Securities Law and the New Deal Justices

Abstract

Taming the power of Wall Street was a principal campaign theme for Franklin Delano Roosevelt in the 1932 election. Roosevelt's election bore fruit in the Securities Act of 1933, which regulated the public offering of securities, the Securities Exchange Act of 1934, which regulated stock markets and the securities traded in those markets, and the Public Utility Holding Company Act of 1935 (PUHCA), which legislated a wholesale reorganization of the utility industry. The reform effort was spearheaded by the newly created Securities and Exchange Commission, part of the new wave of experts brought to Washington to rein in business. PUHCA also marked the federal government's first significant incursion into corporate governance, with a corresponding reduction in the traditional role of investment bankers. The SEC's ascendance over the investment bankers was reinforced during FDR's second term by the Chandler Act of 1938, which provided the agency with a broad role in the bankruptcy reorganization of troubled companies.

Enacting those statutes was only the beginning, as the scope and effectiveness of the SEC's regulatory efforts depended critically on navigating these new statutes past an initially hostile Supreme Court. After substantial delay in the lower courts, the securities statutes eventually got a friendly hearing in the Supreme Court, where a number of Justices came to the Court after serving as the "Founding Fathers" of the federal securities laws. Roosevelt's Supreme Court nominees were involved in drafting the new legislation, securing its passage in Congress and implementing a litigation strategy that successfully stalled final determination of the constitutionality of the securities laws until New Deal appointed justices were in place. Felix Frankfurter played an important role in shaping the Securities Act and PUHCA, and was a key advisor on litigation strategy to the Roosevelt administration. Hugo Black led the legislative battle to enact PUHCA against the utility companies. Stanley Reed and Robert Jackson were key courtroom advocates arguing PUHCA's constitutionality. William O. Douglas headed the study of Protective Committees that led to the Chandler Act and was Chairman of the SEC.

In this article, we explore the role of the New Deal justices in enacting the securities laws, litigating the challenges brought against them and then interpreting these laws in securities cases before the Supreme Court. We show the important role that these New Deal justices played in ensuring a broad scope for the federal securities laws through generous interpretation. Once constitutional questions had faded, securities cases proved to be a critical testing ground for newly emerging theories of administrative law. We demonstrate the split over the importance of judicial review versus deference to the rule of experts that emerged among these Roosevelt appointees. Finally, we explore the relative lack of influence of Douglas and Frankfurter in these cases, despite their familiarity and experience with the securities laws.

Keywords: Supreme Court, Securities Act, New Deal justices, bankruptcy reorganization

JEL Classification: K22, K23