Many claims have been made about the current pace of SEC rulemaking, some inconsistent with reality.  The U.S. Chamber of Commerce, for example, has claimed that under Chair Gary Gensler the SEC launched an “unprecedented” “barrage of rulemaking.”[1]  A brief review of verifiable facts about the agency’s actual regulatory output to date may be useful in assessing and forecasting the rest of the agency’s agenda.  It is also worth benchmarking both the SEC’s rulemaking and the extent and nature of litigation challenging its rules to assess how changes in legal doctrine and court personnel are affecting the agency.

Through January 20, 2024, the date of this analysis, 1008 days into Gensler’s term, the SEC had adopted 51 final rules.  This total excludes rules of the stock exchanges, which number in the thousands each year, in all administrations.  Those rules make changes that mostly reflect the ongoing business operations of the exchanges, which are for-profit entities, and do not have the kind of direct effects that ordinary SEC rules do.  Also excluded are exemptions and interpretive statements.

Just over half (27) of those final rules are technical and of limited general interest.  The SEC updates its EDGAR manual routinely, for example, using the same process as for more substantive rules.  Other technical rules include changes to the SEC’s rules of practice, delegations of authority to heads of SEC divisions, changes in fee schedules, and so on.  To be sure, these changes can matter, but they are not the kinds of rules most people have in mind when they are assessing rulemaking activity of an agency.  Reasonable people might disagree about whether rules are technical or non-technical, but none of the qualitative points in this review would change, regardless of how judgments about classification might be made on the margins.

Not counting technical rules, 24 final rules had been adopted under Chair Gensler as of January 20, 2024. They begin with rules on Universal Proxy (11/17/21), implementation of the Holding Foreign Companies Accountable Act (12/2/21), and Proxy Advisors (7/13/22), and end with rules on Conflicts in Securitizations (11/27/23), Treasury Market Clearing (12/13/23), and SPACs (1/24/24).  Notable final rules along the way include ones on 10b-5-1 Plans (12/14/22), Buyback Disclosure (5/3/23), and Beneficial Ownership Disclosure (10/10/23).

How does this compare with SEC rulemaking under prior administrations?  Is it true, as the chamber and others have claimed, that the Gensler SEC has been the most aggressively regulatory SEC in recent history?  The data tell a different story.  In the first 1008 days of their respective terms as chair, the SEC passed 30 non-technical final rules under Jay Clayton, 24 under Mary Jo White, and 32 under Mary Schapiro.  In other words, the Gensler SEC is directly in line with, or even slightly less aggressive than, its predecessors, as shown in this Table:

If skeptical readers worry that this  bottom-line is skewed by the technical vs. non-technical classification, they can be assured that it holds when one looks at all rules passed, or the percentage of technical vs. non-technical rules, under the last four long-serving chairs.  Gensler’s total number of final rules (51) is below that of Clayton (54) and Schapiro (62), if a little higher than White (44).  That trend, too, is flat.

How much litigation is the SEC’s rulemaking encountering?  Here, the story and trend are quite different.  Recognizing that sometimes lawsuits take some time to initiate, a straight comparison of lawsuits challenging rules to date should show fewer challenges to the current SEC’s rules than to prior SEC rules.  Yet Gensler’s SEC’s final rules have already attracted as many lawsuits as the three long-serving prior chairs combined.  Expressed as a rate, the time series shows a distinct “hockey stick” shape in the pattern of litigation:  3 percent of the Schapiro SEC non-technical rules attracted lawsuits, a rate that slightly more than doubled under White and Clayton.  By contrast, Gensler’s SEC has been sued 21 percent of the time for its non-technical final rules.  Rules attracting lawsuits include those governing Proxy Advisors, Buyback Disclosure, Securities Lending, Short Sales, and Private Funds.

It is too early in the litigation process to predict with confidence how well the SEC will do in court.  Some lawsuits may be low-odds rolls of the dice by well-funded trade groups.  But we can already see the nature and breadth of the types of challenges and where they have been brought.  In both respects, litigation has shifted, along with the overall rate.  Claims continue to be made based on the Administrative Procedures Act, long a staple of challenges to rule changes.  These include challenges alleging insufficient – or what a panel of generalist judges say is inadequate – cost-benefit analysis.

But adding fuel to the litigation fire are more claims premised on basic statutory authority.  Chevron[2] deference is still nominally the law as of this writing,[3] but litigants are acting as if the decision that gave that doctrine its name has already been overturned.  The lack of deference seemingly expected of courts by plaintiffs has only been reinforced by the “major questions doctrine,” a nominally “interpretive” principle given dramatically increased prominence by the U.S. Supreme Court in West Virginia v. EPA in 2022.[4]  The potential breadth of the “major questions” doctrine was clear from Justice Gorsuch’s concurrence in West Virginia v. EPA. In it, Gorsuch asserted that the question of whether a rule is authorized becomes a “major question” imposing a heavy burden on the agency if the rule (1) addresses a topic of political controversy, (2) affects a significant part of the economy, (3) imposes large compliance costs, (4) intrudes into states’ rights, or (5) reverses a prior agency rule or interpretation.[5]

Gorsuch’s assertion was followed by a spike in rule challenges exploiting this doctrine, as shown by data on challenges across the government, compiled and analyzed by Natasha Brunstein.[6]  Such a high level of challenges is an unlikely to persist long-term, if for no reason other than that it would impose a heavy burden on the courts.  Recognition of this may, perhaps, have led a Trump appointee to give a “major questions” argument the back of his hand in a footnote en route to upholding the Department of Labor’s revision to what factors pension fiduciaries could consider.[7]  A much narrower approach to “major questions” was also taken in a securities law decision by Judge Jed Rakoff in the Southern District of New York, where he rejected the idea that the size of the crypto industry was sufficient to turn application of long-standing SEC rules into a “major question.”[8]  Yet the possibility that some courts might follow Gorsuch’s vision of what counts as a “major question” is one of the driver’s of litigation against the Gensler SEC’s final rules, with the doctrine cited in briefs in industry challenges to rules governing Private Funds, premised in part on the idea that the authority claimed by the SEC is “novel.”[9]

Where suits are filed is also (for now) remarkably different from where they were filed in the past.  Under the last three long-serving SEC chairs, nearly all claims attacking rule changes were brought in the D.C. Circuit (or, where statutorily directed, the D.C. District Court), and none in the Fifth Circuit.  Under the Gensler SEC, all but one have been brought in the Fifth Circuit.  It is almost taken for granted that litigants have been and will continue to forum shop, taking advantage of the perceived effects of the partisan inclinations of the Fifth Circuit as compared with other Circuits.  The Wall Street Journal reported that one of the trade groups challenging the SEC’s Private Fund rules – the National Association of Private Fund Managers (NAPFM) – was organized by two hedge funds (Millennium Management and HBK Capital Management) specifically to bring that challenge.[10]  It would be a striking coincidence that the NAPFM was organized in Texas, in the Fifth Circuit.  Millennium’s vice chairman and chief legal officer also happens to be a former general counsel of the SEC.  That partisan-oriented forum shopping is not more of a scandal – at least for lawyers who profess to believe in the value and possibility of a politically neutral rule of law — is worth at least noticing, and is likely contributing to the uptick in litigation under Chair Gensler.

It is also unlikely to be an equilibrium:  If more than one plaintiff challenges a rule in different district or circuit courts, the first-to-file does not get to choose where the case will proceed.[11]  One would not expect, for example, the Chamber of Commerce to get to determine where any future climate change disclosure rule would be evaluated.  Environmental groups are unlikely to be unreservedly happy with any politically plausible final rule, given their broader ambitions and comments on the proposed rule.[12]

In sum, contrary to some claims, the current SEC is not adopting rules at a faster pace than did prior SECs; by contrast, it is being sued far more often.  True, the total absolute number of lawsuits remains small, given that the absolute number of rules itself is not large.  But the effect of the elevated litigation risk is in part to slow down regulatory change. The agency has to spend more time considering the full range of reasonable alternatives to a given potential rule, scoping its initial proposal with a view to possible changes that could be made in light of likely public comments, analyzing the economic consequences of those alternatives, and reading through thousands of public comments, not simply with a view to gathering useful information but also with a view to bulletproofing the final rule releases, debating internally the margin of error that inescapably vague statutory language gives it to respond to changing markets and business practices.

These effects are general, and will not over time be purely partisan in effect.  Those who applaud the accumulating sand in the wheels of regulation seem to forget that the same slow clunking machinery has to be used to improve regulation or altogether deregulate as well.  The very people who privately smile when they see how long regulation takes are the same people who publicly scowl when agencies are forced by lack of resources in the face of litigation risk to “regulate by enforcement” – that is, carry out Congress’ command to enforce the law as written, as vague as statutes commonly are, and do so without the benefit of clarifying rules or exemptions.  On a quiet day, thoughtful business leaders or even trade groups not diverted from the interests of their members by agency costs might take from this brief analysis reasons to consider letting the political process, and choices among varied expert personnel subject to political oversight, shape and constrain regulation over time, rather than pushing an ever-increasing number of rule changes into the courts, which in the end are managed by political appointees with stronger commitments to various ideologies than either law or expert policy.

ENDNOTES

[1] Letter from U.S. Chamber of Commerce to Patrick McHenry and Maxine Waters (Apr. 14, 2023), available at http://tinyurl.com/32upnaa6.

[2] Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

[3] Chevron was revisited in a pending Supreme Court case, Loper Bright Enterprises v. Raimondo.  See Amy Howe, Supreme Court likely to discard Chevron, ScotusBlog (Jan 17, 2024), available at http://tinyurl.com/y5234pc3.

[4] 142 S. Ct. 2587, available at http://tinyurl.com/adeny7b4.

[5] See pages 9-13 of Gorsuch’s concurrence.

[6] Natasha Brunstein, Taking Stock of West Virginia on its One-Year Anniversary, Yale J. Reg. Notice & Comment (June 18, 2023), available at http://tinyurl.com/2am8sc3f.

[7] Utah v. Walsh, 2:23-CV-016-Z (N.D. Tex. Sep. 21, 2023), note 3.  That judge had previously achieved notoriety for his nationwide block of the approval of mifepristone (“Plan B” birth control) by the Food and Drug Administration, which went too far even for the Fifth Circuit.  See Ann E. Marimow and Perry Stein, Appeals court rules abortion pill can remain on market with restrictions, Wash. Post (Aug. 16, 2023).

[8] SEC v. Terraform Labs Pte. Ltd. and Do Hyeong Kwon, 23-cv-1346 (JSR) (S.D.N.Y. July 21, 2023), available at http://tinyurl.com/yeyrd7sc.

[9] E.g., National Association of Private Fund Managers et al. v. SEC, Brief of Amicus Curiae the Chamber of Commerce (Nov. 8, 2023) (asserting that the rules will alter “fundamental details of a regulatory scheme” and arguing that this “elephant” cannot fit inside the “mousehole” of the statutory provisions cited by the SEC in adopting the rules).

[10] Paul Kiernan, Private Equity, Hedge Funds Brace for Coming SEC Overhaul, Wall St. J. (Aug. 2, 2023).

[11] E.g., http://tinyurl.com/58mbmjps (Rule 25.1 et seq. specifies random selection for Circuits in such event).

[12] E.g., http://tinyurl.com/2p8y8jj7 (NRDC comment on SEC climate proposal advocating expansion of Scope 3 disclosure requirements); http://tinyurl.com/2hvdb5w8 (comment from Sierra Club et al. advocating expanding climate disclosure coverage to include private funds).

This post comes to us from John Coates, the John F. Cogan Professor of Law and Economics at Harvard Law School, who served as general counsel of the U.S. Securities and Exchange Commission and acting director of its Division of Corporation Finance.