SEC Inspector General Warns of More Lawsuits After Loper Bright

The Securities and Exchange Commission is likely to face more pressure both in and out of the courts. 

This week, the SEC’s Office of the Inspector General, an independent auditing and investigations body, released its annual report, which stated that the regulator should expect increased litigation regarding rulemaking, in part due to the Supreme Court overturning a long-held precedent by which federal courts defer to administrative agency rules. 

Chevron’s Tail

In terms of the inspector general’s warning, released on Monday, the auditor warned that the “SEC should anticipate increased litigation by parties challenging current and future rulemakings and ensure that new regulations will withstand judicial scrutiny.”  

The inspector general cited the Supreme Court’s decision in the Loper Bright Enterprises v. Raimondo case, which overturned about 40 years of precedent known as the Chevron deference, a legal doctrine which had required federal courts to defer to administrative agencies. Now, courts hold more power in how to rule on challenges to agency rulemaking, including rules from the SEC and the Department of Labor. 

“The current regulatory environment may lead to increased forum shopping by petitioners and extended periods of uncertainty about the permissible scope of agency action,” the inspector general wrote.  

In response to the post-Chevron environment, the auditor called on the SEC to “continue to develop” a rigorous administrative process, including getting public feedback on rulemaking and giving “reasoned responses” to public comment.  

Howard Fischer, a partner in Moses & Singer LLP, believes one byproduct of Loper Bright may slow the pace of SEC rulemaking and reduce the volume of litigated enforcement actions by the regulator.  

 “The Supreme Court’s recent rulings on administrative agency powers and restraints seem to have opened the floodgates to litigation against the SEC,” Fischer wrote via email. “We are likely to see a plethora of rules challenged—even ones that have been implemented for a significant period of time. In addition, rulings limiting the SEC’s use of administrative proceedings are likely to force more cases to federal court—which will involve lengthier, and more expensive, proceedings.” 

Earlier this year, the SEC’s top enforcer, Gurbir Grewal, stepped down after implementing what many experts saw as a rigorous regulatory period. At the time, experts expected his replacement to continue a similar level of enforcement—with the election results now potentially shifting that calculus.