U.S. appeals court hears arguments weighing on Wall Street policing

A U.S. appeals court panel questioned government lawyers at length on Wednesday in oral arguments on whether or not the Securities and Exchange Commission’s hiring of administrative law judges for in-house proceedings violated the Constitution.

The case, and one about hiring practice at another regulator, the Consumer Financial Protection Bureau that is being heard by the same court on Wednesday, could have major ramifications for the policing of Wall Street.

The future structure of the bureau, which was created by the 2010 Dodd-Frank Wall Street reform law to protect consumers from predatory lending, hangs in the balance in the U.S. District Court of Appeals for the District of Columbia Circuit.

The judges will reconsider a prior ruling which found that the powers of Richard Cordray, the agency’s director, were unconstitutional because he can only be fired by the president for cause, and not at will.

No decisions were expected on the day and rulings in appeals court hearings typically take weeks or even months to be published.

The two court challenges have already emboldened some financial firms to push back against the CFPB and the SEC when they have accused them of wrongdoing and the outcome of the cases could provide ammunition to critics of both agencies.

Many Republicans have accused the CFPB of overstepping its powers and called for legislation that would make it more accountable to Congress. Their attacks on the bureau have intensified since the election of Donald Trump as president. Trump’s administration has said it wants the ability to dismiss Cordray for any reason and put its budget under congressional control.

Both cases could eventually land in the U.S. Supreme Court, especially the SEC’s case which has already generated a split between the Washington, D.C. appeals court and the Tenth Circuit Court of Appeals, which ruled that the SEC had violated the Constitution.

The SEC earlier this week suspended all pending in-house cases in which defendants may appeal before the Tenth Circuit, amid the legal limbo surrounding the issue.


At the crux of the CFPB case is whether the director wields too much power without accountability to the president, in violation of the Constitution’s separation of powers provision.

The case was brought by PHH Corporation (N:PHH), a mortgage company that was sued by the CFPB in 2014 with allegations of illegal kickbacks. The company won a victory in October 2016, when a three-judge panel threw out the CFPB’s $109 million penalty against PHH Corp on the grounds the bureau’s structure was unconstitutional.

The CFPB appealed, and its own attorneys will represent the bureau in Wednesday’s arguments. With the election of Trump in November, the White House has since switched sides and now supports the CFPB’s opponent.

It is unclear what the Trump administration will do if the CFPB prevails in its appeal.

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