On Monday, October 4, 2021, the Supreme Court embarked on what the New York Times has called a “momentous” new term.  In part that’s because the Court has agreed to hear a number of cases that will have an unusually profound impact on controversial social policies, including abortion and gun rights.  But the Court’s docket is also significant because, as always, it includes cases addressing profoundly important financial and economic issues, those that directly affect the ability of every American to earn, save, invest, and spend their money without being victimized by predatory businesses and financial firms.  These are, in short, the cases that help determine how well Americans can meet their basic life needs, establish and maintain a decent standard of living, and pursue the American Dream.

That’s why, in October, we released another in a series of reports focusing on the Court’s financial docket.  We review the key decisions from the prior term involving protections for consumers and investors and we look ahead to the financial cases slated for this term. We also examine the track record of Justice Kavanaugh during his three years on the bench. Finally, we provide an update on the transparency challenges facing the Court in its handling of important cases on the shadow docket. Here’s a sampling of our review.

Last Term.  During the 2020-21 term, the Court delivered a number of blows against consumers and investors in the areas of financial regulation, administrative law, and standing. For example, the Court—

• took a very effective enforcement tool—disgorgement or restitution—out of the hands of the Federal Trade Commission, reducing the likelihood of recovery for victims of fraud (AMG Capital Management, LLC v. FTC);
• opened the door for banks and other financial firms to argue that their fraudulent statements were too “generic” to have mattered to investors (Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System);
• held that even where Congress has expressly created a private right to sue for statutory violations, plaintiffs must still separately satisfy the standing requirements to a court’s satisfaction, thwarting Congress’s intent to facilitate private enforcement of the law (TransUnion LLC v. Ramirez).

What Lies Ahead.  This term, the Court will decide whether a whistleblower who got nothing from an arbitration panel can challenge that decision in a state court; whether the Justices will show deference to an agency’s reading of the law or mount a fresh assault on the administrative framework we rely on for protection against a wide range of threats to the public interest, from financial fraud to pollution; and whether retirement savers will have their day in court against a retirement plan fiduciary who offered a vast and confusing array of investment options including overpriced and underperforming funds.  The Court is also being asked to decide a long list of issues surrounding mandatory arbitration, the biased and secretive dispute resolution process foisted on almost all consumers and investors regardless of how badly they have been ripped off by a bank, broker, or payday lender.

Justice Kavanaugh.  Our review of Justice Kavanaugh’s track record yields unsurprising results.  In 2018, when Justice Kavanaugh was awaiting confirmation to the Supreme Court, Better Markets issued a report indicating he would be a pro-business Justice who would leave investors and consumers more vulnerable to fraudulent, predatory, and anti-competitive practices perpetrated by financial firms.  His voting record on the Court confirms these fears:  He favors limiting the independence of regulatory agencies, weakening agencies’ enforcement tools, forcing consumers into mandatory arbitration, and shutting off access to the federal courts with restrictive standing requirements.

Transparency Challenges.  Finally, we briefly examine the intensifying controversy surrounding the lack of transparency in the Court’s handling of critically important cases on the “shadow docket.”  Those decisions are issued on a rushed basis, without full briefing and oral argument, and with minimal explanations of the basis for the decisions. This approach to judicial decision-making is problematic on multiple levels.  It inevitably leads to poorer quality outcomes, given the haste and lack of full briefing and argumentation on the issues presented.  More broadly, it erodes the legitimacy of the Court as an institution worthy of the public’s trust.

Cases of Interest in the Federal Courts

We continue to track a number of cases pending in the federal courts that involve key issues in the areas of financial regulation, administrative law, and standing, all of which will affect the financial lives of anyone with a wallet, bank account, credit card, mortgage, car loan, or student loan.

• A lawsuit (The Doris Behr Irrevocable Trust v. Johnson & Johnson) attempting to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.
  • Why it matters? Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in open court before unbiased judges when they are ripped off by banks and corporations. These typically fine-print clauses force defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization (SRO) which, no surprise, consistently favors the industry. Investors and consumers rarely obtain meaningful recovery.

In this case, a federal court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement, or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, incentivizing lawbreaking by limiting the legal rights of investors to stop it.

Given that shareholders are the owners of public companies and they rely on legal actions as one important way to protect their investments and police management, such a decision could have a significant and adverse impact on capital formation and allocation.

• • Status.  In a positive development on June 30, 2021, the court granted defendant Johnson & Johnson’s motion to dismiss. However, it also granted the plaintiff “one final opportunity to file an amended complaint.”  The third amended complaint and Johnson & Johnson’s motion to dismiss it are now before the court, which is expected to decide the matter soon.
• A lawsuit (National Association for Latino Community Builders v. CFPB) challenging the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the predatory financial firm doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with exorbitant fees and sky-high interest rates, what we call a “debtor’s prison without walls.” (See Dennis’s op-ed on this issue for The Hill).
  • Why it matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.

Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.

• • Status.  Earlier this year, the CFPB moved to dismiss the action based on the claim that the plaintiff, a nonprofit membership association of organizations that serve Latino communities, has no “standing.”  The agency is arguing that neither the plaintiff nor its member organizations face the type of concrete injury from the rule that would entitle them to bring their case in federal court.  The doctrine of standing once again figures prominently in an important case, potentially preventing the plaintiff’s claims from being heard on the merits.  The briefing is complete and we await the court’s decision on the threshold standing issue.
• A lawsuit (Hughes v. Northwestern University) seeking to hold retirement plan administrators accountable in court for allowing clearly inferior investment options to remain on a retirement plan menu.
  • Why it matters. The U.S. Supreme Court has an opportunity to improve the lives of countless retirement savers by giving them a chance to hold those who administer retirement plans accountable when they breach their fiduciary duties.  That’s what’s at stake in the Hughes case, which the Court will decide this coming term.  It’s all the more important as the retirement crisis in this country intensifies and Americans increasingly rely on prudent administration of their 401(k)’s to close the gap between their savings and what they’ll need once they reach retirement.

Hughes and the other plaintiffs allege that they suffered losses because their retirement plan administrators failed to remove investment options with bloated fees and poor performance.  That was a breach of the administrator’s duty to monitor plan investments and remove the imprudent ones.  The district court and the Seventh Circuit tossed the plaintiffs out of court, holding in part that the plan fiduciaries were absolved because the plan included at least some prudent investment options among the bewildering array of some 200 available choices.  That holding is doubly flawed.  It not only conflicts with precedent but also ignores the practical challenges that most workers face when trying to choose among a vast collection of investment options offered by their retirement plan.

We joined AARP and other organizations in an amicus brief urging the Supreme Court to reverse the lower court’s decision, restore the plaintiffs’ claims, and give them a chance to prove their case at trial.  As we argued, the decision below misinterprets the duty to monitor investments and applies an unfair and overly stringent pleading standard.  It also undermines Congress’s core objective in the applicable statute, ERISA, which was to protect retirement plan participants from abuses by plan fiduciaries. Unless the Supreme Court reverses the Seventh Circuit, private enforcement of the law will suffer a major blow, weakening deterrence and exposing retirement savers to a heightened risk of unrecoverable loss when plan administrators fail to discharge their responsibilities.

• • Status. The case is now fully briefed and oral argument is set for December 6, 2021.
• An industry challenge (Citadel Securities LLC v. SEC) to the SEC’s approval of a new type of trading order that helps protect investors from predatory trading activity by sophisticated high frequency trading firms.
  • Why it matters. The outcome of this case will have a huge impact on the ability of everyday investors to protect their money from being siphoned away by high frequency trading (HFT) firms like Citadel. That’s why we weighed in to help defend a new order type developed by IEX, an investor-friendly exchange that has earned our praise since it was founded in 2016. The SEC rightly approved that order type late last year, but Citadel is fighting to protect its ability to generate near-certain profits—to print money in effect—through privileged data access and sophisticated trading technology.  It has asked the D.C. Circuit to invalidate the SEC’s approval of the IEX order.

HFTs spend enormous sums of money to get a sneak peek at trading activity on the exchanges before the public sees it, and they buy high-speed computer programs capable of acting on that information in microseconds. As retail investors and millions of Americans planning for retirement place their orders, HFT firms can snap them up and skim off near-certain profits because they know where the market is about to head—up or down.

It’s not just fundamentally unfair, it’s also a plague on our markets. This sort of HFT activity not only bleeds investors, it but also drives away large institutional investors. They are the lifeblood of our markets, yet because of HFTs’ predatory behavior, they are increasingly turning to alternative trading venues that are safer for them but much less transparent and less regulated than the exchanges. That means less liquidity, transparency, and price discovery on the exchanges, which in turn hurts the market in the long term.

In our brief, we explained the advantages HFTs enjoy and the harm they inflict on investors.  We also showed how the D-Limit Order, which automatically resets its price when HFTs are about to strike, helps neutralize the HFTs’ unfair advantage. Fortunately for investors, the SEC’s mission is to protect investors and the integrity of the markets, not Citadel’s coveted business model, so it approved the IEX order type in accordance with the securities laws and all the requirements surrounding rulemaking. We urged the Court to affirm the SEC’s decision.

• • Status.  The case is set for oral argument before the D.C. Circuit on October 25, 2021.
• A challenge (Alliance for Fair Board Recruitment v. SEC) to the SEC’s approval of a new rule issued by the NASDAQ that would help advance the cause of racial justice.
  • Why it matters. Huge societal challenges such as climate change and racial injustice are rightly receiving increasing attention among policymakers, major media outlets, and members of the public.  Those engaged in the financial services industry, including the financial market regulators like the SEC and members of the industry like NASDAQ, have key roles to play in solving those problems.  Often the first step toward meaningful change on such challenges is public transparency.

 The NASDAQ, a major national stock exchange that lists over 3,000 company stocks, recently took a major step forward on the racial injustice front by issuing a new rule that would require each company listed on the exchange to publicly disclose the self-identified gender, racial, and LGBTQ+ status of each member of the company’s board of directors.  The rule also requires each listed company to have, or explain why it does not have, at least two members of its board who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+.

The SEC approved the rule in August and the petitioner, the “Alliance for Fair Board Recruitment,” promptly challenged it in the U.S. Court of Appeals for the Fifth Circuit. The Alliance is based in Texas yet shrouded in mystery, as its website simply declares that its mission is to “promote the recruitment of corporate board members without regard to race, ethnicity, sex and sexual identity” and further that “The identities of our members are confidential.”  Their decision to seek review of the NASDAQ diversity disclosure rule in the Fifth Circuit was clearly a strategic choice because that federal appellate court is widely regarded as ideologically conservative and pro-business.  A victory in the case by the Alliance will invalidate an important measure that provides key insights into the composition of thousands of boards of directors, information that would undoubtedly and ultimately lead to greater diversity in America’s board rooms and progress toward bringing minorities into the economic mainstream.

• • Status.  Briefing in the case is just getting underway so the basis for the petitioner’s legal challenge is not yet clear.  Based on the Alliance’s comment letter on the rule previously submitted to the SEC, they apparently will contend that the rule exceeds the SEC’s authority, violates the Constitutional prohibitions against compelled speech and discrimination based on race and gender, and conflicts with evidence supposedly showing that stock returns suffer when firms are pressured to diversify their boards—a claim that  runs counter to studies that actually correlate improved corporate performance with diverse boards.