The Supreme Court’s move to curb federal agency powers could curtail efforts by the U.S. Securities and Exchange Commission to establish new rules to police Wall Street and invite more litigation, legal experts said in the wake of Friday’s landmark ruling.
The court overturned a 1984 precedent that had given deference to government agencies in interpreting laws they administer. The decision raises the spectre of fresh grounds on which to challenge the markets watchdog in court as it rolls out new policies or seeks to regulate new corners of the markets.
The SEC is already fending off an increasing legal assault from public companies, major Wall Street firms and well-heeled cryptocurrency players.
The SCOTUS decision, made 6-3, is likely to tie the SEC’s hands as it rolls out new rules, according to half a dozen legal experts.
The SEC did not respond to a request for comment. SEC Chair Gary Gensler told Reuters this month that the agency pivots as required by courts’ interpretation of the law.
The ruling is a “game-changer,” said Richard Hong, a former SEC trial lawyer and partner with the Morrison Cohen law firm.
The SEC will likely have more reason to pause before acting when seeking to police new financial instruments, said Cary Coglianese, a law professor at the University of Pennsylvania who specializes in regulation.
“It will make it more difficult for agencies to adapt their understandings of statutes in the face of new circumstances,” Coglianese said.
The precedent, known as the Chevron deference after a ruling involving the U.S. oil company, had been cited by the SEC and other agencies in prior court cases to justify new regulatory efforts, as they deemed the activities within their purview. But now it would fall solely to a court to determine if the agency is acting within the law, which experts said could have a chilling effect.
Proponents of the approach argue that the Chevron deference allows federal regulatory bodies to adapt to changing times and circumstances. But the Chevron doctrine has come under growing criticism from conservatives, arguing it allows rule-writers to overstep their legal authorities.
While the SEC and other regulators have other tools on which to lean, Chevron has been a bedrock of agency rule making.
Between 2003 and 2013, Chevron was applied 66.7% of the time when litigating SEC rules in circuit courts and in those cases the agency won just over 81%, according to 2017 research published in the Michigan Law Review.
“Going forward, agency action will be under even greater scrutiny and there will likely be more opportunities for the regulated community to challenge agency rules and adjudications,” said Varu Chilakamarri, a partner at K&L Gates.
Friday’s ruling is the latest effort of the conservative “war on the administrative state,” which aims to weaken federal agencies across the board. Gensler’s ambitious agenda has made the agency, which oversees around 40,000 entities, a top target.
The SEC stayed this year’s landmark climate disclosure rule due to legal challenges. A federal appeals court this month struck down its overhaul of private fund oversight on the grounds the agency exceeded its authorities.
“The challenge to the SEC’s climate rule was already poised to be a difficult fight for the agency,” said Leah Malone, leader of Simpson Thacher’s ESG and sustainability practice. Friday’s shift “raises even further questions about the survival of the climate rule, as well as other pending rule proposals that have been in the spotlight,” Malone said.
Friday’s ruling is the second blow to the SEC’s authority in as many days from the Supreme Court. On Thursday, the justices ruled the agency’s reliance on in-house courts to handle enforcement cases was unconstitutional.
“If yesterday’s decision was causing tremors, causing some dishes to tumble out from the cupboards, today’s case is a Richter-7 earthquake,” said Hong.