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April 2014 Archives


Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

For much of the 20th century, the steady growth of the administrative state led to increased calls for the codification of a legal and regulatory framework through which people and industries could be provided a degree of certainty in the course of their day-to-day activities. In the past few years, the scope of change in this field has accelerated, with executive aggrandizement at the center of the discussion. From a constitutional standpoint, the ongoing question remains to what extent the executive branch can increase its power while remaining within the strictures of the separation of powers.

To that end, the Supreme Court recently held 6-2 in Environmental Protection Agency v. EME Homer City Generation, L.P. that the EPA's Cross-State Pollution Rule as interpreted was valid, overturning the D.C. Court of Appeals.

Legally speaking, the reach of the EPA under the Rule turned on the meaning of the phrase "contribute significantly." Section 110(a)(2)(D)(i)(I), dubbed the "good neighbor" provision, says that states must prohibit emissions in amounts that "contribute significantly to nonattainment, or interfere with maintenance by, any other State with respect to any such national primary or secondary ambient air quality standard."

The EPA claimed that, because the statute was ambiguous as to what factors could be used to determine what constitutes "significant," the EPA should have the right to fill the gap with their own cost-benefit analysis; specifically, they wished to use the nature of the technology a given state employed to determine whether the state is meeting its obligations under the good neighbor provision. For example, if a state was using EPA-approved technology to mitigate its pollution, it would be more likely to be deemed to be complying with the good neighbor provision.

The petitioners, which included states and some private companies, claimed that "significant" could not be interpreted this way, because the Clean Air Act only mandates that emissions are to not interfere with other states, and says nothing about the means used to achieve that goal. Therefore, the Rule allowing the EPA to factor in the technological means of emissions reduction would stretch agency authority in violation of the language of the statute.

From a policy perspective, the Court siding with the EPA on a statutory vagueness issue portends other potentially nefarious applications of agency aggrandizement. As the Wall Street Journal notes, the case deals with a novel approach to administrative regulation:

No one disputes the EPA's authority to regulate air pollution across state lines, but for the first time the EPA imposed its standards without giving states a chance to offer their own plans. Also for the first time, the agency imposed a uniform compliance standard regardless of an individual state's contribution to cross-state pollution. This is aimed at Texas and other states that have large coal-fired electric plants and forces higher reductions in emissions than states might otherwise have to implement. It is part of the Administration's agenda of imposing via regulation what it can't get through Congress, even a Democratic Senate.

By favoring certain types of emissions-prevention technologies, the EPA would be able to impose politically-favored regulations on the states in circumvention of individual state legislatures and principles of federalism, all under the guise of an "ambiguity" in a statute when the agency does not agree with the statutorily-stated words. The danger ultimately lies in the precedent being laid out; namely, that an agency is presumptively deemed to be in the best position to resolve statutory ambiguities, and should be allowed to proffer rules to resolve those ambiguities. The safer presumption would lie in placing the benefit of the doubt with the politically-accountable Congress, i.e. assuming that Congress did not include the technology analysis in the statute because it did not wish to do so. Within this approach, Congress could change the statute if it so chose, and the nexus of the policy-making decision would still remain in its rightful place. Moreover, it would prevent agency aggrandizement from potentially spreading to other agencies and becoming a systemic problem.

If the country is to retain its constitutional balance, the separation-of-powers doctrine must be respected as a guiding force, even in the midst of the changing needs and obligations of a modern government.

Regulation by Guidance
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In an opinion this week, United States District Court Judge Ronnie Abrams dismissed a complaint filed against the Federal Reserve Bank of New York (FRBNY) by a fired employee. The case turned, in part, on whether a Fed advisory letter is "a law or regulation," which would trigger the application of whistleblower protection. The employee--a FRBNY bank examiner--alleged that she lost her job in retaliation for refusing to change an exam report finding of noncompliance with SR-08-08, Fed guidance related to compliance risk management programs. The Fed, citing as authority a paper drafted by international banking regulators, issued SR-08-08 to clarify its views on compliance for large, complex banks. In its defense in this case, the FRBNY pointed out that SR-08-08 was not promulgated through a notice-and-comment process or published in the Code of Federal Regulations, two hallmarks of a binding regulation. The court agreed that "SR-08-08 is an advisory letter that does not carry the force of law."

While the court's view that the document is not legally binding on banks is correct as a matter of administrative law, the former employee also appears to be correct that the Fed acts as if SR-08-08 is binding. As the plaintiff noted, the Fed routinely includes compliance with SR-08-08 as a condition in settled enforcement actions. The settlements refer to SR-08-08 as "guidance," but nevertheless compel compliance with that guidance. SR-08-08 is full of directives to large banks, including some very specific ones, such as a requirement that compliance risk management programs be documented and specific board obligations. What will Fed examiners say when banks, armed with the FRBNY's defense in this case, argue that they do not have to set up compliance programs that conform to a mere guidance document?

Lyft v. Saint Louis
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Robert Panzenbeck
Legal Intern, Manhattan Institute Center for Legal Policy

On Monday, a Saint Louis Judge issued an injunction meant to stop the nationally popular Lyft ride share app from operating in the city and the county. The injunction came down two days after Lyft launched in Saint Louis, disregarding a cease and desist order from the Metropolitan Taxi Commission. On Friday, local police, in conjunction with MTC officers, issued summons and restraining orders to Lyft drivers, who were easily identified due to the conspicuous pink mustaches that adorn the front of their vehicles. Along with tickets, Lyft drivers were also given a list of licensed cab companies that were hiring.

Saint Louis is not the first city to confront ride share programs. Across the nation, regulators have expressed near unanimous concern that the growth of ride share programs might create a wild west scenario, where unknown, underinsured drivers flood the market, creating a public danger. Local governments, to be sure, have a vested interest in regulating the quantity and quality of drivers. Rideshare programs have often exacerbated the situation by refusing to play ball.

Apart from municipalities, taxi drivers have a bone to pick with ride share programs. In Chicago, cabbies have filed suit against the City for allowing Lyft and Uber to operate outside of the regulatory framework, alleging in their complaint that the states failure to enforce the taxi rules against these entities violates equal protection. The drivers also allege, quite reasonably, that allowing free riders like Uber and Lyft potentially devalues the 6800 cab permits in play in the Chicago market, whose aggregate value is estimated at 2.38 billion dollars. In states like New York, dual taxi medallions recently sold at auction for 2.5 million dollars.

Part of Lyft and similarly situated tech firms failure to comply with existing regulations stems from how these companies views themselves in the marketplace. Lyft maintains that they are not a traditional cab service, but a peer to peer ride sharing service, different from what's offered by a traditional cab. Instead of hailing, Lyft allows users to obtain a "Lyft" by connecting with drivers in the area via a mobile app. Users can track the driver on a map until they arrive; at the end of the ride, rather than charging a fare, Lyft suggests a donation. This is deducted from a credit card, and no cash is exchanged. At the end of the ride, both passenger and driver rate their experience. Riders that "under donate" are flagged by drivers and drivers that offer a low level of customer service will be disconnected from that particular passenger and less likely to pick up fares. Lyft drivers whose rating falls below a certain level are no longer permitted to provide "Lyfts," the equivalent of being fired.

Lyft and other ride share programs are part of what's being dubbed "the sharing economy," where individuals use internet applications like Lyft, Uber, and AirBnB to share excess goods and services. Rather than relying on professional cab drivers, Lyft and other sharing economy applications allow regular users to make optimal use of excess economic resources to serve a community need. In Saint Louis, the average Lyft driver is described as "someone who works during the day and drives at night to pay for beer or cover student loans." Advocates for such companies argue that the use of real time input by users incentivizes rigorous self-regulation, with real time feedback provides data that helps maximize the possibility of providing a positive customer experience. Lyft is a good example. Although it has so far refused to comply with the Saint Louis law that requires drivers to be vetted by the city, Lyft's website details its rigorous driver driver safety standards, including interviews, DMV and Criminal background checks, a zero tolerance drug and alcohol policy, and a robust insurance policy.

Whether or not this sort of self regulation will prove adequate, it's clear that applications like Lyft have been able to recognize what's important to their users, and adjusted their business model accordingly. In the process, they've sparked innovation in formerly stagnant marketplaces, placing regulators and existing firms at a disadvantage. Writing at Forbes about Lyft competitor Uber's struggles with regulators, Larry Downes sums it up rather well:

The benefits of closely overseeing ride services are obvious--or, at least, were obvious when rules went into widespread existence starting in the early 20th century. They include ensuring that drivers and their vehicles are safe and adequately insured, that passengers are charged reasonable and predictable fares, and that limits are placed to protect drivers and riders alike from having so many vehicles for hire on city streets that no traffic can actually move.

The costs of removing competitive pressures from industries are also significant. Chief among them: in the absence of market dynamics, there are few if any incentives to innovate. Why should the driver of my last cab ride spruce up his vehicle, when every taxi at the cab stand charges the same fare and goes whenever its turn comes up? When price is controlled and new entrants are prohibited, only a fool would spend money to differentiate their product or service.

Writing at nextSTL, Alex Ihnen notes that although Lyft is not complying with the current regulatory model, it hopes to work with Saint Louis supervisors to shape regulations that it believes are more suitable to its business model. However, Ihnen notes that the MTC has had problems reaching agreements with other ride share programs in the past. Uber departed the marktplace after dubbing the conditions unsuitable to their business model. New York based Carmel is currently the only mobile app driven service operating in compliance with MTC regulations.

One thing is certain: the popularity of these firms will force regulators and market participants to work together to establish a new regulatory framework that can keep pace with these rapidly developing technologies. Janelle Orsi, an Oakland based attorney and director of the Sustainable Economies Law Center, sums up the legal quandary that is the sharing economy quite well. Writing at Post Growth, she notes:

...for now, the sharing economy exists almost entirely in legal grey areas. Zoning, securities, public utilities, health and safety, and employment laws aren't usually barriers to feeding, housing, lending a hand, and giving a ride to our family and friends. But they are barriers when we engage in the same activities as commercial businesses, such as restaurants, hotels, or taxis. Everything happening in the sharing economy lands somewhere on a spectrum between what is regulated and what is not. I love that about the sharing economy. The fact that it defies legal classification is proof that the sharing economy is new and different

Earlier this week, the Court of Appeals for the D.C. Circuit issued its much awaited opinion regarding the Securities and Exchange Commission's conflict minerals rule. The court ruled in the SEC's favor with respect to the challengers' Administrative Procedure Act and economic analysis claims and in the challengers' favor on their constitutional claim. The claim on which the challengers prevailed has attracted the most attention, but other parts of the opinion could also have important effects.


The Federal Deposit Insurance Corporation has produced valuable research on community banks, but more research is needed to address an issue of great concern for small banks--growing regulatory burdens. At the end of 2012, the FDIC released a helpful community banking study that explored the characteristics and practices of community banks. And yesterday, the agency issued a report on community bank charter attrition, which offers valuable insights into the nature and drivers of bank consolidation. The message of the most recent report is clear--despite years of consolidation activity, community banks are here to stay. That is good news, because the diversity of the U.S. financial system--including its large number of community banks--is critical to its ability to serve the nation's diverse financial needs. The study's optimistic assessment of the future, however, largely ignores one key issue--the effects of regulatory burdens on small banks.



by Jarrett Dieterle, former legal intern at Manhattan Institute's Center for Legal Policy, and author of The Lacey Act: A Case Study in the Mechanics of Overcriminalization published in the Georgetown Law Journal

What if I told you that the U.S. Department of Justice could prosecute a renowned American company for exporting wood in violation of a foreign country's laws? To many Americans, such a tale would be unbelievable. How, they might ask, could violating a foreign law make one susceptible to a felony conviction in the United States?

The answer is the Lacey Act, which was the proximate cause of the now-famous Gibson Guitar raid that occurred in the summer of 2011 (when the company was accused of exporting wood for its guitars in violation of the laws of India). Under the Lacey Act, it is illegal to "import, export, transport, sell, receive, acquire, or purchase" any plant or type of wildlife that was "taken, possessed, transported, or sold" in violation of a foreign or domestic law. Penalties for violating the Lacey Act can lead to draconian punishments--including felony convictions, jail time, large fines, and asset forfeiture.

Legal scholars like Paul Larkin of the Heritage Foundation have long highlighted the Lacey Act as an example of the concept of "overcriminalization" (a topic well-covered on Point of Law, as well). Overcriminalization means criminalizing conduct that most people do not view as inherently criminal or blameworthy. Although the Lacey Act's present day form has been extensively analyzed, little has been written about the Lacey Act's long and tortured history. In other words, we know a lot about why the Lacey Act criminalizes conduct that is often innocuous, but we know much less about how the law evolved to become a poster child for overcriminalization.

With this in mind, I decided to retrace the history of the Lacey Act and explore how the Act has changed over time. The result of this effort was recently published in the Georgetown Law Journal, and it turned up some fascinating trends about how overcriminalization occurs in modern, democratic societies.


Today, the momentum is growing for fundamentally restructuring the national residential mortgage market in the wake of the earlier collapse of the Federal National Mortgage Association (FNMA, or "Fannie Mae") and Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac). These two government-sponsored enterprises (GSEs)--so-called in recognition of their hybrid public/private nature--have long written large chunks of the residential home mortgage market, to the tune of trillions of dollars. The current legislative fixes now on the table include a bipartisan proposal from Tim Johnson and Mike Crapo, coupled with an earlier entry by Maxine Waters. The Johnson-Crapo proposal follows on earlier entries from Jeb Hensarling on the House side and Bob Corker on the Senate side. Each of these proposals seeks simultaneously to unwind the past and to redefine the future. To evaluate them requires understanding the historical linkage between past events and future prospects.

To begin, some background. In response to the brewing subprime mortgage crisis in 2008, Congress in late July of that year passed the Housing and Economic Recovery Act (HERA). That legislation, inter alia, created a new Federal Housing Finance Agency (FHFA), which on September 7, 2008 placed into a conservatorship both GSEs. These conservatorships were intended to keep both entities alive in order to facilitate their return to the private market. They were not receiverships whose object is the orderly liquidation of the two businesses. The basic plan called for an infusion of up to $200 billion in fresh cash into Fannie Mae and Freddie Mac under a Senior Preferred Stock Purchase Agreement (SPSPA) that gave the government warrants, exercisable at a nominal price, to acquire a 79.9 percent ownership stake in each enterprise. In exchange for that advance the senior preferred stock carried a 10 percent annual dividend payment, which went up to 12 percent if the GSEs delayed their dividend payments on the senior preferred.

The terms of that deal were radically altered in August 2012, when the United States, acting through the Treasury Department, imposed, through the Third Amendment to the 2008 SPSPA, a "net worth sweep" that entitled the government to 100 percent dividends on future earnings. That one bold stroke effectively made it impossible for the GSEs to repay their loans and rebuild their capital stock. Both the junior preferred stockholders and the common shareholders could under this agreement never receive a dime from either GSE, even after the entities returned to profitability. Assessing this gambit requires understanding two things: first, the relationship between the Third Amendment and the original 2008 SPSPA; and second, the relationship between the Third Amendment and efforts to revitalize the housing market. Both relationships are widely misunderstood today.


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Regulators on the Beat
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Mark Cuban and his attorney wrote a piece in the Wall Street Journal today that is worth reading. Cuban successfully beat back insider trading charges by the Securities and Exchange Commission. To do so, he took the relatively unusual step of going to trial instead of settling with the SEC. Defending oneself against an SEC enforcement action is costly financially, but can also take a toll on one's mental and physical health, family life, and career. For that reason, many people choose--regardless of the validity of the SEC's allegations--simply to settle and move on with life as best they can. Cuban maintains that the SEC should operate under a rule currently applicable in the criminal context that requires the government to turn over to the defense material exculpatory evidence. Cuban's commentary raises broader questions about regulatory agencies' enforcement programs.

 

 


Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.