When legal scholars specializing in financial regulation have examined the Financial Stability Oversight Council (FSOC), their lens has usually focused on matters outside of the core public law expertise they are best positioned to contribute. This curious state of affairs is the consequence of the historical mutual disinterest between administrative law scholars and financial regulatory scholars. This Article helps bridge this divide, conducting a comprehensive administrative law analysis of the FSOC’s Section 113 designation program, and using it as a case study of an emerging trend in U.S. public law: increased contestation concerning the legal legitimacy of financial supervisory programs that provide for extensive, open-ended discretion on the part of regulators.
Today, the FSOC’s designation program and other supervisory programs like it require financial supervisors to draw from an ever-deeper reservoir of administrative discretion to make hypothetical and conjectural assessments of future events. These programs have come to resemble so-called “risk regulatory” regimes—programs that require the exercise of significant regulatory discretion to counteract future harms subject to non-trivial uncertainty. In response, affected regulatory subjects have seized upon this discretionary power, calling into question the legality of its exercise. This Article analyzes the legal sufficiency of the procedural and substantive constraints on the FSOC’s discretion embedded in the FSOC’s designation statute and its own rulemakings.
It uncovers several structural problems with the FSOC framework. Whereas some of these problems are susceptible to amendatory fixes, others are not. These more trenchant problems are ubiquitous in risk regulatory regimes, but financial supervisory regimes have yet to develop the institutional and doctrinal forms needed to reconcile such open-ended discretion with the rule of administrative law. In presenting this analysis, the Article fires a warning shot in the direction of financial regulators, policymakers, and scholars, cautioning them that other programs are likely to be contested in the near future.