Much of the reporting about the Supreme Court’s recent decision in West Virginia v. EPA has focused on what it means for the ability of the Environmental Protection Agency and other environmental agencies to address climate change. The court’s decision, however, has broad implications for other regulatory agencies, including the financial regulators.
In its decision, the court formalizes a rule of statutory construction that it calls the “major questions doctrine.” Under this doctrine, administrative agencies must be able to point to clear congressional authorization in extraordinary cases when they claim to make decisions of vast economic and political significance. The court creates a two-part test to examine: 1) whether the history and breadth of the authority exercised by an agency that results in a broad societal impact is such that a court should hesitate before concluding that Congress really meant to confer such broad authority and 2) whether Congress did provide clear authorization. A merely plausible textual basis for the agency action in this context is not sufficient under the doctrine. The decision provides some general interpretive guidance for the application of the doctrine, but leaves much interpretation to the courts.
Inferring congressional intent is always a difficult exercise for the courts. Congress is a collective body and lawmakers have their own individual reasons for voting for or against a proposal. To interpret congressional intent from the absence of legislative action is even more perilous. Justice Scalia once wrote that “we should admit that vindication by congressional inaction is a canard,” yet the court establishes this as the foundation of its new doctrine.
The court’s far-reaching effort to place limits on regulatory action is likely to raise serious issues regarding future financial regulation. The odds that actions by a financial regulator could be challenged or invalidated under the doctrine, as happened to the EPA, are best examined across a spectrum.
On one end of the spectrum are regulatory actions where statutes provide a high level of detail or there is a history of congressional involvement. For example, many of the actions taken by financial regulators to avert economic disaster could have been challenged or even invalidated under the major questions doctrine if that had been the controlling legal standard in 2008. Facing the collapse of the financial system, Treasury’s use of the Exchange Stabilization Fund, the Federal Reserve’s use of its Section 13(3) authority and the FDIC’s use of the systemic risk exception to create the Temporary Liquidity Guarantee Program all involved novel or expansive interpretations of long dormant or newly interpreted statutory authority.
Yet, it was Congress, not the courts, that determined the agencies had overreached and significantly restricted or restructured how these programs would work in future crises through the Dodd-Frank Act and other legislation. In responding to the COVID-19 crisis, Congress and the regulatory agencies revived many of these powers in their amended form as the government attempted to lessen the impact of government shutdowns and declining economic activity. The specific statutory changes and the continued interaction with Congress to fine tune statutory authority would seem to exemplify the type of regulatory action backed by congressional authorization that the court seems to favor and should insulate at least these emergency powers from future challenge under the court’s new doctrine.
Yet, much financial regulatory activity is based on broad, generalized grants of authority from Congress to the regulators and may now be susceptible to challenge. Rules relating to consumer or investor protection may be especially vulnerable if the rulemaking involves a substantial degree of interpretation of an underlying statute and would result in a profound political or economic impact.
It is very difficult to know how far the courts intend to go in this gray area under the doctrine. In the EPA case, the court found that there was no congressional authorization that would make clear that Congress intended for the issue to be resolved in the manner that the agency had chosen. However, the court ignored that Congress had appropriated money to fund the agency’s implementation of the rule. The court also ignored legislative action that was vetoed by the president to disallow the regulation under the Congressional Review Act. The court’s circumscribed and selective review of legislative activity fails to provide direction as to just what the court would find a sufficient expression of congressional authorization beyond a detailed prescriptive statute.
The most extreme circumstance on the major questions spectrum, and perhaps the most problematic, is instances where there is a clear absence of financial regulation, and may be a need for emergency action, but the situation involves a new or evolving issue where Congress did not anticipate the issues and has not responded to it specifically. The absence of a regulatory scheme for digital assets and cryptocurrency, where agencies are attempting to regulate under their general authority and Congress has so far not acted, could mean that the government may not be able to respond rapidly or effectively without challenge if this sector of the industry becomes a systemic problem.
Given that financial regulation by definition often involves rulemaking in areas with significant economic and political importance, the financial agencies should expect increasing challenges to their actions in the coming years. Ironically, the court’s effort to rein in the administrative state also preempts the ability of Congress and the president to address issues of perceived overreach as they did following the financial crisis. In doing so, the court moves beyond serving as a neutral umpire and injects itself into important policy decisions. Like a judicial helicopter parent, the court steps in to fight policy battles for a Congress that is constitutionally equipped to protect its own interests. In taking this action along with the developing line of cases regarding the nondelegation doctrine, which limits what authority Congress can delegate to the executive branch, the court is aggressively seizing a role for itself in policy issues that are the province of Congress and the president as the people’s elected representatives. At a minimum, the court’s decision will create confusion and invite continuous litigation in financial regulation.
More concerning, in a world where future threats can emerge and metastasize in the financial system with almost unimaginable speed, the major questions doctrine with its bias toward inaction, increases risk that the government will not be able to protect its citizens or the economy effectively in future financial crises.
