Courts Cloud the Future of Regulatory Agencies’ Tools

By now, political junkies know all about PredictIt. The Australia-based venture offers the equivalent of betting markets for politics, allowing users to buy and sell shares based on the expected outcome of events such as elections. Some pundits view the action on PredictIt and similar exchanges as a more reliable alternative to sophisticated forecasting models when voters go to the polls.

Though some PredictIt users have become adept at this form of political wagering, few probably would have bought shares in the likelihood that PredictIt itself would become the subject of a potential landmark court decision. In July, the U.S. Court of Appeals for the Fifth Circuit issued a ruling in a long-running case involving the betting service that could have sweeping effects on federal agencies’ use of no-action letters.

First, the relevant details. Markets like PredictIt generally must register with the Commodity Futures Trading Commission to operate in the United States. In 2014, PredictIt applied for and received a no-action letter representing that the CFTC’s Division of Market Oversight would not recommend enforcement against the market if it operated without registering. The DMO revoked the no-action letter in 2022, charging that PredictIt had failed to live up to the terms under which the letter was first issued. The move resulted in a lawsuit that eventually ended up with the Fifth Circuit.

A majority of the Fifth Circuit judges who heard the case – Clarke v. CFTC – held in favor of PredictIt, essentially likening the DMO’s no-action letter to a license for the market to operate under the Administrative Procedure Act. As such, revoking the no-action letter constituted a final agency decision, making it subject to judicial review. On those grounds, the judges ruled that the decision failed the so-called arbitrary-and-capricious standard.

The decision left some observers wondering about the utility of no-action letters going forward. As lawyers from Sidley Austin LLP noted in an article on the decision, other agencies such as the Securities and Exchange Commission rely on no-action letters as a workaround for the more formal regulatory process. According to Sidley’s analysis, the Fifth Circuit just closed that avenue to regulators. Moreover, the decision will likely spur more legal challenges to agencies’ past decisions regarding no-action letters.

Importantly, the decision in Clarke adds to the mounting pressures on regulatory agencies coming from the legal system. It follows a ruling handed down by the Supreme Court earlier this year affirming that respondents can challenge the constitutionality of federal administrative proceedings. In a note on the decision, lawyers from Patterson Belknap Webb & Tyler LLP speculated that the SEC and other regulatory agencies may decide to bypass their own administrative proceedings in favor of going to federal court. Additionally, they noted that the decision raises the “potential to implicate the constitutionality of the agencies themselves, or of some portion of their enforcement apparatus.”

Federal agencies don’t want to see PredictIt taking bets on those kinds of questions.

***

The Intelligize blog is on hiatus for the Labor Day holiday and will return on Thursday, September 7, 2023