In my first piece that I wrote, almost one year ago, I opened with a quote from Warren Buffett: “If a cop follows you for 500 miles, you’re going to get a ticket.” We saw this happen once again recently with one of the largest financial services companies in the world: Charles Schwab.
The SEC accused Schwab of not disclosing hidden fees and of allocating funds in a sub-optimal fashion, via its robo-advisory service. Schwab, according to their press release, “neither admits nor denies the allegations” and agreed to settle for $187 million because this decision is “in the best interest of our clients, company and stockholders.”
In short, Charles Schwab, a company with an excess of $8 trillion in assets under management, decided to accept a nearly $200 million fine because they felt that was the better business decision. This, of course, aligns with the finding stated on FinanceFeeds.com that 96 percent of all SEC cases are settled before trial. If a global giant like Schwab believes that it makes more financial sense to settle with the SEC, what hope do smaller firms have?
One such smaller entity that did decide to fight back is George Jarkesy. Jarkesy was accused by the SEC of, among other things, overestimating the value of his hedge fund assets (approximately $24 million). After nearly 10 years of fighting against the SEC’s in-house judge, the Commission imposed a fine of $300,000 in civil penalties and $685,000 in disgorgement.
Jarkesy appealed to the Fifth Circuit Court of Appeals, claiming that the SEC violated his Seventh Amendment right to a trial by jury, and the Court agreed. The Fifth Circuit called upon a seldom-used legal theory known as nondelegation doctrine. Nondelegation doctrine states that Congress cannot delegate its legislative powers to other entities without an “intelligible principle” on which to base their regulations.
While the SEC may or may not have a compelling case against Jarkesy, the power that the Commission has is simply un-American. What makes our country so unique and wonderful is our system of checks and balances. In some parts of the world, the government can simply decide that you are guilty, but our founding fathers had the foresight to separate power to our three different branches: executive power to the President, legislative power to Congress, and judicial power to the federal courts.
It is the slow dissolution of this separation of power that has essentially established the SEC as an overreaching, draconian system. The Fifth Circuit decided that allowing the SEC to decide when to use their own in-house administrative law judges (ALJs) amounts to delegation of the legislative power vested to Congress.
Additionally, the Court also observed that these ALJs have the ability to exercise executive power – that is, they do not pass or interpret laws, but they do have the ability to enforce them as written. Per Article II of the Constitution, the President has the authority to remove officers in the executive branch. SEC ALJs, however, may only be removed for good cause via a Merits System Protection Board meeting. The Fifth Circuit ruled that this insulation of ALJs was unconstitutional.
I started writing this series to help shed some light on the different issues created by the regulatory agencies here in the United States, specifically the SEC. I believe that the SEC is, at its heart, an organization designed to aid and protect those of us who work in the financial sector and our investors, but, as it stands now, it is little more than a tyrannical, hypocritical system that seems to only make decisions based on its own self-interest.
As always, I welcome your thoughts. What do you think of the SEC and its separation –or non-separation—of powers? Please email me at Publius.Connect@gmail.com and let me know. Together, we can work to restore the SEC and other overreaching regulatory systems to a true, fair and equal design.
Editor’s note: The author of the preceding article is a chief executive officer in the financial services industry, who, for fairly obvious reasons, elects to share his thoughts on this subject anonymously. The DI Wire does not normally publish articles that do not disclose the author. In this instance, however, we have allowed it given the nature of the piece, the importance of open discussion and varying viewpoints, and the fact that we have personally confirmed Publius’ identity.
The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of The DI Wire.