Supreme Court rulings will change the regulatory landscape – to some extent

WASHINGTON — Supreme Court Opinion Repealing Chevron’s Submissiveness Rule Last week’s decision will allow the justices to decide whether the agency’s interpretation of the law is correct. Although the decision overturned a historic legal precedent, banking experts say its impact on prudential banking regulation will likely be limited.

That’s in part because the decision — which consolidated two similar cases, Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Raimondo — was not intended to overturn prior rulings based on Chevron’s deference for the sake of deference itself, said Karen Solomon, senior counsel at Covington & Burling and a former official in the Office of the Comptroller of the Currency.

“Loper Bright clearly does not overturn prior cases decided under Chevron,” Solomon said. “The immediate effect Loper Light and hard-line rulings on prudential banking regulation are likely to be limited because these decisions do not violate existing case law that relies on Chevron.”

Lower courts are now expected to use their own statutory interpretations to review agency work. But Solomon says the Supreme Court still allows some reliance on agency judgment by preserving the application of the Skidmore rule of deference — which allows courts to consider agency interpretations without those interpretations being binding.

“If an agency supports its regulation by carefully explaining the facts that led it to regulate in a certain way, a court may accept that explanation as a reason to uphold the agency’s regulation,” she said. “(But) a court doesn’t have to do that — it can find that the statute requires something more or something different than what the agency has presented and strike down the agency’s regulation on that basis.”

That doesn’t mean there won’t be knock-on effects. Solomon says one effect will be that banks will feel they have more freedom to challenge the agency’s rules, and regulators will have to pay more attention to their regulations in anticipation of such challenges. That could mean longer regulatory timelines required by Administrative Procedure Act could last even longer.

“Agencies will need to prepare detailed, carefully reasoned records of their decisions to make their conclusions persuasive under the Skidmore standard,” she said. “Interagency negotiations could be even more protracted than they are now, and individual agencies could add layers of internal controls to their decision-making to protect themselves from having their decisions reversed in court.”

Ian Katz, a managing director at Capital Alpha Partners, says Chevron’s demise is more likely to shape future regulation than to invalidate existing regulation, since cases already decided by Chevron will remain intact. And while he says courts will likely misjudge the agency’s authority to some extent, the banking industry will likely feel more emboldened to challenge regulatory interpretations it balks at.

“Regulated companies, knowing they have the wind of litigation behind them after Chevron, will have a bargaining chip when discussing potential regulations with agencies,” he said. “We wouldn’t expect them to completely withdraw planned proposals, but those proposals probably won’t be as forceful as they were before.”

Adam Rust, director of financial services at the Consumer Federation of America, says another case decided Monday could have equally dire consequences. In Corner Post Inc. v. Board of Governors of the Federal Reserve, the court ruled 6-3 that the long statute of limitations on claims against the regulations was unconstitutional, which could allow companies to sue and challenge the regulations over time.

“Often the agency rule is a negotiated compromise among many views (where) a few get everything they want, a few get nothing, the majority get heard, and then markets adjust to the new norm, (but) there are always a few who disagree strongly,” he said. “The rule is a recipe for these outsiders to go on fishing trips.”

Rust added that agencies will now need to make sure they don’t rely too heavily on the assumption that courts will defer to their perspective. Still, he warned that the increased threat of legal action could have the effect of stripping the rules of their power.

“Agencies will need to be careful not to rely on Chevron’s deference to issue rules, but it’s equally important for troubled agencies to stand up to corrupt tyrants,” he said. “They need to craft the right rule, not just one that’s palatable to extremist views.”

Solomon notes that the post-Chevron era could change the rules that apply existing statutory authority to new and emerging technologies, such as crypto or artificial intelligence. Congress could incorporate the decision by building explicit delegations of authority to implementing agencies into the legislation, she said.

“In Loper Bright, the Supreme Court recognizes that Congress sometimes expressly delegates discretion to agencies—for example, to define specific statutory terms… (saying) that a reviewing court should respect the delegation while overseeing the agency’s compliance with its limits,” she said. “So when enacting new legislation—such as a statutory framework for crypto or AI—Congress may be able to achieve greater predictability about how the statute will operate if it expressly delegates authority to agencies in areas where it wants the agencies to operate.”