Case over fishing law could hamstring the SEC and DOL

A case before the Supreme Court over an obscure fishing regulation could be devastating to the SEC’s ability to make new regulations and enforce the ones already on its books.

Last week, the high court heard oral arguments in two cases challenging a federal regulation that requires fishing-boat operators to pay the costs of observers who ensure that they are complying with the law. The implications of the pending decisions could be severe for federal agencies, as the cases essentially challenge a 40-year-old court ruling that has set the basis for how civil servants interpret the law.

That is known as the Chevron deference, which essentially means that courts defer to federal agencies in their interpretations of broad or unclear language in the laws passed by Congress. That leeway has allowed regulators like the Securities and Exchange Commission and Department of Labor to implement rules that keep up with times. But over the past several years, opponents of the Chevron deference have criticized it as permitting an “administrative state” in which unelected officials have too much control.

Several of the Supreme Court’s majority conservative justices alluded to their positions on Chevron during oral arguments, hinting that the long-standing doctrine will be limited, if not overturned.

“I don’t know if it’s a foregone conclusion,” said Kurt Wolfe, of counsel at law firm Quinn Emanuel Urquhart & Sullivan. That's because the court declined to overturn Chevron in two other cases that called it into question, he noted.

“The impact on the SEC will depend very much on the outcome of the case. There have been a number of [cases] over the last few years where the media and the bar expected the court to potentially overturn or at least really narrow Chevron, and it hasn’t quite happened that way, yet,” Wolfe said. “The court always seems to find a way around it.”

The court could place limits on the doctrine, which could mean that courts could only defer to the expertise of federal agencies in interpreting the law where Congress intentionally made language vague.

“It looks like, based upon the arguments, that Chevron will not come out of this decision [being] upheld in its entirety,” said Jason Roberts, CEO of the Pension Resource Institute. “It is all-out overruled, or is it limited?”

A case in which Congress clearly intentionally left it up for federal agencies to interpret and implement law is seen in versions one and two of the SECURE Act, as the Department of Labor, IRS and Treasury were tasked with defining various aspects of the laws, he noted.

But if Chevron is severely limited or overturned, there will be a question about how agencies implement rules and regulations. For example, Roberts said, in 1974, Congress tasked the DOL with implementing the Employee Retirement Income Security Act, but it didn’t define the term “investment advice,” something the DOL is currently working to define as part of its forthcoming fiduciary rule. The DOL will make rollover recommendations from employer-sponsored retirement accounts to IRAs subject to fiduciary duty, but there could be a question, absent Chevron, about whether the agency has authority to regulate IRAs, Roberts said.

While the outcome of the case before the Supreme Court won’t directly interfere with agencies' ability to make regulations, it would make it much easier for plaintiffs to challenge their regulations in court.

If Chevron is overturned, the risk is that “the SEC will no longer be able to create new rules that are designed to apply to new things going on in the marketplace,” Wolfe said.

For a sense of how impactful that would be, consider crypto currencies and digital assets. There isn’t a statutory mandate for how to handle those, Wolfe noted. In writing regulations, the SEC cites its authority in the ’33 Act, ’40 Act, Dodd-Frank, Sarbanes-Oxley and other laws, he said.

“The SEC could be hamstrung in a sense that they could no longer promulgate new rules or regulations to cover different kinds of conduct, new technologies, new things happening in the marketplace – at least not without fear of a [legal] challenge,” he said.

Dan Crowley, partner at K&L Gates, said in an email that regardless of Chevron’s fate, “the SEC’s authority will remain clear.”

But “whether it exceeds that authority is, and will remain, a separate question,” he said.

Crowley argued that there would be a minimal impact on the SEC because the Chevron deference is “the flip side of the major questions doctrine, which was at issue in West Virginia v. EPA.”

In that case, “the Supreme Court essentially held that unless authority to address a major question has been delegated by Congress, the agency has no such authority. With respect to the SEC, Congress has very clearly delegated specific authority to regulate our capital markets, which the SEC has done for 100 years,” he said.

Although the Chevron deference has been a target of conservatives in recent years, it was originally considered a major court victory for Republicans during the Reagan administration, Harvard Law School professors Jody Freeman and Andrew Mergen wrote last week in a guest piece in The New York Times. In that case, Chevron v. Natural Resources Defense Council, “the court deferred to the Environmental Protection Agency’s pro-business interpretation of the Clean Air Act.

“Now, though, Chevron is seen as enabling agencies to run amok," they wrote. "Overturning it is part of a larger project to disable the federal administrative state.”