Supreme Court Strikes Down Chevron and Implications for SEC Rulemaking Agenda

PETER HAYNES: Welcome to episode 62 of TD Cowen's podcast series, Bid Out, a market structure perspective from north of 49. My name is Peter Haynes, and today is a special edition of the podcast series in which our resident legal beagle in administrative law, JW Verret, comes back to the show to close the loop on Chevron and the Supreme Court ruling last week that throws into question the powers of US government agencies, including the SEC.
Also joining us today is my colleague from the Washington Research Group, Jaret Seiberg. Jaret has over 30 years of experience covering Washington financial services policy issues and will help us understand how the Chevron decision will impact SEC rulemaking going forward.
Just a quick reminder for our listeners. JW Verret is a professor in the Antonin Scalia School of Law at George Mason University and is an expert on administrative law in the SEC and the first-ever three-time visitor to our podcast series. JW and Jaret, thanks for joining us today.
JW VERRET: Thanks for having me. It's an honor.
PETER HAYNES: OK, JW, I'm going to start with you. Last week, as the current session of the Supreme Court neared its summer break, financial market participants were eagerly anticipating a ruling on a Supreme Court case known as Loper Bright Enterprises versus Raimondo.
This case involved the power of a subsidiary of the Department of Commerce to force herring fishermen in Maine to pay for government monitors onboard each fishing vessel. The fishermen sued the agency, claiming it did not have the power to enforce this fee. JW, tell us how the Supreme Court ruled in this case. And what does it mean for agency rulemaking going forward?
JW VERRET: The SEC overturned the Chevron doctrine, a 40-year-old doctrine-- relatively new in Supreme Court terms-- a 40 year doctrine that the US Supreme Court had not cited since 2016. They made note of the fact that they hadn't used it in a while.
They overturned the Chevron doctrine. The Chevron doctrine had said that in the event a statute is ambiguous, the judiciary should give deference to the agency's own legal interpretation of its statute.
The judges, the majority opinion in Loper, said, look, "the point of the Constitution is we're supposed to say what the law is." That's a direct quote from an opinion from Chief Justice Marshall. It kind of defines Supreme Court powers. We're supposed to say what the law is. We understand how to interpret law. When a statute is ambiguous, we understand as judges how to interpret the law.
Sure, we'll still give deference to agency fact-finding. Agencies still get deference in fact-finding. But we will interpret the law, the abiding law, rather than the agency.
I have to admit, people make a lot of predictions. I predicted on our last episode together they would not fully overturn Chevron. They would have some middle solution that tempered Chevron a bit. I was wrong. I was wrong in my prediction. So I'll be careful about making predictions today.
PETER HAYNES: Well, you're absolutely right. When we did talk a few months ago, we talked about the potential outcomes. They included the complete elimination, a revised Chevron that you just discussed, or status quo. Now that we've seen the end result, is there any wiggle room for workarounds?
JW VERRET: A court can still consider the agency's interpretation of its statute. And a court can still say, we think you're right. Administrative law-- how can I describe it?
I once took about a week to spend time with an administrative law statute for a problem I had that I couldn't figure out. I spent about a week with the Administrative Law Treatise. And I went through the 500 pages that just distill administrative law.
And at the end of that exercise, I felt like I hadn't learned anything more that I didn't know before. I was more confused after reading the Administrative Law Treatise and otherwise. It's a meandering, unclear-- and there are a lot of Chevron-type decisions that say, well, we won't give them deference this time or that time for this reason or that reason.
PETER HAYNES: Is it a sea change?
JW VERRET: I don't know. It still kind of depended what circuit you were in and what judge you got under Chevron. And sometimes they would say, well, we don't have to give Chevron deference because the statute is not ambiguous. The statute is clear. We think the statute is clear.
Is it a sea change? I'm not sure. Administrative law was ambiguous to begin with. Sorry that's not more helpful, but that's-- I'm a critic of administrative law, even though we all have to study it a bit.
PETER HAYNES: Well, yeah, you've mentioned-- you mentioned back in February when we talked about it just the growth of the administrative state and just the amount of pages of legal doctrine that exists now, in part because agencies are adding so much to that rulemaking process.
So as I understand it, previous rules that cited Chevron will not be relitigated. But my question is, what about all other rules that did not cite Chevron that are a work in progress right now, or even recent rules such as the recently passed ESG policy, which is actually being litigated from the other side by environmentalists that did not think the final rule was strong enough? Can Chevron and this ruling have an impact on any of those cases?
JW VERRET: Yes, for any case in which a litigant is able to make a colorable argument that the statute authorizing the SEC to do something is ambiguous. Remember, federal agencies don't have plenary power to do anything they want. Federal agencies only have the power to do things that Congress expressly grants them the power to do.
If the agency is stretching the boundaries of that power and citing to something that's kind of ambiguous, then depending on whether it's a defendant the agency is suing or a plaintiff challenging the agency, it helps someone on the other side of litigation with the agency.
PETER HAYNES: Sure. Jaret, do you have any thoughts or questions for Jay W?
JARET SEIBERG: Thanks, Peter. First, JW, I'm very disappointed that there wasn't some sort of fishy reference in your opening comments about how this is a fishy case or something. I fully expected this would at least be a pun-filled opening segment.
I would [AUDIO OUT] though, as you think about some of the recent cases that we've had in financials, you have a number of cases being litigated. And they all seem to be litigated in the Fifth Circuit. Is there really going to be much difference in the Fifth Circuit, given I'm not sure where there's been much deference for those judges to what the federal agencies have been doing.
JW VERRET: That's a bit of a red herring argument. Let's be honest.
[LAUGHS]
Yeah, there we go. There we go. Let's classify a little bit the different types of litigation. So this is-- Chevron doctrine-related litigation is challenging an agency and saying "you don't have authorization in the statute, in the law, to do what you're doing."
And maybe there's some ambiguity, and then Chevron deference gave a little bit of help to the agency. But that's one type of litigation. But there's at least a couple of others. Another is purely constitutional litigation-- this structure is unconstitutional.
So, for example, the case about the in-house ALJs, Administrative Law Judges, was about the Constitution. Chevron is irrelevant for a challenge like that, say, one in the Fifth Circuit. A challenge based on the things the SEC is required to consider in adopting regulation is not going to be affected by Chevron deference.
So if it's a cost benefit analysis challenge, the agency didn't do enough cost benefit analysis in its rules. That's a frequent and growing type of challenge. That's unaffected by this. So it's only for those cases in which the SEC is claiming authority to do something, and it's not clear in statute that they were granted that authority.
Now, for those types of cases, I agree with you that the Fifth Circuit was probably pretty critical anyway. So does it change the game a ton? Probably changes the game a little bit in DC Circuit litigation.
PETER HAYNES: So, Jaret, when you think about things on a big-picture level, what do you see as the most important implications of Chevron's defeat for the various US government agencies that you follow and the policymaking that they do?
JARET SEIBERG: So, you know, Peter, I think that's really the heart of what we've been trying to figure out. And at the end of the day, I think most of the agencies for a while now have assumed that they're not going to get much deference.
And as JW was pointing out, there's been rollbacks of deference across the board. We've heard, oh, well, we're not going to give you deference on x, but maybe on y. And so I'm not really sure the agencies have been nearly as aggressive in recent years.
And really, my hope is that with repeal now fait accompli, I really hope that perhaps we can get rid of some of the more extreme policy swings that we see from one administration to another, where you get some very aggressive interpretations of the law to try to achieve policy objectives that can't be attained on Capitol Hill.
And if that happens, I think that's really positive for the financial space in general. Part of my broad concern has been that we used to "compete between the 40-yard lines," we would say in US football, where, one administration to the next, we will only be 10 yards from the center line.
And now it seems like we compete between the 20-yard lines, or maybe even the 10-yard lines. There's a lot of grass between these two positions. And if we can do anything to try to minimize or reduce the spread between the two political parties, I think that's a positive.
PETER HAYNES: When I think about my perspective on following the rules of the commission, I do feel like the status quo will be much more likely going forward because it seems that every various aspect of SEC rulemaking is litigated by somebody who has a vested interest.
So would you agree with the statement that, generally speaking going forward, there will be more status quo, which I think is basically what you're saying, between the 40-yard lines? And that worries me a little bit because there's still some incremental changes that can make the market better.
JARET SEIBERG: First of all, Peter, I totally agree with you. There are obviously incremental changes that if you and I were king for the day that we would try to impose.
I think the problem is that there's plenty of people out there who want to be king for the day. And we might not like some of their changes. Just look at some of the market structure proposals that Gary Gensler has put forward on retail trading. I don't think all of those really are in the best interest of the market.
And the good thing about limiting discretion and more litigation is that it makes it less likely for these agencies, in my view, to really get aggressive in interpreting their authority and trying to do too much unilaterally.
And so to me, I think that safeguard is probably worth giving up some of the reforms that you and I would like to see. And frankly, if our ideas are good enough, hopefully Congress at some point will get around to making the changes.
PETER HAYNES: Well, JW, let's dig in on the equity market structure reforms that Jaret was referring to. We discussed this back in February. One of the interesting aspects of the current SEC administration's docket of cases that specifically involve equity market structure is that they may be, in fact, immune from this Chevron ruling. Can you explain again for our listeners why this is the case?
JW VERRET: Yeah. So one of the things we talked about in trying to read the tea leaves for what happens if Chevron is eliminated, Chevron deference is eliminated, what happens to the package of four items in market structure?
And the contention I was making last time, and I still have. So I guess I should be careful about predictions because I was off a little bit on whether or not Chevron would be abolished.
But still, my prediction is among those package of items, something like fee regulation, like regulation of access fees, is pretty squarely within what the SEC is specifically permitted to do under the '75 Act amendments and under the '34 Act that preceded it. So there's no ambiguity in that statute to even necessitate Chevron deference.
It's pretty clear from the beginning of exchange regulation, you are the exchange regulator of-- exchange fees are regulated by the SEC. That's been clear from the beginning.
On something like the auction proposal, that's this new creative idea, maybe there is a statutory ambiguity issue. So I think that one could get a little hot. But I think the core NMS proposal is pretty safe in terms of what's specifically authorized in statute.
And then the second thing I'd mention-- I used the analogy of a shield and a coat of armor, I guess it was. I forgot which was which. But the other defense to potential litigation is that just generally speaking with the objectives the SEC is required to consider in the '75 Act amendments, it's not just about Chevron and whether or not you're authorized to do something. Even for things you're authorized to do as an agency, you have to consider certain things.
The general requirement is a consideration of efficiency, competition, and capital formation, in addition to investor protection, kind of a four-part mandate of the SEC, four items. But in the '75 Act amendments, there's also an emphasis on fairness. And the phrase "fairness" comes up, I think, a couple of times in the statute and then another couple dozen times in the implementing regulations under the '75 Act amendment.
So this fairness concept is something the SEC should consider. And I think it kind of honestly just. waters down the cost-benefit analysis requirement that applies in other areas of rulemaking. Because how do you quantify fairness?
So I think for those two reasons, specific authorization in the amendments to look at these, the kind of watering down of the cost-benefit analysis requirements with this emphasis on fairness, and then third, issues with the private non-delegation doctrine that we talked about last time.
For those three reasons, as a betting man, I don't bet on litigation against the NMS rule. I think it's a loser. Litigation against the auction proposal? Yeah I don't know. If you bring a suit, you might have a shot.
PETER HAYNES: And most people think the older competition rule will not see the light of day, will not go final before the end of the administration.
But let's come back to access fees. There's a school of thought that if the SEC were to reduce access fees more than anticipated, maybe 10 mils across the board, that at least one exchange would sue the SEC.
Given the fact that it wouldn't be under a Chevron deference-- because you've made very clear that the NMS rule amendments in '75 protect the SEC in terms of its rulemaking around fees-- how would an exchange, or under what terms would an exchange sue the SEC if they were to want to argue that they've gone too far on cutting fees, access fees?
JW VERRET: Well, I think we have a window into the argument they're going to make from letters that have been coming down from the Hill. The most recent letter from a coalition of members of Congress emphasizes wait, wait and see. You need to wait until this new 605 data comes in before you do any regulation, or else you have insufficient cost-benefit analysis. I think that's probably the argument that we're going to see.
We don't have a final rule yet, so there's still time to tweak the economic analysis in the final rule. I think the SEC, DERA, would be smart to include data they've seen so far from 605 data coming in or whatever. They need to figure out what to do with that particular argument.
I suggest one of the things they can do with it is to emphasize that fairness is an important independent component. And competition is a component of the original cost-benefit analysis mandate that kind of turns the SEC into an antitrust regulator.
And I think there's analysis they can do there. I've included a lot of that in the comment letters I've submitted in support of the Reg NMS proposal. Nothing is ever certain, but I like the odds of the SEC and the core NMS rulemaking.
The other stuff at the periphery has a better chance. But overall, I think this part of Gensler's agenda is pretty safe. The bloodbath is going to be on the corporate governance side. And all the more politicized corporate governance stuff he's doing that has no specific statutory authorization, that stuff is going to-- the courts are going to take a machete to all that stuff.
JARET SEIBERG: Before we dive in to the really good stuff, just on the auction proposal, I think I'm in the same boat with everybody in that we don't believe it's going to get finalized. But that could be enormously disruptive to a lot of trading.
And it is something that-- we have a lot of investors who are very focused on that issue. And I'm not sure where the SEC is authorized to mandate auctions for retail order flow.
And so I do think that that could be one of those narrow areas where this decision would have a benefit. And I'd be curious, JW, if you agree with that, or if you think there might be some ambiguity there.
JW VERRET: I'm not sure that the SEC has specific authorization to do an auction proposal. I don't know what the end result of that suit is. But Chevron definitely would affect a lawsuit over that, no question.
PETER HAYNES: JW was talking about DERA doing its economic analysis on perhaps final tweaks on the access fees. Time is definitely an issue right now.
I've heard about 10 different versions of when the SEC policymaking under the existing administration has to be finalized before it can be subject to what is known as the Congressional Review Act. What is the actual deadline for SEC rules to go final this summer? And when are you anticipating that we'll hear about some of these NMS rules that we just discussed?
JARET SEIBERG: Sure. So I can tell you that with great specificity on December 31. Because it is a backwards-looking calculation based on some arcane definition of when Congress is in session. It is not worth trying to even figure it out because you won't know it until you're there.
And the reality is it's generally viewed as Memorial Day, and we are already past Memorial Day. And so really, the clock is unlikely to expire before the end of this Congress and you get a new 60-day clock, if the clock doesn't expire. And so I do think the Congressional Review Act will be available in the next administration.
That said, I think we just all need to relax a little bit about the Congressional Review Act. First, it's a very blunt instrument. The agencies cannot put out a similar proposal covering the same area without the consent of Congress.
And I don't think industry generally wants to see agencies permanently constrained in that way. It may work for a narrow issue, but on something like market structure, where you want some flexibility, it's probably not the greatest tool.
In addition, you would need complete control of Congress to really make the Congressional Review Act an effective tool to be able to be used. That's why, for instance, we saw it used during the first two years of the Trump administration.
If you do have complete control, though, you also get control of the agencies, at least eventually. And so you can use the agencies to try to change these proposals.
You also have the ability to add riders on to other bills to try to change rules that have already been adopted and finalized. And so there are paths that are less extreme than the Congressional Review Act, if you have complete control of the government.
It's why I don't expect broad use of the Congressional Review Act. And frankly, we generally see it more as an indication of areas where change is likely than we see it as a real tool to implement policy.
The only exception could be if Gensler really tries to do something radical during these last few months, and assuming Trump wins. But that just seems out of character right now. It seems everybody's focused on the election.
And I'm not sure you pick up any-- with all love, Peter-- I'm not sure you pick up any votes by touting anything on market structure. I just don't think that's near and dear to many voters' hearts. And so I don't think Gensler is really going to be looking to get the market upset over these final four or five months.
PETER HAYNES: Might be able to lose a few votes if you were to ban PFOF or something like that, but we know that's not going to happen anytime soon.
JARET SEIBERG: Exactly. Right.
JW VERRET: And let me add to Jaret's great points there one more point on that, which is that there's not an infinite budget for CRA votes. Senate floor time is very precious, especially at that point in the beginning of an administration. You have to eat up floor time for confirmations of all kinds of new nominees.
And there's always judges. That was a big focus for Senator McConnell. We'll see what a new leader would do, how focused it will be on judges. But basically, there's a trade-off. The more CRA votes you have, the less time you have for nominations and judges and other legislation.
There were only a couple dozen, I think, of these in the beginning of the Trump administration, across all federal agencies. So as a betting man, I'd bet on something else more politicized if it falls within this window, though I think Gensler has probably tried to adopt things right before the window that were most likely to face a CRA vote. But it's just that budget of floor time will limit how many of these you can do.
PETER HAYNES: Such as the ESG rule which went final on a watered-down basis earlier this year and will hopefully avoid, or for the sake of the Democrats, avoid the Congressional Review Act.
So, Jaret, I don't know why I did this, but I watched the theater known as the House Financial Services Committee meeting last week, which was a hearing on equity market structure rules. There were five witnesses. I believe four of them were for the majority House party, and one was for the minority, Democrats.
And the individuals answered questions that appeared completely along party lines, with the majority calling for a pause on all outstanding market structure rules until, quote, "we get more data." I thought it was a bit embarrassing, given the fact that they, in certain instances, made reference to the fact that we can't go forward with any other rules until we see the data from Rule 605, which is completely unrelated to access fees and tick requirements.
So that said, I am curious, though, if the tone of the questions and the answers that were provided by the witnesses are any indication of potential final market structure rulemaking that we'll see from Gensler?
JARET SEIBERG: No. Oh, wait. You want more than that?
PETER HAYNES: No, but it's a no because they're Republicans, and Gensler's a Democrat. And this is just theater?
JARET SEIBERG: This is more than just theater. This is political fundraising, right? All these people are trying to raise money, not just for their own re-election but to contribute to the broader Republican campaign coffers.
The financial sector is a sector that has individuals that contribute a lot of money. Market structure is important to a lot of those contributors. And so you schedule a hearing.
And I concede I am of the swamp. I am for the swamp and have been working in the swamp since 1990-91. And this is just what we see. If you noticed during the hearing, you didn't have that many follow-up questions.
And that's because very few members of the committee really have any idea what market structure is. They basically read the questions from their staff. It's very difficult to ask a meaningful follow-up question. And to me, this is much more a "check the box" exercise than a real effort at legislating.
PETER HAYNES: All right. Are you going to call me-- you going to call me cynical, JW?
JW VERRET: No. I watched it. I used to staff those hearings, so I knew the game.
JARET SEIBERG: I know the game.
PETER HAYNES: Well, I will tell you guys that in watching that hearing that there were times when the congressional leaders in the room there had difficulty reading the words that were on their questions, which you could tell they had probably read a couple of times before. But the words didn't really flow properly in the context of the questions they were asking.
But I also understand, as you say, it's political fundraising here. So, Jaret, final question for you. Maybe it's the million dollar question.
There's five SEC commissioners who vote on rules. One is the chair, and his name is Gary Gensler. And he was appointed by the president. If we have a change in administration in November, does the chair have to change?
JARET SEIBERG: Well, the president can designate somebody else as the chair, but Gensler doesn't have to resign. And given how many traditions when it comes to transitions have been tossed out the window, it's going to be fascinating to me to see what Gary decides to do.
The Senate has been in the process of confirming one of the Democrats to a new term. And that would mean that Democrats would have at least a three-vote majority on the SEC if Gensler didn't step away, even if he couldn't control the staff.
And we haven't really seen that before. But frankly, we hadn't seen an effort to oust an FDIC chairman prior to the Biden administration. I still remember when FDIC chairs and comptrollers of the currency regularly served well into the term of the next president, even if that president was of a different party.
And the rules are constantly changing. And so while I guess I probably expect Gensler to step down, it's a new world. And I think we just need to accept that the old norms may not hold.
JW VERRET: I would add to that, though, I expect if he didn't step down, he would be removed by the president.
JARET SEIBERG: As chair, though, but he can't remove him as the commissioner.
JW VERRET: He can't?
JARET SEIBERG: I think he could only remove him as chair.
PETER HAYNES: So here we go. We've got more ambiguity because we're into parts unknown. It's unbelievable, eh? Because who would have thought this? Because the norms, as you say before, is that the chair would leave if the administration changes. And here we are in a situation where maybe that doesn't happen. Or if the chair stays, then they're staying with an understanding that there's a new administration in place.
So this is fascinating stuff, guys. Look-- very much appreciate you hopping on short notice here, both Jaret and JW, and for helping educate our listeners on, again, if it's market structure nerds on the other end of the line here, we're all in the same boat.
We aren't lawyers, but we're recognizing that a lot of what we're following here is driven by the law and the powers of the agencies that are governing markets. And you guys have done a great job here today helping us understand these issues better.
And on behalf of TD Cowen and the podcast series, thanks for coming on.
JARET SEIBERG: Thank you. And just remember, if you're on my side of the border, vote early and vote often.
PETER HAYNES: Yeah, absolutely. So I need a few more debates to make a decision on who I'm going to vote for.
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