More on Dabit and federalism

Ted Frank disagrees with my comments about federalism in my previous post. Much as Ted and I agree on most issues, and much as I sympathize with the points he makes here, I think it's worth one more post to elaborate our disagreement.

Ted says that “it stands federalism on its head to say that an elected Madison County judge (or even Attorney General Spitzer) gets to dictate a nationwide regulation of securities law. SLUSA, and the Court's interpretation of SLUSA, is not inconsistent with federalism.”

I agree that the federal government ought to rein in state abuses, including the ones Ted mentions. That’s why we have the Commerce Clause. I’m not against the general principles underlying SLUSA. The question is where to draw the line. On the specific issue in Dabit, the Court may have correctly interpreted where Congress drew the line. And barring holders from state court may have been the right thing to do. But I would have preferred that Congress have given more leeway to the states to regulate securities fraud through their corporation laws, which is not subject to the sort of abuses that gave rise to SLUSA. In other words, like the states, the feds can go too far.

Ted also criticizes my suggestion that Dabit might come back to haunt us in the first SOX suit to reach the Court. He says that "not even the Free Enterprise Fund is suggesting that the Supreme Court should be striking down Sarbanes-Oxley because it violates the federalist structure of the Constitution."

True. But the Court’s view of the role and function securities laws nevertheless may affect the result. In SEC v. Wall Street Publishing Institute, 851 F.2d 365 (1988) the DC Circuit held that the First Amendment did not prevent the SEC from enjoining the publication of monthly magazines by an investment adviser. The court reasoned in part (at 373) that regulation in an area of extensive federal control should be sustained even without weighing its merits.

In a close case, which the FEF's PCAOB suit would be, I would not be surprised if the Court’s view of the importance of federal securities regulation influenced the result, just as I believe this view influenced the result in Dabit, even if it was technically irrelevant to the (in my view close) statutory interpretation issue.

Update:  Steve Bainbridge has a good summary of the Dabit posts and discussion of the federalism issue.  As I'm struggling with a slow internet connection, I'll just refer everybody over there for the links.