Key decisions from the 2023-2024 U.S. Supreme Court term presage a "seismic shift"1 in administrative law that could very well result in "a tsunami of lawsuits"2 against the federal government. At a minimum, the financial services industry is facing significant uncertainty as to what regulations and regulatory decisions will survive legal challenges, and there is potential for some big changes. For financial services companies regulated by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve), the National Credit Union Administration (NCUA), or the Consumer Financial Protection Bureau (CFPB, and together with the OCC, FDIC, Federal Reserve, and NCUA, the Federal Banking Agencies), the immediate implications of the Court's decisions include: (1) more litigation challenging agency actions; (2) more uncertainty; (3) more incentive for the Federal Banking Agencies to act less transparently; (4) a greater need for the Federal Banking Agencies to more completely address significant comments in the rulemaking process; and (5) more contested enforcement actions.
Authors' Note: This Advisory provides brief summaries of the recent Supreme Court cases and some preliminary takeaways. We will provide more in-depth content on these and related issues in the weeks and months ahead.
Summaries of Selected Cases
- Loper Bright Enterprises v. Raimondo. In Loper Bright Enterprises v. Raimondo (Loper Bright), the Supreme Court overturned its prior decision in Chevron v. Natural Resources Defense Council, which had established one of the bedrock principles of administrative law: that is, where a federal statute is ambiguous, the federal courts must defer to an agency's reasonable interpretation of the statute (Chevron Deference). Under Loper Bright, courts will continue their prior levels of deference to agency findings of fact and policy decisions but not to the agency's statutory interpretations — except where the statute at issue clearly indicates that Congress has authorized the agency to act with a degree of discretion, such as statutes that (1) expressly delegate to an agency the authority to give meaning to a particular term; (2) empower an agency to prescribe rules to fill in the details of a statutory scheme; or (3) delegate to an agency the authority to regulate within the limits imposed by a term or phrase in the statute that leaves agencies with some flexibility (e.g., "appropriate" or "reasonable"). In those cases, the role of a reviewing court is to determine that there has been a constitutional delegation of authority, fix the boundaries of that delegated authority, and ensure that the agency has engaged in reasoned decision-making within those boundaries. Of note for the financial services industry, in many of the statutes governing the authority of the Federal Banking Agencies, Congress unambiguously gives the agencies significant discretion,3 and in those cases, it may be harder to successfully challenge the Federal Banking Agencies' exercise of their discretion.
- Corner Post, Inc. v. Federal Reserve. In Corner Post, Inc. v. Federal Reserve (Corner Post), the Supreme Court held that the default six-year statute of limitations to challenge agency actions under the Administrative Procedure Act (APA) begins when an alleged injury caused by the agency action occurs, not when the agency action is final, even for facial challenges to the agency action. This means that newly regulated entities (e.g., Corner Post) can challenge older agency actions (e.g., the Federal Reserve's promulgation of rules for interchange fees in 2011) that were otherwise settled law. And, in the words of Justice Jackson in dissent, "[i]t also allows well-heeled litigants to game the system by creating new entities or finding new plaintiffs whenever they blow past the statutory deadline." Absent congressional action to specify a contrary trigger for suits under the APA, this decision could have significant destabilizing effects on a financial industry that thrives on certainty.
- Securities and Exchange Commission v. Jarkesy. In Securities and Exchange Commission v. Jarkesy (Jarkesy), the Supreme Court considered whether a defendant in a Securities and Exchange Commission (SEC) administrative proceeding was entitled to a jury trial in federal court instead of before an administrative law judge (ALJ), where the SEC had commenced enforcement proceedings. The Court held that, under the Seventh Amendment of the United States Constitution, an individual defendant has a right to a jury trial when the SEC seeks civil money penalties against him or her in a securities fraud case. The decision, which is based on the historical distinction between suits at common law and suits at equity, calls into question the constitutionality of many other agencies' administrative proceedings. This is of particular importance for the prudential banking agencies (i.e., the Federal Reserve, the FDIC, and the OCC), which also rely on the use of ALJs and, unlike the SEC, do not currently have the authority to initiate enforcement proceedings in federal district court.
- Cantero v. Bank of America, N.A. In a unanimous decision in Cantero v. Bank of America, N.A. (Cantero), the Supreme Court reaffirmed the standard it articulated in Barnett Bank v. Nelson, 517 U.S. 25 (1996), which Congress codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. § 25b), that a state consumer financial law may apply to a national bank so long as the state law does not "prevent or significantly interfere" with the national bank's exercise of its powers. The Court overruled the decision of the Second Circuit on the ground that it lacked the kind of "nuanced comparative analysis" required to properly apply the Barnett Bank standard. To properly apply that standard, the Court ruled, a court "must make a practical assessment of the nature and degree of interference caused by a state law." The Court remanded the case to the Second Circuit to make such a practical assessment. In light of the Court's decision in the Loper case, judicial deference to the OCC's preemption regulations, which identify types of state laws that are preempted under the Barnett Bank standard, will likely not be permitted, and the Second Circuit on remand in Cantero, and other courts in future cases involving preemption under the National Bank Act or the Home Owners Loan Act, will have to make their own decisions regarding which state consumer financial laws interfere with the powers Congress granted to national banks and federal savings and loan associations.
- CFPB v. Community Financial Services Association of America. In CFPB v. Community Financial Services Association of America, the Supreme Court held that the CFPB funding mechanism satisfied the Appropriations Clause of the Constitution and was, therefore, constitutional. In the immediate aftermath, CFPB Director Rohit Chopra stated that the CFPB would be "firing on all cylinders" moving forward, but the Loper Bright decision could cause the CFPB to tread more carefully in the days ahead.
- Ohio et al v. Environmental Protection Agency. As part of its 5-4 decision in Ohio et al v. Environmental Protection Agency to grant a stay to the states challenging an Environmental Protection Agency (EPA) action, the Supreme Court found that the EPA had likely acted in an arbitrary-or-capricious manner by failing to offer a "reasoned response" to comments submitted during a notice and comment period for a proposal put forth by the EPA. Specifically, the Court found that states would likely prevail in their challenge because "the EPA's final rule was not 'reasonably explained,' ... the agency failed to supply 'a satisfactory explanation for its action' ... and ... instead ignored 'an important aspect of the problem' before it." Although the Supreme Court's decision in Ohio v. EPA was based on specific provisions of the Clean Air Act, for the financial services industry, this case serves as a reminder that participating in the administrative notice and comment process can set up later challenges to agency action.
Takeaways From the Term as a Whole
1. On balance, there will likely be more challenges to agency actions.
Loper Bright and Corner Post have given better odds to a regulated financial institution, institution-affiliated party, trade association, or industry group that sues the regulators in federal court on behalf of its members — and regulated entities may very well take advantage of the shift. However, due to the long-standing reluctance of banking organizations to sue their regulators, we anticipate that the increase in challenges to agency actions will be brought by bank executives, shareholders, and other insiders of influence or trade associations and industry groups.4 Because banks are subject to regular supervisory oversight by their primary federal regulators (as well as, in many cases, the CFPB) and such oversight continues beyond resolution of any dispute, we do not anticipate that the Court's rulings will result in more challenges brought by individual banks, except under bet-the-bank circumstances. Nonetheless, the universe of viable challenges to rules has expanded, so activity could accelerate as the industry takes advantage of the new decisions. Additionally, there will likely be more challenges to agency actions against individuals such as actions banning individuals from participating in the banking industry or otherwise being an institution-affiliated party due to alleged wrongdoing.
2. There will be less predictability.
Whatever one's views on the administrative state, the benefit of having a clear statute of limitations for facial challenges and offering deference to the agencies was that there was a single, national rule that regulated industries could rely on. After the Loper Bright and Corner Post decisions, there will be more challenges to rules — even older ones — and the possibility of more circuit splits as judges apply their own interpretations of statutes rather than deferring to reasonable agency constructions. Whether this is a good thing or a bad thing is in the eye of the beholder, but regulated entities may need to have a more dynamic view of the regulatory environment and prepare for multiple regulatory scenarios at once.
3. The financial services regulators have incentives to
move to more opaque actions.
The regulators are now on notice that there will be more judicial scrutiny of their actions, including rulemakings, guidance, policy statements, and policies and procedures. As a consequence, there may be an incentive to lean on their broad enforcement and supervisory powers, which tend to be less public. In any case, the agencies will likely rely heavily on their litigators to advise on the potential litigation risks with various actions. On the other hand, as noted below, those on the receiving end of such agency actions may have greater leverage in reaching favorable non-litigated settlements.
4. Regulated entities should take advantage of the notice and comment process.
In the face of less judicial deference, regulators will need to offer a "reasoned response" to all substantive comment letters submitted during the notice and comment process of rulemakings to avoid having a federal court find that the agency acted in an arbitrary and capricious manner. This should incentivize regulated entities to submit meaningful comments during rulemakings — including careful textual analysis of the governing statute supporting their favored construction. This is particularly important for issues that are meaningful to individual institutions or small groups of institutions that are not fully aligned with the larger trade associations.
5. The impact on the Federal Banking Agencies is unknown, but the strategies for navigating enforcement actions — for both the banking agencies and respondents — will change.
Because the Jarkesy decision was limited to SEC proceedings, it is unclear at this point how the Federal Banking Agencies will be impacted by this decision. In the short term, we expect the banking agencies may become more measured in pursuing certain enforcement actions that lack a high likelihood of being consensually resolved and seek remedies that are the same or analogous to the remedies sought by the SEC in Jarkesy. This may impact the nature and style of the allegations made by the agencies in their 15-day letter process and the specific remedies sought. The Court's decision also may provide the subjects of enforcement inquiries (and in particular individuals) with greater leverage pre-resolution. Indeed, especially in the short term, the Federal Banking Agencies likely will prefer consensual resolutions instead of taking the risk of being pulled into federal court where judges and discovery rules may be less favorable to the agencies than in administrative court.5
Footnotes
1. Securities & Exchange Commission v. Jarkesy, 603 U.S. ____ (2024) (Sotomayor, J., dissenting).
2. Corner Post v. Federal Reserve, 603 U.S. ____ (2024) (Jackson, J., dissenting).
3. See, e.g., 12 U.S.C. § 3907 ("Each appropriate Federal banking agency shall have the authority to establish such minimum level of capital for a banking institution as the appropriate Federal banking agency, in its discretion, deems to be necessary or appropriate in light of the particular circumstances of the banking institution.") (emphasis added).
4. That said, the intricacies of third-party standing can be a real issue for banks, including in the recent CRA litigation. See Defendants' Consolidated Brief in Opposition to Plaintiffs' Motion for Preliminary Injunction, ECF No. 67, Texas Bankers Association et al v. Office of the Comptroller of the Currency et al, 2:24-cv-00025-Z-BR, at 12, 40-42 (N.D. Tex.) ("Every plaintiff in this action is an association purporting to sue on behalf of its members, ... but they have not satisfied the requirement that they identify by name at least one member who would have standing in its own right or show all members of the association are affected by the challenged activity.").
5. A case has already been filed in the Northern District of Texas challenging the constitutionality of an FDIC enforcement action against an individual based on, inter alia, the lack of a jury trial and the removal protections for administrative law judges used by the FDIC. See Burgess v. Federal Deposit Insurance Corporation et al, Complaint, ECF No. 1, 7:22-cv-00100-O, ¶¶ 9-12 (N.D. Tex.). The FDIC's appeal to the Fifth Circuit was stayed pending resolution of Jarkesy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.