Hey Barron,
Is it correct to assume that congress delegated the SECs duties to private SROs in the 1938 act?
Very interesting question.
First, just so we can clarify for everyone on the board who might not know the basic history...Congress did not create FINRA. It created NASD thru the 1938 Maloney Act, which reported to the SEC (created in the 1934 SEA). FINRA was created thru a later merger that SEC authorized. NASD was an SRO as much as FINRA is now, though. Congress did, indeed, authorize the SRO to oversee much of the financial industry under the supervision of SEC.
I think we can understand the logic behind this move. First, it was much cheaper to do it this way. Second, by creating a non-government agency to oversee the stock market, corporations were more likely to participate in the stock market that was mostly independent of the government, which would spur economic growth.
So, the question is...Can they do this?
Can they do this?
So...the short answer is "kind of".
We must accept the following statements as true in order to proceed:
1. The government contracts with private entities all the time (though rarely thru legislation).
2. The functions of FINRA are PRIMARILY within the executive powers of the executive branch.
3. FINRA reports to SEC in almost every aspect, to the point that SEC can even issue sanctions on FINRA. The one major aspect that SEC does not partake in is FINRA's leadership appointment or dismissal.
So, accepting these things as true, I would say the following:
Congress did not delegate SEC duties to FINRA thru the Maloney Act. It delegated Executive duties thru the Maloney Act. The Executive branch would have been able to wholeheartedly contracted with a non-government agency to pick up some of the duties of the SEC without breaching any part of the Constitution, and is something they do all the time.
So did Congress violate the Constitution by delegating Executive Branch duties? Yes and no.
Yes, because Congress can not delegate Executive Branch duties...they are Executive Branch duties.
No, because unless the Executive Branch complains about its duties being delegated, noone would have standing to sue Congress and reverse the delegation.
It is worth noting that Article 2 Section 2 Clause 2 of the Constitution allows Congress to appoint inferior officers to government positions. However, this provision of the Constitution does not seem to apply to non-government positions. In fact, there is not anything in the Constitution that addresses dealings with non-government agencies. So does the lack of wording in the Constitution permit such actions? I would say yes, if it is appropriate. This is why we have 27 Amendments...clarification points to the Constitution made after the fact. However, that being said, this probably wasn't appropriate as we are talking about clearly Executive Branch functions.
So, my answer to your question would most likely be...no, Congress cannot delegate executive duties to NASD (now FINRA) thru the 1938 Maloney Act unless FINRA would be accepted under Article 2 Section 2 Clause 2 of the constitution as an "inferior officer" (unlikely in my opinion). But unless the executive branch complains, it can be implied that they are ok with it...and only they have standing to reverse it (The SEC could have standing as well...maybe).
