The Value of Regulatory Technology in the Wake of Loper-Bright

By: Aliya Haider

On June 28, The U.S. Supreme Court delivered its decision in a twin set of cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, challenging a federal rule that requires commercial fishing vessels to pay for the onboard observers who monitor their catches. The result was seismic: The Court overturned a 1984 decision known as the Chevron doctrine, reversing four decades of precedent and shifting power from federal agencies to federal judges.

Some background on how rulemaking works: Congress passes legislation – or statutes – and federal agencies propose, adopt, implement, and enforce rules to execute statutory intent. Regulated entities comply with these rules; federal agencies respond to compliance failures with enforcement actions. In the past, were a court to review an agency’s decision, the court would have to defer to the agency’s interpretation so long as it is “reasonable.” The court must defer to an agency’s reasonable interpretation even if the court believes that the agency’s interpretation is not the best interpretation.

In short, for the past 40 years, we have deferred to the technical expertise of federal agencies to provide clarification of ambiguity in statutes and guidance in their respective fields, be it the environment, financial services, or international fishing. Critics of Chevron deference critiqued overreach of a regulatory state. Advocates of Chevron deference valued the technical expertise of federal agency leaders.

Now all that has changed. When agency rules are unclear, courts no longer must defer to agencies to determine what’s best. Federal judges now can decide on ambiguous statutory language.

What behaviors will the demise of Chevron deference trigger? That part is still unwritten. Some agencies might rely more on enforcement actions, like the Environmental Protection Agency or Consumer Financial Protection Bureau. Other agencies, like prudential regulators such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission, might rely more on requiring supervisory controls. Another consequence could be that regulated entities bring even more challenges to agency enforcement than currently in place. In which case, the burden on the judicial system would be unavoidable.

The SEC may prove to be a focus for post-Loper Bright challenges. The agency has engaged in rulemaking at a rapid pace in recent years under the Administrative Procedures Act (APA) and authority provided by the federal securities laws (including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940). The onslaught of rules prompted criticism from some in the industry, who state that the pace and volume of rule-making indicates a potential lack of thoughtfulness about the operational implementation of such rules. Others note that, in fact, there is not more rulemaking – simply more visible litigation. For example, at present, the SEC is already fighting APA-based challenges to recent rulemakings in federal court in the Fifth Circuit. Litigants have been and will continue to bring their cases to particular courts, or what is known as “forum shopping,” taking advantage of the perceived effects of the partisan inclinations of the Circuit court judges.

When engaging in rulemaking, in determining whether it is in the public interest and for the protection of investors, the SEC generally must consider the impacts of rulemaking on efficiency, competition, and capital formation. Clarity, predictability, and stability of rules are key for capital markets. Time will tell the impact of the Loper-Bright ruling. However in the medium term, the ruling discourages regulators from new rulemaking or modes of interpretation as new rules are more susceptible to challenges. At the same time, the ruling certainly encourages standard enforcement of existing rules, as precedent provides reliability which protects against challenge. When implementing new rules, regulators may need to be cautious and increasingly solicitous of industry feedback to mitigate the risk of legal challenge.

One thing is clear, technology to elevate transparent, logic-based compliance has never been more important in a new era of heightened ambiguity and enforcement. Compliance departments now, more than ever, will benefit from showing how they arrived at their interpretations and implementations of regulation. In an era with active rule-making, encouraged litigation, and potential emphasis by regulation through enforcement, a framework to implement best practices for operational and compliance teams, as well as a mechanism to evidence how and why decisions were made, is essential.