bush victory mean for regulation of the capital markets? It's hard to say with any confidence, because President Bush did not campaign on issues of corporate governance or securities regulation. If the President is now looking for suggestions, however, here are two top priorities to which he should give prompt attention:

1. Fire Securities and Exchange Commission Chairman William Donaldson. Chairman Donaldson was brought in to pour oil on the troubled waters stirred up by his well-meaning but politically incompetent predecessor Harvey Pitt. Donaldson did that task reasonably well. Although at one point it looked like Enron and the other corporate scandals could dent President Bush's image, Donaldson's tenure at the SEC saw those issues disappear from the front pages.

Yet, even though Donaldson has several years left on his term, it is rumored that he is contemplating stepping down after the election. If so, Bush should encourage him; if not, Bush should give him a shove out the door. Although nominally a Republican, Donaldson has consistently sided with the two Democrats on the Commission rather than fellow Republican Commissioners Atkins and Glassman in a series of highly contentious 3-2 votes, all of which significantly increased the regulatory burden on securities firms and markets.

In particular, Donaldson has let Democrat Commissioner Harvey Goldschmid wield an unusual degree of influence for a minority member. Goldschmid is a very smart guy and a highly experienced securities lawyer and academic, but he is also highly partisan with a strongly pro-regulatory outlook. Goldschmid has been a driving force behind a number of the SEC's most controversial regulatory efforts. The next SEC Chairman must be somebody who can relegate Goldschmid to the usual nonentity status of minority Commissioners.

2. Get a replacement for Donaldson on board in time to block the SEC from adopting its shareholder access proposal. As I've explained in my TCS columns Does the SEC Know When Enough Is Enough?, and The SEC: From Bad to Worse?, this proposal to let selected shareholders nominate directors under certain circumstances is fundamentally inconsistent with both federalism and sound corporate governance.

The federalism implications are particularly significant, because the SEC proposal would mark a substantial intrusion of the federal government into an area of corporate law traditionally reserved for the states. The corporation is a creature of the state, "whose very existence and attributes are a product of state law." States have an interest in overseeing the firms they create. States also have an interest in protecting the shareholders of their corporations. Finally, a state has a legitimate "interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs."[1] In other words, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law.

According to the Supreme Court's decision in CTS Corp. v. Dynamics Corp., the country as a whole benefits from state regulation in this area, as well. As Justice Powell explained in that case, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country."[2] So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead leads to more efficient corporate law rules.

Federal preemption cuts off that process of experimentation. Congress and the SEC rarely revisit their rules, leaving many controversial provisions carved in stone. By blocking the SEC's shareholder access proposal, President Bush would draw a line in the sand in defense of competitive federalism and state rights.

 

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[1] CTS Corp. v. Dynamics Corp., 481 U.S. 69, 91 (1987).

[2] New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).

Stopping Specter

If there is the slightest risk that Ar len Specter is going to block conservative court nominees, he must be kept out of the Judiciary Committee chair. Alert reader Bruce Johnson sent me a link to a Redstate post arguing that it is possible to stop Arlen Specter from becoming chair of the Judiciary committee by putting pressure on the appropriate Senators, viz., his fellow Senators on the committee (the ones who by secret ballot "recommend" who should preside), and majority leader Frist.

Granted, Specter claims he was misunderstood and that he'll be a good boy:

Contrary to press accounts, I did not warn the President about anything and was very respectful of his Constitutional authority on the appointment of federal judges.

As the record shows, I have supported every one of President Bush?s nominees in the Judiciary Committee and on the Senate floor. I have never and would never apply any litmus test on the abortion issue and, as the record shows, I have voted to confirm Chief Justice Rehnquist, Justice O?Connor, and Justice Kennedy and led the fight to confirm Justice Thomas. ...

In light of the repeated filibusters by the Democrats in the last Senate session, I am concerned about a potential repetition of such filibusters. I expect to work well with President Bush in the judicial confirmation process in the years ahead.

But why take a chance? Put him on some Committee where he can't do any harm.

The Impact of Affirmative Action on Minority Law Students

Over at the Volokh Conspiracy, Eugene Volokh reports on a Chronicle of Higher Education story on a study conducted by our mutual UCLA law school colleague Richard Sander of the effect affirmative action has on minority law students. As the Chronicle explains, Sander puts forward data tending to show "that ending racial preferences in law-school admissions would increase the number of black lawyers because it would help ensure that students attend law schools where they are more likely to succeed."

I've been hearing a lot of buzz about this article in the law school underground; unfortunately, the usual suspects on both sides seem to be having their usual knee-jerk reactions rather than actually engaging the research on its merits. If you want to judge for yourself, check out Sander's webpage on affirmative action, which states that the article will be uploaded soon and already presents various data sources.

Law and Morality in America

Reflecting on President Bush's victory, libertarian journalist/blogger Megan McArdle wrote:

"The most destructive trend of the last four years has been the left's resort to ever-more-tenuous conspiracy theories to explain their political failures.

"This is certainly not a unique vice of the left. Libertarians have it in spades. I've sat through approximately 8 zillion heated conversations about how the reason libertarians don't have more power is that the electoral system is stacked against us, when it's crystal clear to me that the reason we don't have more power is that a clear majority of Americans don't agree with us. They like middle-class entitlements, drug laws, mortgage tax deductions, farm subsidies, and most of the rest of it. If we want to see our programs enacted, it won't help us to change the system (proportional representation is the usual magic bullet of choice for libertarians) if we don't first change America -- at which point we won't need to change the system."

Did you notice what's missing from McArdle's list of things on which "a clear majority of Americans don't agree" with libertarians?

Values and morals.

According to exit polling data, moral values were ranked by most voters as the most important issue in their decision. Among those voters who did so, over three-quarters reportedly went for Bush.

In 11 states, proposals to ban same sex marriage were on the ballot. Voters passed all 11, most by substantial margins. In contrast, the Libertarian Party "would repeal existing laws and policies intended to condemn, affirm, encourage or deny sexual lifestyles, or any set of attitudes about such lifestyles."

The American people want their laws to reflect their morals and values. Conservatives get that; libertarians don't.

Law consists in the first instance of a set of doctrinal propositions; i.e, the legal rules derived from statutes, judicial precedents, and opinio juris. Legal reasoning is more than the mere identification and manipulation of doctrinal propositions, however, because doctrine itself is inextricably linked with morality and policy. The doctrinal propositions of which law consists thus rest on a tripod whose legs are: moral norms, which characterize conduct as right or wrong; policy, which characterizes states of affairs as good or bad in light of the general welfare of society; and experience, which teaches us the way the world works. Although all three are important, conservatives understand that moral norms have special relevance to evaluating asserted rights, because it is morality itself that shapes our perceptions of what constitutes an injury for which one has a right to redress.

Conservatives thus agree with Edmund Burke's argument that "Man's rights exist only when man obeys God's law," towards which we admittedly grope feebly and imperfectly. Hence, conservatives believe our laws should reflect the moral norms embodied in the natural law.

Most libertarians refuse to accept the proposition that law can and should be based on moral principles derived from natural law. Some of them know that the American people strongly disagree. Knowing that their agenda of radical individual autonomy therefore cannot prevail in democratic processes, they have turned to the courts. Libertarian law professor/blogger Randy Barnett, for example, has argued that:

"Consider the claim that homosexuality is immoral. I strongly disagree. Now what? In a contest between a majority of state legislators and me and those who agree with me, what privileges the legislature's judgment of morality? In what way are they experts? How does being elected to the legislature qualify them to make these judgments? Do they hold hearings on the morality of homosexuality and offer reasons for their conclusions? Or do they just press a button and register their vote? Most importantly, how can we assess the merits of their claim? If we cannot, then in reality they can prohibit whatever they want (and for whatever reason they want). No matter how objective morality may be, any such doctrine of constitutional law is recipe for tyranny."

Hence, Barnett argues, any attempt to codify morality is unconstitutional.

As long as large-L Libertarians refuse to contemplate the prospect that law may reflect any moral norms other than a radical individual autonomy, they will remain a fringe element in American politics. As long as small-l libertarians insist on using the courts to achieve what they cannot obtain through the vote, they will be on the other side of the culture wars from conservatives.