That didn’t take long.
Within two months of the Supreme Court’s ruling that courts need not defer to the experts at a federal agency when interpreting an ambiguous law, judges have already been using their new power. Federal judges have spared Amazon a fine over allegedly illegal imports and blocked the Federal Trade Commission’s noncompete ban before it could take effect.
Figuring out how courts replace the departed precedent, known as Chevron deference, is going to take some time. In the meantime, you still have to stay on the right side of a regulatory regime that’s wobbling without “one of the most important principles in administrative law for 40 years,” according to Cornell Law School’s Legal Information Institute.
For some background on how Loper Bright might shape compliance for financial entities and the companies that serve them, CFO Brew spoke with Hadas Jacobi, a financial regulatory lawyer at Reed Smith and former regulator with the New York State Department of Financial Services.
This conversation has been edited for length and clarity.
Now that Chevron deference is gone, what takes its place?
Everybody’s still kind of trying to make sense of how this is going to be applied on a practical level, because the current framework that was disassembled by the Chevron reversal was one that both the industry and the regulatory landscape has been working within for years. So when you have something that is very well established and is essentially a self-running machine, and then you break it, but you don’t put something new in place in order to replace it, then it’s gonna take a while for things to scramble back together in an orderly fashion.
There’s always a chance that state regulators are going to seize on this opportunity, and maybe pursue spaces that the state regulators’ federal counterparts would have been responsible for imposing penalties on before. But I think that’s a short-term outlook…States tend to follow suit when something substantial changes in federal law, especially if the Supreme Court explicitly says that a certain approach is contrary to the Administrative Procedure Act. States have their own version of the Administrative Procedure Act.
And similarly, state courts have also made decisions that rely on Chevron indirectly by adopting the same logic. New York, for example, has its own version of Chevron, so New York regulators have relied on that type of deference. And now the question is, what are state courts going to do in light of the Supreme Court ruling, and how is this going to affect regulatory entities?
How will this affect enforcement?
Even though the original thinking behind wanting to overturn Chevron was to simplify things, it actually could lead to the creation of a multi-tentacled beast of litigation and regulatory hearings all happening kind of at the same time. So what you might have is a federal regulator—who is now not permitted to impose a civil monetary penalty—will adjudicate their claims of violations, and they will require a company to give back money to investors, to put in policies and procedures to address the violations, etc. And then you will also have your attorneys general and Departments of Justice of the world, who can then bring criminal proceedings and impose civil monetary penalties. Or you can have the non-civil monetary penalties challenged, and then have all of these multiple legal actions going at the same time.
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Regulators are going to be highly motivated to settle enforcement actions before they get to the hearing level. I think that regulators had a lot more leverage to impose high penalties [and] just to bring a multitude of charges, of violations that maybe they are not going to be so excited to bring forward now because they know that every one of them is going to be scrutinized very carefully. So they’re going to be more motivated to settle in a consent order with the licensed or registered entity before it gets to the hearing level.
There’s one challenge there, which is that the regulators are going to likely want to put more facts and reasoning in their consent orders to flesh them out a little bit more than they did earlier. Because [they] are, I think, going to become even more commonplace than they were…So there might be a bit more information in there that licensed entities are going to want to prevent from getting out there for reputational harm reasons.
Any other takeaways or advice?
I think that now, post-Loper Bright and generally in this zeitgeist of disassembling the regulatory state…there is a bit of uncertainty, both on the regulators’ behalf and on the industry’s behalf, which really calls for a meeting of the minds and a partnership between regulators and the industry in order to proactively work these issues together so they don’t end up being something that needs to be litigated down the line.
Partnership with industry players in drafting new rules and regulations, first of all, helps the regulator ensure that their rules and regulations reflect what the industry needs and wants, which is a good thing on its own behalf. Also, it would shield them from potential challenges in court, to a certain extent, and it gives the licensed entities the opportunity to be the first ones to present the issue to the regulators and so to frame it in the light most favorable to them.
I would [also] say—and I’m sorry if this is a little self-serving, but it’s actually very true and very necessary—but partner with experienced outside counsel that are familiar and comfortable with regulatory interactions and conversations.