James Tierney finds that Loper Bright, the latest ruling in a rash of Supreme Court cases undermining the Securities and Exchange Commission’s authority, will limit the agency’s intervention in the market and produce uncertainty for businesses as they guess which rules will survive the judicial review.
This article is part of a series that explores how Loper Bright and the end to the Chevron deference doctrine will impact the ability of the federal agencies to regulate the economy. You can read the other articles in the series already published here.
Securities regulation has historically been characterized by broad Congressional grants of authority to the Securities and Exchange Commission to create rules in the public interest and for the protection of investors. The Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, overturning Chevron deference, in which courts deferred to federal agency expertise and rulemaking where application of the relevant statute was ambiguous, is likely to create short term uncertainty about the direction of policy in securities markets. Longer term, the trend toward what Justice Elena Kagan in her dissent called “judicial aggrandizement” creates new challenges for industry self-regulation in the securities markets.
The courts and the SEC’s interpretive agenda
The first-order impact of reduced deference is a curtailment in the SEC’s ability to interpret and enforce securities laws across various regulatory programs. During Gary Gensler’s tenure as SEC Chair, the agency has launched extensive rulemaking initiatives in areas like climate disclosure, private funds, predictive data analytics, and proxy advisors. These initiatives have faced considerable pushback from industry, and courts have increasingly scaled back elements of the SEC’s agenda in recent years. One question will be whether this trend of judicial skepticism continues, or if courts give effect to guardrails outlined in Loper Bright for when agencies might still get deference.
Consider the SEC’s climate disclosure rule as a case in point. The rule mandates that public companies disclose material climate-related risks to their operations. It draws on the SEC’s broad statutory authority to mandate disclosure deemed “necessary or appropriate in the public interest or for the protection of investors.” Currently, the rule faces legal challenges from both states and industry groups claiming it overreaches, and from environmental groups arguing it doesn’t go far enough.
The state challengers had initially framed the rule as a “major question” under the Court’s earlier decision in West Virginia v. EPA (2022), which stripped from federal agencies the authority to make rules with major economic or political significance. Now, Loper Bright is expected to take center stage, as reflected in the SEC’s recent briefs invoking language from the majority opinion (page 17 and n.6) that an agency can still get deference where Congress has delegated “discretionary authority” to “fill up the details of a statutory scheme” and to “regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility.” With replies from the challengers due later in September 2024, the outcomes of these challenges will likely hinge on the judicial receptiveness to this rationale.
Another interpretive effort is the SEC’s dealer rule, which expands the scope of which kinds of trading firms must register with the Commission. The securities laws define “dealer” to include those who buy or sell as part of a regular business, but exempts those who do so “not as part of a regular business.” The dealer rule broadens the interpretation of acting “as a part of a regular business,” reducing the scope of the exemption. A group of private funds have challenged the rule, arguing that it is a “relic” of the Chevron era.
Finally, this reduction in deference to agency interpretations will force the SEC to navigate a more constrained regulatory environment. Notably, the agency’s method of implementing regulations, governed by considerations of efficiency, capital formation, and competition (ECCF), traditionally interpreted to include cost-benefit analysis, may face new challenges. The overturning of Chevron curtails the SEC’s ability to adopt alternative criteria for efficiency assessments, signaling a tougher road ahead for innovative regulatory approaches.
Implications for compliance and investor protection
There are compelling reasons to believe that the financial industry ultimately might not like Loper Bright. Many firms have structured their operations around existing regulatory frameworks, valuing stability and predictability. These qualities are essential for businesses and markets to thrive, but Loper Bright jeopardizes these interests. For instance, as illustrated by a recent court ruling that blocked enforcement of the Federal Trade Commission’s rule against non-compete agreements, abrupt legal changes can undo years of compliance planning. Businesses can’t assume that every rule will be invalidated, so must undertake costly efforts that will sometimes be wasted under this new environment.
Moreover, in industries regulated by different statutory regimes, other cases decided this past Supreme Court term alongside Loper Bright could give newly created businesses an advantage. The Court in Corner Post held that the six-year limitations period for challenging an agency action accrues not when the regulation is adopted but when the challenger is harmed. This will enable new firms, in a significantly changed judicial environment, to challenge older regulations that incumbent firms may be used to and that have not been revisited for decades. To be sure, the securities laws have an even shorter limitations period than that at issue in Corner Post. But if its principles were applied here, they would promote legal challenges by new market entrants against long-established regulations. This could create a situation where legacy rules are perpetually in dispute, eroding the legal stability vital for robust economic activities.
What’s more, while regulatory obligations are often viewed in terms of compliance alone, costs, trust and safety—central to the securities laws—are crucial for building investor confidence, which is essential for the functioning of expansive capital markets. These elements encourage ordinary individuals to invest in ventures that boost the real economy. Yet it is in tension with the broader ideological shift that positions courts as preferable guardians of the public interest.
Industry self-regulation after Loper Bright
For this reason, Loper Bright introduces new risks for the future landscape of financial regulation. The principle of self-regulatory and market-based approaches to securities regulation hinges on a decentralized model of knowledge and authority, seeking to harness industry’s subject-matter expertise with a backstop of federal agency oversight. The longtime statutory purpose of securities law has been to establish a system of dispersed power and decision-making based on the broad distribution of knowledge in society.
These principles are in stark contrast to the role of the judiciary advocated by the Supreme Court under Chief Justice John Roberts. In line with its shift, there is a movement to dismantle self-regulatory organizations (SROs) in securities markets like the Financial Industry Regulatory Authority (FINRA), a private corporation that oversees member brokerage firms and exchange markets. Professor Ben Edwards and I have noted the threat posed by the Roberts Court’s outdated view of governance for the independence of industry SROs like the stockbroker regulator FINRA. For example, a notable case pending before the D.C. Circuit questions the constitutionality of FINRA’s enforcement powers, with Judge Justin Walker signaling potential problems in a concurrence to an order staying the underlying FINRA enforcement proceeding. Loper Bright might be another arrow in the quiver prompting courts to scrutinize SRO actions and the mechanisms of the SEC’s oversight.
This trend is part of a broader effort to erode the administrative structure underpinning securities markets. The Roberts Court’s stance here could lead to the dismantling of protections essential for maintaining retail investor confidence that Main Street will be given a fair shake by Wall Street. That kind of confidence is necessary to support the capital markets that exist in the United States today.
Loper Bright and broader headwinds for the SEC
The broader direction of judicial review also suggests some non-doctrinal implications. For years, the SEC has faced headwinds in the courts, losing several series of cases involving challenges to the scope of its remedial sanctioning powers and the structure of its adjudication forum. Cases like Kokesh (2017) and Liu (2020)pared back the timing and availability of a certain kind of monetary remedy—disgorgement—for securities fraud. Meanwhile, other cases faulted the manner of the SEC’s in-house administrative law judges’ appointments (Lucia v. SEC, 2018), the process for raising challenges to the forum (Axon/Cochran, 2023) and the lack of a jury in the agency forum (SEC v. Jarkesy, 2024). These cases reflect baseline skepticism of the SEC’s enforcement programs, and Loper Bright signals an even deeper shift in judicial attitudes.
While Jarkesy in particular applies only on its face to civil penalty anti-fraud claims, I argue in a new essay forthcoming in Duke Law Journal that it is likely to be extended to other kinds of adjudication programs. It is also likely to have a demand-side effect on settlements across a range of programs. Together with Loper Bright, these cases are likely to manifest in fewer proceedings and settlements in the adjudication forum, fewer lawsuits in court overall, and less production of “securities law.” The SEC will have different incentives to bring cases where the cost of litigating is higher after Jarkesy and the likelihood of deference is lower.
Currently, much of securities law is produced in settlements and enforcement actions, which serve as practical data points that help define the boundaries of legal doctrines. As the adjudication forum becomes less stable, and as courts are more skeptical of the SEC’s interpretation of statutes, the agency may focus its enforcement efforts on the most egregious and least sympathetic cases.
An approach that tends to spotlight the worst offenders may be less useful for the rest of the industry, especially if the targets tend to present fact patterns markedly different from typical market participants. This disparity can lead to real challenges for businesses trying to comply with regulations and for lawyers who must advise clients under uncertain conditions. The broader impact may undermine both the clarity and reliability of legal guidance available to clients in regulated industries.
Author Disclosure: James Tierney is assistant professor at Chicago-Kent College of Law. Before teaching, he practiced at the SEC’s Office of the General Counsel.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
