The Rise and Fall of the SEC in Bankruptcy

Abstract

As commentators have long pointed out, once established, administrative agencies are almost impossible to kill. Scaling back the authority of an agency is somewhat easier, but even retrenchment proves difficult. Given these political realities, the trajectory of the Securities and Exchange Commission (SEC) in corporate bankruptcy is remarkable. Led by William Douglas (head of the SEC before his appointment to the Supreme Court), the New Deal reformers and their allies in Congress transformed corporate reorganization practice by enacting the Chandler Act of 1938. In addition to destroying the influence of Wall Street bankers and lawyers, the Chandler Act positioned the SEC at the heart of the reorganization process. At first, the SEC did in fact play a dominant role in bankruptcy. But over the next several decades, the SEC slowly lost its grip. The end came in 1978, when Congress ushered the SEC out of bankruptcy almost completely as part of its next major reform. This Article addresses a single question: what happened? Why did the SEC, whose oversight had been seen as crucial to investor protection, disappear from bankruptcy? Drawing from recent positive political theory on Congressional institutions, I argue that the answer to these questions lies in the initial structuring of the SEC's role. In their zeal to destroy the Wall Street banks and lawyers who had previously dominated reorganization practice, William Douglas and the other New Deal reformers strengthened the hand of two interest groups, the general bankruptcy bar and bankruptcy judges, who each had strong incentives to resist SEC oversight. Congress's enactment of the Chandler Bill, rather than a companion bill considered at the same time, further compounded the SEC's troubles by subjecting subsequent reforms to a committee (the Judiciary Committee) that is more likely to favor bankruptcy lawyers than the SEC. Although these political factors explain the SEC's near disappearance from bankruptcy, this Article concludes that the time may now be ripe for the SEC to increase its profile once again, though in a more limited way than the New Deal reformers envisioned. Many of the securities law issues that the SEC regulates, from takeovers to securities trading, now figure prominently in major corporate reorganization cases as well. Regulation by the SEC would be the best means of coordinating the treatment of these issues inside of bankruptcy and out.