Securities and Exchange Commission Historical Society

William O. Douglas and the Growing Power of the SEC

Broadening the SEC Mandate

Many New Deal agencies faced challenges to their constitutional authority in their formative years. The Supreme Court struck down much of the hastily written legislation passed in the hectic first 100 days of Roosevelt’s first term. The conservative Court held that Congress had unconstitutionally delegated broad legislative powers to a wide variety of executive agencies. Douglas had studied and understood this legal problem. Cognizant of the Supreme Court decisions that limited the authority of some early New Deal agencies, Douglas worked to create in the SEC an executive agency that was careful not to overstep its constitutional prerogative, yet was strong enough to become an effective regulator of the economy.

Two major Supreme Court decisions played an enormous role in the expansion of the agency’s power to regulate the economy. In 1935, the SEC had subpoenaed J. Edward Jones before the Commission, requiring him to produce numerous papers it deemed relevant to a registration statement that Jones had filed covering some proposed trust certificates. Before complying with the subpoena, Jones withdrew the registration statement, but the Commission nonetheless demanded that Jones appear and comply with its subpoena. When Jones refused to appear, the SEC filed suit demanding compliance with its subpoena.

At stake was not merely the SEC’s subpoena power but the validity of the legislation requiring SEC stock registration of companies selling publicly traded stock. An adverse ruling would cripple the SEC’s ability to fully investigate corporate abuses, create administrative rulings, and make legislative recommendations. However, the federal appellate court held that the act was unconstitutional. On April 6, 1936, Justice Sutherland delivered the opinion of the U. S. Supreme Court. In finding that the action of the SEC in insisting on its subpoena after Jones had withdrawn is registration statement was "wholly arbitrary and unreasonable," the Court appeared to strike a blow at the SEC’s investigative power.

Fearful of the potential abuse by the growing administrative capacity of the New Deal agencies over personal liberties, the Court held that "if the various administrative bureaus and commissions, necessarily called and being called into existence by the increasing complexities of our modern business and political affairs, are permitted gradually to extend their powers by encroachments- even petty encroachments- upon the fundamental rights, privileges and immunities of the people, we shall in the end, while avoiding the fatal consequences of a supreme autocracy, become submerged by a multitude of minor invasions of personal rights, less destructive but no less violative of constitutional guaranties."(1)

However, because the Court failed to sustain the lower court’s ruling that the act itself was unconstitutional, the SEC dodged a legal bullet. The decision, coming only months after Douglas took his seat on the Commission, served as a warning that the Court would not tolerate an administrative agency without limits. As a Commissioner, Douglas and his staff reacted to the Court decision, implementing a legal framework that protected the power of the SEC by following a more circumspect and careful investigatory and litigation process.

The second case dealt with the power of the national government to regulate holding companies. Holding companies permitted an incredible concentration of control which posed a formidable barrier to the efficient and effective utilization of national power resources. Many utility companies, which had originally formed as single, private companies, were organized under the structure of immense holding companies which provided management and capital control. For example, Electric Bond and Share, a holding company organized by General Electric, had under its corporate structure eight intermediate holding companies operating utilities in twelve states and several foreign countries. Holding companies allowed a small group of directors in the parent company to set policy for the subsidiary companies.

By 1935, these holding companies operated a national utility system that bound operating utilities to the holding companies, and which charged fixed and often exorbitant management fees and extortionate interest rates to the operating companies. Roosevelt believed that holding companies provided no benefit to the operating utilities and were a detriment to investors and consumers. After passage of the 1933 and 1934 Acts, President Roosevelt called for major reform of the nation’s power resources.

The Public Utility Holding Company Act of 1935 ("PUHCA") was a comprehensive proposal for federal regulation of the nation’s power resources which included the mandatory dissolution of holding companies which were used to organize smaller utility companies under one massive corporate entity. When Congress passed PUHCA, it gave the SEC responsibility for its administration. Passage of the Act gave the federal government through the SEC, for the first time except during wartime, the power to reshape an entire industry to occur as soon as practicable after January 1, 1938.

Holding companies, unwilling to accept the legality of the rising administrative state, fought back, filing lawsuits challenging the constitutionality of the legislation. By early 1938, administration and enforcement of PUHCA had become the SEC’s most pressing battle. The SEC lawyers, having learned their lessons about the constitutional limits of administrative power, chose the biggest holding company, Electric Bond and Share, which had control of a substantial part of the public utility industry, as the first major enforcement action. Douglas’s staff carefully constructed the litigation, briefed and argued the case, all the while cognizant of the reasons for the constitutional losses of the early New Deal legislation. The Supreme Court considered the constitutionality of the Public Utility Holding Company Act of 1935, and when the Court upheld the Act on March 28, 1938, the SEC had won its most important battle.

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(1) Jones v. Securities and Exchange Commission, 56 S. Ct. 654, 661 (1936).

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George C. Mathews, William O. Douglas, James M. Landis, J.D. Ross and Robert E. Healy

Oral Histories

29 November 2001

Milton Cohen

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