Regulation by Settlement

Abstract

This article explores a recent development at the intersection of administrative law and financial regulation: the explosion in enforcement actions brought by federal agencies against financial institutions, and the exclusive resolution of those cases via settlement agreements that preclude meaningful judicial review. It argues that those practices have given rise to a distinct new form of policymaking, “regulation by settlement,” which has significant implications for both areas of the law.

Regulation by settlement has two defining features. First, by pursuing settlements that target certain areas of the financial system on a comprehensive basis, agencies are able to leverage those agreements in a manner that effectively establishes novel legal standards of general applicability. Settlements are now a tool for setting policy in financial regulation. Second, the procedural posture of those settlements allows agencies to engage in a uniquely freewheeling style of policymaking, which sidesteps nearly all of the constraints that administrative law applies to more conventional forms of agency action.

The article closes by considering normative issues raised by regulation by settlement, including questions concerning its consistency with rule of law values and efficiency from a cost-benefit perspective. It also reviews potential reforms, such as subjecting settlements to greater judicial scrutiny or presidential oversight. The broader contribution to the literature is to show how a richer understanding of the regulatory process can be gained by analyzing its public law and business law aspects in parallel.

Keywords: Financial Regulation, Administrative Law, Securities Law, Banking Regulation