The US Supreme Court’s decision in Loper Bright Enters. v. Raimondo and Relentless v. Department of Commerce has raised questions regarding the future of financial services regulation, including by the US Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), and the US Department of Labor (DOL). While the decision is beneficial to those who wish to challenge these regulators, the practical impact may simply reinforce a judicial trend to overturn rules in this space.
As discussed in our previous LawFlash, Chevron Doctrine Overruled: US Supreme Court Upends Longstanding Foundation of Administrative Law, the Supreme Court’s decision in Loper Bright Enters. v. Raimondo and Relentless v. Department of Commerce [1] marks a fundamental shift in the dynamics of judicial review of federal regulations, eliminating Chevron deference to an agency’s reasonable interpretation of a statute. The practical impact on any particular area of federal regulation will depend on the specific agency, its underlying statutory authority, and its practices regarding rulemaking, guidance, and enforcement actions.
HOW DOES LOPER BRIGHT IMPACT THE SEC’S ABILITY TO ADOPT NEW RULES AND GUIDANCE THAT WITHSTAND CHALLENGE?
Importantly, the decision does not prevent the SEC from issuing rules and guidance, especially where the governing statute expressly delegates the SEC authority to promulgate rules on a particular topic. However, if a rule is challenged, a reviewing court will not automatically defer to the SEC’s interpretation of the applicable statute. Rather, the court may need to interpret the statute itself, using traditional rules of statutory interpretation and construction.
Loper Bright does not directly impact agency actions that involve mere guidance or interpretation (e.g., FAQs, interpretative guidance, and guidance updates). And where the agency takes action that implicates Loper Bright, its interpretations at a minimum remain subject to “Skidmore” deference, which gives some weight to the agency’s interpretation to the extent it demonstrates a “power to persuade.” [2]
Observation: While the decision can help those who seek to challenge the SEC’s rules, it is too soon to tell whether the SEC will change its approach to rulemaking or interpretation of the federal securities laws as a result of the decision. As industry participants know, the current administration has issued a number of aggressive rules, rule proposals and guidance (often without invoking Chevron deference), and has faced substantial challenges even before Loper Bright.
Most recently, the private fund adviser rules were vacated in toto by the US Court of Appeals for the Fifth Circuit. Notably, the SEC did not argue that it was entitled to Chevron deference. Instead, it argued (unsuccessfully) that the plain language of the statute gave it the right to enact the rules at issue. [3] Given the SEC’s proclivity not to concede that a statute contains ambiguities (therefore obviating the need to even reach the Chevron deference analysis), the Loper Bright decision overruling Chevron may be less impactful on the SEC’s approach to rules and their defense, or whether challenges succeed or fail. For an in-depth analysis of Nat’l Assoc. of Private Fund Mgrs. v. SEC, read our prior LawFlash.
Other controversial rule proposals, including the Safeguarding Advisory Client Assets [4] and Predictive Data Analytics [5] proposals, saw their timelines pushed back in the face of significant criticism through the comment process before the Loper Bright decision. Specifically, the SEC plans to repropose the safeguarding rule and the predictive data analytics rule following strong rebuke from the financial industry and from the SEC’s own Investor Advisory Committee, which found the proposed rule too broad and suggested that the SEC narrow the scope of the rule to avoid causing unintended consequences for investors.[6]
Similarly, the SEC recently reopened the comment period for the proposed expansion of the definition of an “exchange” and Alternative Trading System (ATS) [7] to collect industry feedback on the proposal’s application to cryptoasset securities and decentralized financial technologies.
That said, because only final rules (and not proposed rules) can be challenged in court, the timing of such challenges may create issues for entities that want to begin planning for implementation of rules that may be challenged. As such, financial institutions seeking to develop a compliance program for a controversial rule that is likely to be challenged should consider whether a measured approach to implementation is advised and can be supported. Put another way, entities will need to consider whether the effort to implement a policy or procedure in response to a new rule is a good use of resources if the rule may not survive an industry challenge.
WHAT DOES THE DECISION MEAN FOR PENDING LITIGATION AGAINST THE SEC AND OTHER FINANCIAL SERVICES REGULATORS?
Ongoing litigation against federal agencies will likely be strengthened by this decision. For example, on the same day Chevron was overruled, a plaintiff that challenged the CFTC for exceeding its statutory authority filed a notice of supplemental authority explaining that “the Commission can no longer expect the Court to defer to its contrary, idiosyncratic interpretations.” [8]
As another example, earlier this year, the SEC adopted new rules that expand the statutory definition of “dealer.” By defining the term “as a part of a regular business” for the dealer definition exclusion, the SEC narrows the exclusion and broadens the definition of dealer. In her dissenting statement on the rulemaking, Commissioner Hester Peirce commented that the new rule’s narrow interpretation of the statutory exception from the dealer definition “is clearly a misreading of the statute.” Many in the securities industry agreed and, in March 2024, various trade associations sued the SEC.
In their lawsuit, the associations asked the court to declare that the SEC promulgated the dealer definition rule to be in excess of the SEC’s statutory authority and based on arbitrary and capricious rationale, among other arguments. The Supreme Court’s decision in Loper Bright makes clear that, in this context, the SEC’s definition is not entitled to deference. It will be up to the courts to declare what the law is and whether the SEC exceeded its statutory authority in adopting its new rule. The challengers to this rule have already cited the Loper Bright decision as additional grounds for why the SEC’s proposed rule should fall.
Similarly, litigation against the DOL seeking to overturn the Retirement Security Rule (also known as “Fiduciary Rule 4.0”) has already been bolstered by the decision, as the US District Court for the Eastern District of Texas stayed the Retirement Security Rule indefinitely pending a decision on its validity on the merits. The court stated that, as a result of Loper Bright, the court “owes no deference to DOL’s interpretation of ERISA, but rather ‘begins with the text’ of the statute—as all courts do.” [9]
In a second decision staying the rule in the same week, the US District Court for the Northern District of Texas agreed, noting that, among other things, the DOL overstepped its authority through its interpretation of “investment advice” for purposes of fiduciary status under ERISA. [10] It is worth noting that the DOL’s 2016 fiduciary rule (Fiduciary Rule 2.0) was vacated in toto by the Fifth Circuit, which concluded that the rule was arbitrary and capricious and was not entitled to Chevron deference.[11]
HOW WILL LOPER BRIGHT IMPACT ENFORCEMENT, INVESTIGATIONS, AND PROCEEDINGS?
From an SEC enforcement perspective, the overruling of Chevron may not greatly change the agency’s enforcement approach in litigation. As a general matter, the SEC does not usually claim that it is entitled to Chevron deference when it enforces alleged violations of the securities laws. When the SEC brings a claim that a party has violated the securities laws, the parties may litigate over each other’s interpretation of the relevant statute, but it is rare for the SEC to argue that the court should defer to its interpretation of a statute based on Chevron. As a former general counsel to the SEC and CFTC stated, in his experience, “SEC and CFTC officials have been fully aware of the trend of the courts to bypass Chevron in major cases. In interpreting statutes . . . or evaluating litigation risks, the agencies have considered traditional principles of statutory construction and have not assumed that Chevron deference will apply upon judicial review.” [12]
Individuals and entities subject to SEC investigations should continue to identify the programmatic risks to the SEC if the agency threatens an enforcement action through the use of a novel interpretation of a statute. Most cases settle, but if the SEC continues with outsized remedies, Loper Bright may have changed the calculus for registered entities to consider litigating against the SEC. And given the SEC’s spotty track record at the Supreme Court and federal circuit courts, the SEC may adjust its evaluation of litigation risks in each proposed enforcement action.
The recent Supreme Court decision in SEC v. Jarkesy will also have an impact on the SEC’s enforcement strategy going forward, given that this decision is likely to make permanent the SEC’s more recent practice of bringing such litigated cases in federal court, rather than in its “in-house” administrative proceedings. [13] For an in-depth analysis of Jarkesy, please read our prior LawFlash.
WHAT’S NEXT?
Morgan Lewis will continue to monitor how and whether the SEC and other financial services regulators change their approaches under Loper Bright, and we are ready and able to assist financial services firms that are faced with the decision of how to approach compliance with rules or other agency actions that can be successfully challenged.
[1] Loper Bright Enters. v. Raimondo, No. 22-451, 2024 BL 221307, 2024 US Lexis 2882, 2024 WL 3208360 at *3 (2024).
[2] Skidmore v. Swift & Co., 323 U.S. 134 (1944)
[3] Nat’l Assoc. of Private Fund Mgrs. v. SEC, No. 23-60471, 2024 BL 2836655 (5th Cir. June 5, 2024).
[4]See Safeguarding Advisory Client Assets, 88 Fed. Reg. 14,672 (Mar. 9, 2023); Safeguarding Advisory Client Assets; Reopening of Comment Period, 88 Fed. Reg. 59,818 (Aug. 30, 2023).
[5] See Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, 88 Fed. Reg. 53,960 (Aug. 9, 2023).
[6] Recommendation of the SEC Investor Advisory Committee’s Disclosure Subcommittee Regarding Digital Engagement Practices (Dec. 7, 2023).
[7] Amendments Regarding the Definition of ‘‘Exchange’’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, 87 Fed. Reg. 15,496 (Mar. 18, 2022); Supplemental Information and Reopening of Comment Period for Amendments Regarding the Definition of ‘‘Exchange’’, 88 Fed. Reg. 29,448 (May 5, 2023).
[8] Kalshi v. Commodity Futures Trading Comm’n, No. 23-cv-03257-JMC (D.D.C. Jun. 28, 2024).
[9] Fed’n of Ams. for Consumer Choice, Inc. v. United States Department of Labor, No. 6:24-cv-163-JDK at *12 (E.D. Tex. July 25, 2024)
[10] American Council of Life Insurers et al v. United States Department of Labor et al, No. 4:24-cv-00482 (N.D. Tex. July 26, 2024).
[11] Chamber of Commerce of the USA v. United States Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018).
[12] After Chevron: No Deference, No Difference For SEC Or CFTC, Berkovitz, Dan, Law360 (July 2, 2024).
[13] See SEC v. Jarkesy, No. 22-859., 2024 BL 219548 (U.S. June 27, 2024)
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