SEC’s Ambitious Agenda Snagged as Supreme Court Limits Powers

The US Securities and Exchange Commission’s push to extend its regulatory reach clashes with the Supreme Court’s decision to eliminate its standard for when courts should accept an agency’s claim of authority.

The high court’s 6-3 decision gives SEC critics another weapon to fight any moves to regulate new areas and emerging issues, inviting increased scrutiny over the connection between securities statutes and the agency’s actions.

The SEC under President Joe Biden has taken an aggressive approach in its rulemaking and enforcement, expanding the definition of who qualifies as a securities dealer, testing a novel insider trading theory, regulating crypto as a security, and attempting to tighten its grip on the private funds industry. In March, the agency adopted landmark climate disclosure rules that quickly drew lawsuits.

“Courts will be focused on circumstances where the SEC attempts to regulate new fields or new issues that have not previously been within its understood regulatory ambit,” said McDermott Will & Emery’s Paul Hughes, co-head of the firm’s practices focusing on Supreme Court and appellate litigation and government and regulatory litigation.

The Supreme Court’s June 28 decision, in combination with other moves to cut back on agency power, likely will limit the SEC’s ability to maneuver in some of these areas.

Companies challenging the climate rules argue Congress didn’t provide the SEC with clear authority to require greenhouse gas emission disclosures and other climate reporting, accusing the agency of taking general statements about investor protection as giving it the power to “demand almost anything the SEC wants.”

Similarly, hedge funds, private equity firms, and crypto groups, as well as SEC Republican commissioners, argue the agency lacked the statutory authority to redefine securities dealers.

The SEC’s core market protection work, such as policing market manipulation, is more insulated from legal threats because it’s explicitly authorized in securities law.

SEC opponents, who have already had success challenging several of the agency’s efforts in court, will be further emboldened by the elimination of the long-standing doctrine on interpreting ambiguous laws—enshrined in the high court’s 1984 Chevron v. Natural Resources Defense Council case.

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Court Risks

The SEC has won a number of legal cases against crypto companies accused of violating federal securities laws, including an April trial where a jury found Terraform Labs Pte. and co-founder Do Kwon misled investors. But the agency has struggled to find its courtroom footing in other areas where it has been dealt several losses.

The agency has a sub-50% winning percentage in cases decided during the Biden administration that cite the Administrative Procedure Act or Chevron, according to a Bloomberg Law review. The Trump and Obama administrations, by comparison, had a success rate around 70% in similar cases.

Appeals courts in recent months have overturned the SEC’s rejection of Grayscale Investments LLC’s proposal to create an exchange-traded fund based on Bitcoin, finding the denial arbitrary and capricious, and threw out a rule that required more information about companies’ stock repurchases because the agency didn’t properly weigh the costs and benefits.

An appeals court in early June struck down rules requiring hedge funds and private equity firms to detail quarterly fees and expenses to investors, finding the SEC exceeded its authority.

While Chevron hasn’t played an outsized role in the SEC’s defense of its rules over the years, the agency in recent years has lost at least two cases in which it invoked the doctrine.

That includes one case involving a 2020 rule that extended federal proxy rules to cover voting advice provided by firms like Institutional Shareholder Services Inc. A federal district judge in Washington, D.C., said the agency overstepped when it interpreted proxy voting advice to be a “solicitation” that falls under the federal rules.

In another case, the D.C. Circuit said an SEC move related to the publication of market data for securities transactions was unanchored from any reasonable reading of the statute.

Joseph Grundfest, a Stanford law professor and Democratic SEC commissioner during the Reagan administration, said the current commission’s courtroom woes likely will continue if it continues to regulate in the same manner.

“The deeper question for the agency is why their rules continue to flame out on appeal, even though the agency had the benefit of Chevron deference,” Grundfest said.

Curbing Agency Power

The SEC likely can navigate the loss of Chevron, University of Pennsylvania business law professor Jill Fisch said.

She cited the climate rule, which has been paused pending court review, as an example of how the agency might attempt to do so when making new rules. There, the agency scaled back its original proposal, while limiting required disclosures to ones that are material to a company’s business or financial condition, arguably putting it more squarely in the agency’s statutory authority.

The high court’s opinion overturning Chevron is part of a series of moves from courts cutting back on agency power.

The justices last year made it easier to challenge the constitutionality of SEC in-house courts, allowing enforcement targets to go directly to federal district court without waiting for an administrative law judge’s decision. The Supreme Court on June 27 ruled defendants are entitled to jury trials when the SEC seeks civil penalties for securities fraud.

The conservative Supreme Court majority has also advanced the “major questions” doctrine, which says agencies must have clear authorization from Congress for an action that has significant economic or political consequences. Those challenging the climate rule, for example, have invoked the doctrine.

Meanwhile, lower courts are closely scrutinizing the SEC’s economic analysis when making rules, among other aspects of its process.

“Chevron, by itself, is probably not going to be a major obstacle for the SEC,” Fisch said. “But if you look at Chevron in connection with those other doctrines, those other pending issues, absolutely that would be a much bigger concern.”

More Litigation

The Supreme Court’s ruling is expected to embolden companies accused of violating existing SEC rules.

While the decision doesn’t preclude judges from considering the views of the SEC and other agencies, they will no longer be required to defer to regulators that offer a reasonable interpretation of an unclear statute.

“Parties accused of violating statutory provisions in numerous contexts will now have a more level playing field in trying to convince a judge that their conduct comported with the best construction of the statutory provisions in question,” said Robert Skinner of Ropes & Gray LLP, a partner in the firm’s securities litigation group.

The Supreme Court’s decision may not have much impact on the SEC’s crypto enforcement, attorneys said. While Coinbase Global Inc. and other critics accuse the SEC of taking an expansive view of its authority, crypto cases often involve the agency applying Supreme Court precedent. The SEC hasn’t relied on Chevron deference in defending its crypto regulation.

But there are other areas where the SEC’s critics say it has regulated through enforcement actions, including in how it defines a securities dealer. Companies accused of legal violations are expected to push back harder in some of those instances.

The high court’s ruling is expected to be felt across the federal government. Lower courts reviewing challenges to agency decisions felt bound to Chevron’s mandate, even as the Supreme Court recently seemed to ignore the framework, attorneys said.

“After today’s decision, those lower courts will not apply Chevron, and will themselves need to grapple with the canons of construction to determine what the best interpretation of the statute is,” Doug Hallward-Driemeier of Ropes & Gray, who leads the firm’s appellate and Supreme Court practice, said Friday.

The case isLoper Bright Enterprises v. Raimondo, U.S., No. 22-451, decision 6/28/24