(Article from Registered Funds Regulatory Update, July 2024)
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The Supreme Court issued notable decisions further curtailing the powers of federal administrative agencies. The expansion of the administrative state and the growth of regulatory bureaucracies over the latter half of the 20th century gave rise to legal doctrines under the Administrative Procedure Act (“APA”) whereby courts came to rely on regulators both to interpret the bounds of their own statutory authority, and to adjudicate administrative cases enforcing their own regulations. The Court has significantly rolled back these trends, reasserting the independence of the courts in reviewing agency actions and reducing the scope of agencies’ adjudicative authority.
In a pair of cases, the Supreme Court overruled the long-standing Chevron doctrine under which courts extended deference to agency interpretations in cases involving ambiguities in Congress’ grant of regulatory authority. The Court thereby restored to federal district courts the ability to independently resolve ambiguities in disputes over agency action. In a second decision, the Court held that enforcing securities fraud claims in an in-house SEC tribunal violated defendants’ Seventh Amendment right to a jury trial, removing administrative adjudicative authority over certain types of misconduct (like fraud) that were recognized at common law.
The Court Overturns Chevron Deference
For nearly 40 years, federal courts have employed the Chevron doctrine, named for the Supreme Court’s 1984 decision in Chevron v. Natural Resources Defense Council, to extend deference to agency interpretations, including the SEC, in cases involving statutory questions of agency authority. Under Chevron, district courts were required to defer to an agency’s interpretation of Congress’ statutory delegation of regulatory authority, as long as the agency’s interpretation was not unreasonable. The doctrine came to be challenged in a pair of cases before the Supreme Court where the District of Columbia Circuit and the First Circuit, respectively, upheld a regulation issued by a federal agency as a reasonable interpretation of a federal statute. On June 28, 2024, the Supreme Court overturned the lower courts’ decisions and held in a 6-3 vote: “Chevron is overruled.”
Writing for the majority, Chief Justice Roberts found that Chevron cannot be reconciled with the APA, which governs federal administrative agencies, and in fact “is the antithesis of the time honored approach the APA prescribes.” While the APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, Chevron asks the court “to ignore, not follow, ‘the reading the court would have reached’” if no agency were involved.
The Court further criticized Chevron deference as “misguided” by presuming that agencies had special competence or necessary subject matter expertise in resolving statutory ambiguities. “The very point of the traditional tools of statutory construction,” the Court observed, “is to resolve statutory ambiguities,” and those are the tools that courts—not agencies—use every day and should use particularly when the ambiguity concerns the scope of agency power.
Although the Court found that past judicial decisions have shown Chevron to be unworkable and unreliable as a result of inconsistent applications, it did not call into question prior cases that relied on the Chevron framework. Rather, the Court found that the holdings of those cases—including the Clean Air Act holding of Chevron itself— are still subject to statutory stare decisis, which is to say to stand by things decided, despite the Court’s change in interpretive methodology.
While the impact of the Court’s ruling remains to be seen, Justice Kagan warned in her dissent that it “is likely to produce large-scale disruption.” The overturn of Chevron, Justice Kagan wrote, “is yet another example of the Court’s resolve to roll back agency authority, despite congressional direction to the contrary.”
In-House SEC Tribunals Violate Securities Fraud Defendants’ Seventh Amendment Right
On June 27, 2024, the Supreme Court held that the SEC’s adjudication of an enforcement action seeking civil penalties for alleged securities fraud in an in-house tribunal before an administrative law judge violated defendants’ Seventh Amendment right to a jury trial. A 6-3 Justice majority affirmed the Fifth Circuit’s judgment.
The SEC initiated an enforcement action against an investment fund founder and an investment adviser seeking civil penalties and other remedies, alleging that defendants had violated the antifraud provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. Administrative adjudication of such claims has historically been utilized as a means to efficiently and expeditiously enforce regulations without the full scope of procedural rights and formalities attendant to litigation in federal court. The in-house proceedings resulted in a final order against defendants with a civil penalty of $300,000. Defendants petitioned for judicial review and a divided Fifth Circuit panel vacated the final order, holding that adjudicating the matter in-house violated defendants’ Seventh Amendment right to a jury trial. After the Fifth Circuit denied a rehearing, the Supreme Court granted review.
Writing for the majority, Chief Justice Roberts affirmed the Fifth Circuit’s decision as consistent with the Court’s prior Seventh Amendment rulings. The Court concluded that this action implicates the Seventh Amendment because the antifraud provisions at issue “replicate common law fraud, and it is well established that common law claims must be heard by a jury,” considering the Seventh Amendment’s guarantee that in “suits at common law the right of trial by jury shall be preserved.” Summing up, the Court stated that “the civil penalties in this case are designed to punish and deter, not to compensate. They are therefore a type of remedy at common law that could only be enforced in courts of law.” The Court explained that its conclusion effectively decided that this suit implicated the Seventh Amendment and that a defendant would be entitled to a jury on these claims.
The Court also concluded that the “public rights” exception did not apply. This exception has been held to permit Congress to assign certain matters to agencies for adjudication. The Court found that this case did not fall within any of the areas involving governmental prerogatives where the Court has concluded that a matter may be resolved without a jury. Emphasizing the importance of considering the substance of the action—not where it was brought, who brought it, or how it was labeled—the Court concluded that this action involved a matter of private rather than public right and that Congress may not withdraw it from judicial cognizance.
Although the SEC had already begun to restructure its enforcement docket in the years prior to the ruling in June 2024, moving most categories of cases away from administrative courts, the Court’s decision will materially accelerate the trend of litigating disputed SEC cases (whether alleging fraud or otherwise) in federal court. Beyond those immediate ramifications, the rulingmay have sweeping implications not only for the SEC, but for other federal agencies that have made use of administrative tribunals in a similar fashion—the Commodity Futures Trading Commission, the Federal Trade Commission, and the Federal Communications Commission among them. Because such cases can no longer be brought in the relatively efficient forum of an in-house tribunal, agencies like these may face difficult choices in allocating finite enforcement resources, given the resources necessary to litigate each of them fully in federal court.
Loper Bright Enterprises v. Raimondo, No. 22-1219, 2024 WL 3208360 (U.S. June 28, 2024)
Relentless, Inc. v. Dep’t of Com., No. 22-1219 (U.S. argued Jan. 17, 2024).
SEC v. Jarkesy et al., No. 22-859 (U.S. June 27, 2024).