While many have discussed the social issues that might arise because of a majority-conservative Supreme Court, one critical consequence of the current Court has been overlooked: the role of the Court in generating or avoiding systemic risk. For some time, systemic financial risk has been regulated by a mix of self-regulatory organizations (SROs), such as the Depository Trust Corporation, and federal regulators such as the Financial Stability Oversight Council (FSOC). However, the Court’s recent jurisprudence now creates real risk that federal courts will declare keystone SROs unconstitutional because they do not fit neatly into an eighteenth-century constitutional framework.
SROs are under-appreciated regulatory entities comprised of industry members regulating their own industries with deferential oversight from federal administrative agencies. While ordinary civics discussions entirely omit SROs, they play critical legal and economic roles and exercise expansive power delegated to them by the federal government. Yet, as nominally private entities, they enforce federal law and their own rules without abiding by the constitutional restrictions imposed on governmental entities, such as providing due process.
This Article makes three contributions to the literatures in financial regulation and constitutional law—disciplines that rarely interact. First, it provides a detailed account of how SROs became functionally integrated into the federal government and serve as federal law enforcement and regulators. Second, it shows how four different constitutional doctrines, now resurging under a majority-conservative Supreme Court, pose existential threats to existing SRO models. Third, this Article explains how Supreme Court decisions declaring SROs unconstitutional or limiting their powers generate systemic risk and may trigger a financial crisis as well as how possible measures can mitigate this risk.