Courts do not look kindly on innovative financial regulatory institutions. In 2010, the Supreme Court struck down a provision providing dual-level for-cause removal protection for members of the Public Company Accounting Oversight Board (PCAOB), reasoning that the measure’s “lack of historical precedent” was “[p]erhaps the most telling indication of [its] severe constitutional problem.” Ten years later, the Court wrote nearly the exact same words to explain its holding that the structure of the Consumer Financial Protection Bureau (CFPB)—a “novel” agency headed by a single director with removal protection—is unconstitutional. This Term, the Court is considering a constitutional challenge to the Federal Housing Finance Agency (FHFA). Given that agency’s similarities with the CFPB, it may see a similar fate. Indeed, the court below declared that the FHFA’s structure “is a new innovation” that “stretches the independent-agency pattern beyond what the Constitution allows.”
The common theme in these decisions is their reliance on antinovelty doctrine. That doctrine presumes that “if … earlier Congresses avoided use of [a] highly attractive power, [one] would have reason to believe that the power was thought not to exist.” Put plainly, if the structure of PCAOB, CFPB, or FHFA were constitutionally valid, then why didn’t Congress think of it sooner? The Supreme Court’s use of antinovelty has accelerated in the past decade. Except for the recently-appointed Justice Amy Coney Barrett, all of the other justices have written or joined at least one opinion endorsing the doctrine.1
In The Contingent Origins of Financial Legislation, we examine seven major financial laws—and find that their origin stories expose antinovelty doctrine as infirm and incoherent.2 Three themes emerge from our historical case studies. First, from the Federal Reserve Act of 1913 to the CARES Act of 2020, financial legislation is often driven by experimentation. Unpredictable events—from crises to scandals, close elections and innovations in the private sector—often provide the spark for new legislation.
Second, after an event, well-placed individuals whom political scientists call policy entrepreneurs build support for major reforms. Some policy entrepreneurs occupy key government positions; for instances, President Franklin Roosevelt, House Banking Committee Chair Henry Steagall (D-AL), and Senator Carter Glass (D-VA) worked closely on the creation of federal deposit insurance in the Banking Act of 1933, often in a tug-of-war for policy control. Other policy entrepreneurs are situated far from the Beltway. In the late 1990s, Travelers Group CEO Sandy Weill pushed Congress to repeal the Glass-Steagall Act to authorize his company’s merger with Citibank to create a multi-line financial services firm. Weill devised a lobbying and PR strategy for repeal and served as a go-between for President Bill Clinton and Senate Banking Committee Chair Phil Gramm (R-TX) during negotiations over a bill that would do just that: the Financial Services Modernization Act of 1999. Ten years later, then-Professor Elizabeth Warren played a similarly entrepreneurial role in CFPB’s creation as part of the Dodd-Frank Act of 2010.
Further, these policy entrepreneurs did not engage in their entrepreneurial activity only before the legislative moment. In these cases, the proposals were not taken in toto “off the shelf,” but began as intellectual currents that were then substantially reshaped through the legislative process itself. Hence deposit insurance originally as funded by the Federal Reserve, the creation of a new regulatory category of “financial holding company” in 1999, and the CFPB bearing little structural relevance to the Financial Product Safety Commission Professor Warren proposed in 2007.
Third, the legislative coalitions that assemble to pass major financial laws often are temporary and brittle. Sometimes, cross-party coalitions of strange bedfellows align to pass these bills, as was the case with the Bank Holding Company Act of 1956. Other bills, most notably the CARES Act of 2020, enjoyed virtually unanimous support during a Congress marked by deep partisan divisions. The common thread is these coalitions are not built to last.
The bottom line from these three themes is that major financial legislation is generated by unpredictability and historical contingencies. Indeed, of the eight significant financial regulators—the Federal Reserve, FDIC, NCUA, OCC, CFPB, FHFA, SEC, and CFTC—six have bespoke structures. For financial regulatory agencies, novelty is the norm.
Thus, when then-Judge Brett Kavanaugh observed that Dodd-Frank’s legislative coalition “apparently stumbled into” a single-director structure for the CFPB, he was describing, in an important sense, the legislative process itself. Accordingly, judicial doctrine that views novelty skeptically places many financial regulatory agencies on shaky ground, rendering their long-term viability uncertain. Moreover, it also interferes with Congress’s ability to address future challenges, as the products of Congress’s institutional design processes will likely continue to be novel and experimental.
In light of our findings concerning the origins of major financial laws, antinovelty doctrine deserves reconsideration. The very novelty of congressional reaction to public policy challenges should be seen as a defining feature of financial lawmaking, not an unconstitutional defect.
Peter Conti-Brown is an Assistant Professor at the Wharton School of the University of Pennsylvania and Nonresident Fellow in Economic Studies at the Brookings Institution
Brian D. Feinstein is an Assistant Professor at the Wharton School of the University of Pennsylvania This post is based on the authors’ article “The Contingent Origins of Financial Legislation,” forthcoming in the Washington University Law Review.
