Supreme Court Decision Raises Big Questions About SEC’s Authority

Have you heard about the big Supreme Court decision that came down a couple weeks ago? No, not the one about Presidential immunity. We’re talking about the one with the power to upend the regulatory system and the balance of power between the executive and judicial branches of the federal government.

For roughly 40 years, administrative law in the United States has adhered to the Chevron doctrine, so named for the Supreme Court’s ruling in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. in 1984. That decision established that courts should defer to the interpretations of federal agencies when it comes to ambiguous legal statutes. In other words, unless an agency’s interpretation was clearly unreasonable, what that agency said goes.

Last month, the Supreme Court’s holding in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Department of Commerce explicitly tossed out the Chevron doctrine in an opinion authored by Chief Justice John Roberts: “The Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron is overruled.” The high court’s 6-3 ruling fell along ideological lines.

While the monumental decision represents a significant setback for all federal regulators, it could severely waylay the Securities and Exchange Commission’s ambitious agenda under the Biden administration. SEC Commissioner Gary Gensler has prodded the agency to delve into controversial subjects like rulemaking for cryptocurrency and private investment funds. All of them now sit on the chopping block because of the Supreme Court’s ruling.

The rules in peril include the recently adopted Climate-Related Disclosure Rule, a cornerstone of Gensler’s tenure at the SEC. Naturally, business interests have pushed back against the climate disclosure measures, and overturning the Chevron doctrine virtually assures opponents will prevail in court. Look for states to take the baton if policymakers still want to make climate-related disclosures a reality. (Of course, an act of Congress could also put a similar disclosure rule into effect, but no one should expect to see that happen any time soon.)

In fact, the SEC suffered the equivalent of a double whammy from the Supreme Court with the overturning of the Chevron doctrine. A day earlier, the justices had ruled against the ability of the agency to use its own administrative courts to decide securities fraud claims seeking civil penalties. Instead, defendants in such cases have a Seventh Amendment right to a jury trial, according to the Court’s decision.

In the end, the SEC faces a stark reality: No less than the Supreme Court has weakened its authority to make rules and to enforce them. It doesn’t pose an existential crisis for the agency, but the developments raise serious questions about the SEC’s place in the regulatory ecosystem going forward.