It would be premature to make predictions about the near-term course of financial regulation in the United States, but one thing is clear: early summer 2024 will go down as a watershed moment. In just five days spanning the end of June and beginning of July, the Supreme Court issued a series of opinions that, together, could reshape decades of administrative law precedent and practice, with potentially dramatic implications for financial institutions and other companies operating in regulated sectors.
The Court not only dealt a long-expected deathblow to the doctrine of Chevron deference to administrative agency interpretations, but also curtailed agencies’ ability to pursue monetary penalties before administrative law judges, articulated meaningful teeth to the “arbitrary and capricious” standard for judicial review, and opened the door to legal challenges by new companies against long-established rules. The Supreme Court’s decisions have left government agencies—and financial services firms—wondering the extent to which existing regulations will withstand judicial scrutiny and whether, as Justice Ketanji Brown Jackson suggested in dissent, a “tsunami of lawsuits” is poised to wash away much of the existing administrative state.[1] What cannot be doubted, however, is that changes are coming to regulatory policymaking and enforcement framework that evolved over the last half century.
Below we briefly summarize the Court’s holdings in the landmark cases of Loper Bright Enterprises v. Raimondo,[2] SEC v. Jarkesy,[3] Ohio v. EPA,[4] and Corner Post and highlight open questions, key considerations, and next steps for the financial services sector.
A one-two (and three-four) punch for administrative agencies
Administrative agencies have for years faced an uphill battle defending rules and regulatory actions in many federal courts—and especially the Supreme Court—but never before has the Court done so much, so quickly, to curtail the administrative law framework. Many of the decisions summarized below would have been noteworthy on their own; together, their effects could be game-changing.
Loper Bright overturned the Supreme Court’s longstanding Chevron doctrine, which since 1984 had required federal courts to defer to administrative agencies’ reasonable interpretations of ambiguous statutes. Under Loper Bright, federal courts “may not defer to an agency interpretation of the law simply because a statute is ambiguous.”[5] While agency interpretations are no longer given special deference, however, they need not be ignored. Loper Bright still permits courts to give persuasive weight to agency views in cases where a statute is ambiguous, especially where those views are longstanding and consistent or reflect the public understanding of a statute at the time of its enactment, and to defer to agency interpretations when Congress has unambiguously granted an agency discretion or interpretive authority over the relevant provision of law.
- Jarkesy held that defendants are entitled to a jury trial in federal court when the Securities and Exchange Commission (SEC) seeks to impose civil penalties for securities fraud. The Court held that the Seventh Amendment’s right to a jury trial applies to any statutory claim that is “legal in nature,” which it determined that SEC securities fraud actions are based on the form of the remedy available—civil penalties—and the actions’ similarity to common law fraud claims. The Court then rejected the SEC’s argument that the “public rights” exception to the Seventh Amendment applies, holding that antifraud actions involve private rights because they are “in substance” equivalent to suits that could have been tried at common law at the time of the Founding.
- Ohio v. EPA stayed the introduction of new rules proposed by the Environmental Protection Agency (EPA) to regulate ozone pollution in 23 states pending the outcome of lower court challenges to those rules. While the case focused on the procedural issue of whether the rules should go into effect while litigation was ongoing, Justice Neil Gorsuch’s opinion for the Court relied heavily on its assessment of the challengers’ likelihood of success on the merits. In particular, the opinion concluded that the EPA had failed to address concerns identified by commenters that its assessment of the costs and benefits of its proposed rules were premised on faulty assumptions about the scope of their application, which concerns were proven correct shortly after the rules were finalized.
- Corner Post held that the six-year statute of limitations on a plaintiff’s claim under the Administrative Procedure Act (APA) begins to run when a rule issued by an agency first causes harm to the plaintiff, rather than when the rule was first issued. The Court’s holding substantially expands the universe of administrative actions that are potentially subject to challenge, allowing new entities to challenge rules that may have been settled for decades or accepted without challenge during periods when courts were more deferential to agencies than they might be today or going forward.
Key Takeaways for Regulated Financial Services Firms
Loper Bright, Jarkesy, Ohio v. EPA, and Corner Post taken together are likely to substantially increase judicial scrutiny of administrative agencies and may well effect changes in how regulations are made and enforced. Although the decisions leave many questions open, their impact may be felt both in the near-term and over time. To that end, we think companies operating in highly regulated sectors, like the financial industry, should keep vigilant in the following ways:
Expect the unexpected. Perhaps the most important takeaway for regulated entities is to expect increased regulatory uncertainty in the near term. Corner Post effectively reopens the statute of limitations for most agency rules of general applicability, while Loper Bright and Ohio v. EPA make potential challenges more likely to succeed—and could result in defensive changes to settled rules in anticipation of challenges to them. Although new challenges to existing regulations may be a welcome development in some cases, an unavoidable byproduct will be uncertainty for companies that have built their businesses around existing regulation as new legal challenges work their way through the courts. Regulations finalized relatively recently pursuant to older statutes may also be further at risk given the Court’s emphasis in Loper on a statute’s meaning being “fixed at the time of enactment.”[6]
That said, the Supreme Court stopped short of declaring open season on all of its administrative law precedents, and deference to administrative agencies may still be given in some scenarios. Prior decisions upholding agency interpretations of law under Chevron are still entitled to stare decisis, and Loper Bright specifically indicates that a prior court’s “[m]ere reliance on Chevron cannot constitute a ‘special justification’ for overruling such a holding.”[7] The direction of travel is clear, however, and regulated firms have no choice but to assume that regulations seen as untouchable are no longer immune from challenge.
Look out for agencies using other means to influence behavior. Loper Bright removes any additional incentive Chevron may have provided for agencies to issue regulations via notice-and-comment rulemaking. Perversely, the Court’s 2024 administrative law decisions may cause agencies to rely instead on mechanisms to accomplish their objectives that carry fewer procedural protections for regulated entities—regulatory guidance, interpretive rulemakings, and “regulation by enforcement.”
This dynamic will be particularly challenging for supervised financial firms to navigate. For decades, financial institutions have faced a difficult tradeoff when confronted with pressure from their regulators to take—or not to take—specific actions that run contrary to desired business or other objectives. While Jarkesy gives regulated firms additional leverage to push back in cases that proceed to enforcement investigations, in many cases firms will accede to regulatory pressure out of concern for damaging ongoing relationships with an agency (and its personnel) that they interact with on a day-to-day basis. If agencies rely more heavily on informal regulatory mechanisms as opposed to notice-and-comment rulemaking or formal adjudication, supervised firms may have no choice but to be more assertive towards such informal pressure going forward.
Active engagement in the regulatory process is more important than ever. The Court’s emphasis on unaddressed public comments in Ohio v. EPA is one of the clearest demonstrations to date of the critical role the public comment process plays in agency policymaking. While few cases are likely to present as stark an example of an agency declining to consider a key issue raised by commenters as arose in Ohio v. EPA, firms would do well to raise critical issues during the comment process. Additionally, because the Court in Loper Bright emphasized the importance of consistency in an agency’s interpretation over time,[8] changes to longstanding agency interpretations and revisions to existing regulations may become less frequent—in particular, due to diminished likelihood of reversal across changes in administrations. Indeed, in his concurrence, Justice Gorsuch sharply criticized Chevron for enabling constant regulatory uncertainty: “because the reasonable bureaucrat may change his mind year-to-year and election-to-election, the people can never know with certainty what new ‘interpretations’ might be used against them.”[9] In general, he noted, Chevron deference leads to a negative outcome that “engenders constant uncertainty and convulsive change even when the statute at issue itself remains unchanged.”[10] Accordingly, it will be all the more important for firms to take every opportunity to be heard when an agency is establishing a policy position for the first time.
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We will continue monitoring developments and provide additional updates as warranted.
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[1] Corner Post v. Board of Governors of the Federal Reserve System, 603 U.S. __, 2024 WL 3237691 (2024) (Corner Post) at 35.
[2] Loper Bright Enterprises v. Raimondo, 603 U.S. __, 2024 WL 3208360 (2024) (Loper Bright).
[3] Securities and Exchange Comm’n v. Jarkesy, 603 U.S. __, 2024 WL 3187811 (2024) (Jarkesy).
[4] Ohio v. Environmental Protection Agency, 603 U.S. __, 2024 WL 3187768 (2024) (Ohio v. EPA).
[5] Loper Bright at 22.
[6] Loper Bright at 22; see also Loper Bright at 33 (Gorsuch, J., concurring) (“courts have sought to construe statutes as a reasonable reader would ‘when the law was made’”).
[7] Loper Bright at 21.
[8] See, e.g., Loper Bright at 9 (“the longstanding practice of the government—like any other interpretive aid—can inform [a court’s] determination of what the law is.”) (quoting NLRB v. Noel Canning, 573 U.S. 513, 525 (2014); McCulloch v. Maryland, 4 Wheat. 316, 401 (1819); and Marbury v. Madison, 1 Cranch 137, 177 (1803)) (internal quotation marks omitted); see also id. at 15, 21 (criticizing Chevron for “demand[ing] that courts mechanically afford binding deference to agency interpretations, including those that have been inconsistent over time” (emphasis in original) and because under Chevron, “a statutory ambiguity, no matter why it is there, becomes a license authorizing an agency to change positions as much as it likes, with ‘[u]nexplained inconsistency’ being ‘at most … a reason for holding an interpretation to be … arbitrary and capricious.’”).
[9] Loper Bright at 32 (Gorsuch, J., concurring).
[10] Loper Bright at 34 (Gorsuch, J., concurring).
