Supreme Court muddies regulatory authority of SEC and DOL

The Supreme Court today overturned a 40-year-old decision known as the Chevron deference, which gave federal agencies leeway to interpret vague laws, a reversal that will limit how the SEC, DOL, EPA, and others make and enforce regulations.

The new opinion, in a case about fishing boat regulations, stands to take away much of the ability agencies having in making decades-old laws relevant through new rules that keep up with the times.

And it puts recently passed rules at risk in court, including the Department of Labor’s fiduciary rule and the Securities and Exchange Commission’s climate disclosure rule.

“The court has basically rewritten the rules for all agencies. It will obviously have a lot of effect writ large,” said Michael Gold, partner and corporate practice co-chair at law firm Saul Ewing. “Specifically with the SEC the most obvious example is the climate change disclosure rules, which were under attack immediately from when they were issued.”

The SEC has moved to require publicly traded companies to disclose climate risks and emissions data, citing the need for investors to have access to that information in a standardized format.

Also at risk is the SEC’s regulations passed last year for private funds that have already been challenged in court, he said. Those rules require advisors to disclose fees, compensation, costs, and performance quarterly for private investments.

But it could add new challenges for the SEC to establish regulations governing cryptocurrencies.

“The statutes that the SEC relies on are all from 1933 and 1940,” Gold said.

Opponents of the Chevron deference, which comes from a 1984 decision in a Clean Air Act case known as Chevron v. Natural Resources Defense Council, have said that it has resulted in an administrative state in which federal agencies have too much power. But supporters have noted that government agencies have subject-matter expertise that members of Congress and the courts lack.

“This decision from the Supreme Court represents a fundamental change in the way agency rulemaking will be reviewed, and its impact will be vast,” Leah Malone, leader at Simpson Thacher’s ESG and sustainability practice, said in an email provided by the law firm. “The questions posed by petitioners in the climate rule litigation presented some significant challenges even without this decision, but it’s very likely this new precedent will make defending the rule in the Eighth Circuit even more difficult.”

Shortly after the Supreme Court’s opinion on Friday, two industry groups – the Securities Industry and Financial Markets Association and the Financial Services Institute – announced that they joined onto a lawsuit against the DOL seeking to defeat the agency’s fiduciary rule.

“Any rule that is controversial that will have advocates or opponents going to court to overturn the rule is going to be more susceptible” to losses, said Jason Roberts, CEO of the Pension Resource Institute. “Financial services is particularly affected when we think about the regulators’ mission to protect the investing public versus the industry. It’s already a market where we see a lot of litigation.”

There could eventually be less certainty around the rules that agencies make and enforce, and that only complicates life for the entities regulated by them, he noted.

Because federal regulations have been defeated in court even with the Chevron deference in place, agencies might not change their rulemaking agendas, so businesses will have to work to comply with rules that are later shot down, he said.

“I don’t know that we’re going to see a significant pullback [in rulemaking], so to me it means unfortunately that the regulated community will have more fire drills. Because when these things come out, the deadlines are such that you’ve got to start preparing immediately – and the legal process takes time,” he said.

And complicating that is the gamesmanship in Congress, where high-level federal appointments are held up for more than a year, leaving agency leaders will little time to catch up on regulatory changes and push 11^th-hour regulations through before the end of a president’s term, he said.

“That type of rulemaking is already producing less than optimal results, and the predictability has been suspect at least at the DOL,” he said.

It is possible that some DOL rules will be defeated as a result of the opinion and that the agency will be more conservative in drafting new ones, said Alex Lakatos, partner at Mayer Brown.

However, one area where it might not have much effect is class action litigation under the Employee Retirement Income Security Act, in which plaintiffs have sued employers and financial services companies over 401(k) fees, investments, and services, he said.

“I’m not convinced that there is going to be a sea change, and certainly not right away,” he said. “There are going to be a lot of instances where this isn’t necessarily a huge thing.”

In the opinion published Friday, the court’s majority wrote that judges have been moving away from the Chevron deference in recent years, making it less relevant.

“Given our constant tinkering with and eventual turn away from Chevron, and its inconsistent application by the lower courts, it instead is hard to see how anyone – Congress included – could reasonably expect a court to rely on Chevron in any particular case,” the opinion by Chief Justice John Roberts read.

However, less reliance on Chevron in court is related to the overall effort to undo it, Gold said.

While the judiciary has relied less on it, the opposite is true of federal agencies.

“It’s kind of been the baseline rule, and agencies rely on it,” Gold said. In the SEC’s case, it has allowed the agency to use its in-house financial industry expertise to inform rulemaking.

The new opinion “requires Congress to fill in all the gaps [in laws], or it risks the judiciary doing it in the future,” Gold said.

In the dissenting opinion, Justice Elena Kagan posed questions.

“Who should give content to a statute when Congress’s instructions have run out? Should it be a court? Or should it be the agency Congress has charged with administering the statute?” Kagan wrote. “The answer Chevron gives is that it should usually be the agency, within the bounds of reasonableness. That rule has formed the backdrop against which Congress, courts, and agencies – as well as regulated parties and the public – all have operated for decades. It has been applied in thousands of judicial decisions. It has become part of the warp and woof of modern government, supporting regulatory efforts of all kinds – to name a few, keeping air and water clean, food and drugs safe, and financial markets honest.”