Last week, the Supreme Court overturned a decades-old legal doctrine that gave federal regulators the power to interpret unclear laws. This touched off a lot of wild rhetoric about the end of the administrative state. My interest is how scrapping the Chevron ruling will affect financial regulation, but to get some necessary perspective we should start with history.
In the US, the modern administrative state is traditionally traced to the 1887 creation of the Interstate Commerce Commission in response to a public outcry over the conduct of the railroad industry. Over the next 90 years, federal agencies grew in number, size and power with major boosts during the Progressive Era, the New Deal and the Great Society.
All that came crashing down with the economic disaster of the 1970s. Beginning with President Jimmy Carter and his deregulation czar Alfred Kahn, the prevailing winds switched from more regulation to less. While many rules have been passed or tightened since, it’s fair to say that the trend of the last quarter of the 20th century was deregulatory.
The Chevron decision came in 1984, seven years after the high watermark of regulation. So, it clearly was not necessary for the care and feeding of a robust regulatory state. It was, however, supported by those who hoped to stop the Reagan administration from deregulating.
The final historical point is that courts started undermining Chevron before the ink was dry on the decision. This put them on a collision course with activist agencies emboldened by crises such as the bursting of the internet bubble in 2000, the financial crisis of 2007-2009 and Covid. Something had to give eventually. The Supreme Court would have to choose between the power of courts and the power of agencies to resolve ambiguity in legislation. It shouldn’t be a big surprise to anyone that the conservative majority found in favor of the power of courts.
With this more balanced perspective, we can go beyond the facile prediction that overturning Chevron will block Securities and Exchange Commission Chair Gary Gensler’s ambitious agenda on climate-change disclosure, fiduciary responsibilities and cryptocurrencies.
My reading of suits challenging some SEC moves suggests they have little to do with the Chevron defense as honored in practice by courts in recent years. None of the major arguments from plaintiffs opposing the initiatives turn on the interpretation of ambiguous statutes. For example, the key issue is crypto litigation is which digital tokens qualify as securities. This requires interpreting a Supreme Court decision, SEC v. Howey, not congressional legislation. Challenges to the climate disclosure rule also rely on a Supreme Court case, Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, and the “major questions” doctrine, which the court used to block regulators while Chevron was still in force. Perhaps the decision will give some marginal advantages to plaintiffs, but I can’t see it as a decisive change in the playing field.
I see three more consequential changes likely in financial regulation. The first — and this applies more broadly — is the politics of agency heads becomes less important. Hopefully this will reduce the practice of presidents nominating ideologues and Congress failing to act on nominations. The most successful SEC chair in recent memory — perhaps in history — was Arthur Levitt; a non-political industry veteran who oversaw wildly popular and long-overdue changes including Regulation Fair Disclosure, plain-English documents, adoption of modern technology at the SEC, eliminating pay-to-play and most soft-dollar arrangements, and generally improving fairness, transparency and investor protection — all without major obstacles from lawsuits. (Levitt is a board member of Bloomberg LP, the parent of Bloomberg News.)
The second is Congress will likely devote more attention to spelling out its intentions in legislation rather than slapping a marketing-approved title on a laundry list of feel-good provisions that don’t amount to consistent direction to administrators. Congress, not staffers at the SEC or Commodity Futures Trading Commission, will have to set the difficult trade-offs involved with securities regulation. No doubt ambiguities will remain but, in the absence of a Chevron defense, staffers will be encouraged to make the most reasonable compromise interpretations rather than forcing their personal views into the question.
Finally, with plaintiffs and regulators on a level playing field in court, rather than one tilted toward regulators, I expect to see more negotiated settlements, not regulation-by-litigation. But this works as much for deregulation as new or tightened regulation. Progressives will have more trouble getting agencies to do things Congress won’t mandate, but small-government conservatives will have equal trouble getting agencies to overlook things Congress did mandate. Since national politics seem closely balanced between progressives and conservatives at the moment, both would be wise not to yell too loudly about overturning Chevron.
The Supreme Court did everyone a favor by the creative destruction of overturning Chevron rather than letting it die the death of a thousand cuts as previous courts have allowed. We’re back to the simple law of the first two centuries of the US — Congress makes laws, agencies administer them and courts resolve ambiguities if anyone’s mad enough to fight about them. All three branches of government do their jobs better with this clear system.
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