Editor: What is the importance of the recent decision by the D.C. Circuit in Business Roundtable v. SEC?
Tarbert: The Business Roundtable decision is important as the proverbial shot across the bow of agencies undertaking rulemaking under the Dodd-Frank Act or any other analysis that requires them to quantify the economic impact of a rule or agency action. The court reiterated its commitment to a rigorous review of agencies’ cost-benefit analyses and refused to defer to the SEC’s judgment on a number of grounds. The decision also highlights the importance of the notice-and-comment process, particularly with respect to comments addressing factual, objective and empirical matters. Although the decision is likely to have an impact first and foremost on the hundreds of rules to come under the Dodd-Frank Act, the D.C. Circuit did not confine its reasoning to the area of financial regulation. Therefore, we can expect that Business Roundtable will be cited in challenges to agency rulemakings in many different contexts over the next decade.
Editor: Has the cost-benefit analysis requirement always been around?
Tarbert: Cost-benefit calculations are nothing new. While the Administrative Procedure Act (“APA”) - which governs agency action generally - does not require economic analysis for every rulemaking, the statute makes clear that the decision not to undertake a cost-benefit evaluation may itself be subject to judicial review.
In many cases, an economic analysis requirement can be found in a federal agency’s organic statute, such as those governing the SEC and CFTC. In addition to investor protection, the SEC must consider the impact of its rulemakings on “efficiency, competition, and capital formation.” For its part, the CFTC is directed by Congress to evaluate a number of factors, including “efficiency” and “competitiveness.” More recently, in establishing the Consumer Financial Protection Bureau, Congress in section 1022 of the Dodd-Frank Act explicitly required the new agency to analyze each rule’s costs and benefits for consumers as well as its broader economic impact. Similar provisions exist for federal agencies in other spheres, and we can expect Congress to impose these kinds of requirements in all new legislation going forward.
In addition, in 1993 President Clinton issued an executive order requiring agencies to conduct an economic impact analysis for any proposed rule estimated to have an economic impact greater than $100 million in any one year. Most financial sector rulemakings under the Dodd-Frank Act -- as well as future regulations affecting the pharmaceutical, energy, and manufacturing sectors -- are likely to meet the $100 million threshold, thereby triggering a cost-benefit analysis requirement.
Editor: How do you think federal agencies will respond to Business Roundtable in the context of Dodd-Frank rulemakings and beyond?
Tarbert: The most likely consequence is that agencies will slow down as they are required to shore up their analysis and reasoning in light of the D.C. Circuit’s decision. As a result, we can expect more deadlines under the Dodd-Frank Act to be missed. We can also expect agencies to devote greater resources to economic studies and to encourage studies undertaken by academics, think tanks and other institutions likely to support the agency’s goals and proposed regulations.
Editor: What can industry do to take advantage of the decision in Business Roundtable?
Tarbert: The decision in Business Roundtable certainly reinforces the need to raise before an agency every aspect of a rulemaking that an organization finds problematic. The decision also illustrates how specific types of comments can lay the groundwork for an effective challenge to an agency’s economic analysis.
In particular, the D.C. Circuit’s decision underscores the importance of including in one’s comments expert and empirical analyses to contradict (or at least challenge) any unfounded assumptions, dubious principles, or debatable academic research on which an agency’s own analysis might be based. In Business Roundtable, for example, the court relied on a comment from an American Bar Association committee in rejecting the SEC’s contrary assertion as “mere speculation.” The court also relied on the fact that the SEC had done nothing to estimate or quantify the costs it expected companies to incur, and it found deficient the SEC’s reliance on what the court deemed “two relatively unpersuasive” studies. Although courts may defer to expert agencies as a general matter, Business Roundtable demonstrates that such deference likely will not extend to the blind acceptance of any study on which an agency might rely or any unsupported assertion an agency might make. Consequently, companies will likely benefit from enlisting outside counsel and other experts, not just when a case reaches the court of appeals, but also as part of the notice-and-comment process.
Editor: Apart from inadequate economic analysis, what are the other common grounds for challenging agency rulemakings?
Tarbert: Given that the longstanding “arbitrary and capricious” standard is fairly deferential to agencies, it is often hard to find a “slam dunk” basis for having a final rule nullified by the D.C. Circuit or other court. Most challenges necessarily involve a weighing of all of the facts and circumstances relevant to the agency’s decision-making process, including its evaluation of public comments. Good candidates for judicial review are those agency rules or other decisions that evoke well-reasoned and passionate dissents from one or more of the agency’s commissioners or board members. That was true for the proxy-access rule struck down in Business Roundtable as well as for the recent CFTC position-limits rulemaking for which there is a currently pending challenge in the D.C. Circuit.
That said, every so often an agency fails to consider a factor specifically enumerated -- or at the very least implied -- by Congress. Courts have generally deemed these omissions as prima facie evidence that an agency has acted arbitrarily and capriciously. Another situation where courts may conduct a “hard look” review is where an agency changes its legal position or issues a revised rule that is largely contrary to a long-settled policy of the agency. This often occurs in politically sensitive areas such as environmental protection, where subsequent presidential administrations may appoint agency heads with differing views.
A final reason why agency action is sometimes nullified is when the judiciary determines that an agency stepped beyond its statutory authority. In 2006, the D.C. Circuit famously struck down a regulation that would have required most hedge fund advisers to register with the SEC as an action that exceeded the SEC’s authority under the Investment Advisers Act. (The Dodd-Frank Act subsequently vested the SEC with the relevant authority.) In cases where congressional intent is ambiguous, legislative history as well as past practice by the agency are often used as indicators of the limits of a particular regulator’s jurisdictional ambit.
Editor: As a former U.S. Supreme Court law clerk, do you think the High Court will play an increasing role in these cases?
Tarbert: Although it is difficult to predict what cases might capture the Supreme Court’s attention, I would not be surprised to see the Court weigh in on the issue of economic analysis down the line. One factor that plays a large role in the Court’s decision to hear a given case is whether lower courts are at odds on the question presented. In other words, if another court were to articulate an understanding of what the “economic consequences” analysis demands that departs from that of the D.C. Circuit in Business Roundtable, or if different courts of appeals were to reach varying conclusions as to the validity of a single agency rule as a result of economic analysis, the Court might well step in to resolve that conflict. Furthermore, if the U.S. government were to seek review of a decision like Business Roundtable, that petition would likely signal to the Court that the issue of economic analysis is one of national importance. I think the Court would be particularly likely to hear a case on the matter where the challenged rule puts significant sums of money at stake.
It is also worth noting that the justices are not shy about reversing agency policy and would not hesitate to take a case on that basis. As recently as December 2011, the Supreme Court held arbitrary and capricious an approach taken by the Board of Immigration Appeals to govern certain deportations. In that case, Judulang v. Holder, the Court specifically rejected an argument the U.S. government made with respect to the costs it estimated different approaches would entail. That decision arose in a totally different context, of course, but it provides some indication that the High Court could be as searching in its review of an agency’s economic analysis as the D.C. Circuit was in Business Roundtable.
Editor: What are non-legislative agency rules and how can they affect industry?
Tarbert: Non-legislative rules are those binding interpretative rules or policy statements adopted outside the notice-and-comment process normally required under the APA. Closely related are legal opinions, no-action letters, “telephone” interpretations, and other case-by-case determinations that may be tantamount to rules and often have a material affect on business conduct. In the banking sector, for example, the Federal Reserve Board and the Federal Deposit Insurance Corporation regularly release policy statements interpreting key statutory provisions that have a significant impact on the manner in which everyday transactions are conducted. Legal opinions with broad-based applications have the same effect. As some academics have pointed out, there is no clear line of demarcation as to which rules require the notice-and-comment process of the APA and, in any event, whether non-legislative rules are subject to any form of judicial review. Even after a final rule is promulgated, therefore, corporate counsel should engage regulators in an ongoing dialogue to ensure that ambiguous provisions of statutes and regulations are interpreted in a reasonable manner.
Editor: Can the business community expect any relief from Congress from the deluge of regulations?
Tarbert: People often question whether the Dodd-Frank Act will be repealed in whole are in part. If history is a reliable guide, then the answer is more likely than not that the Dodd-Frank Act is here to stay. Sweeping pieces of financial legislation are rarely stricken from the U.S. Code, though they can be (and often are) augmented and amended over time. A more likely scenario is that U.S. Senate and House committees will aid the business community by ensuring that regulatory agencies take seriously the legitimate concerns of industry when promulgating regulations intended to implement the will of Congress. The most obvious way is through the exercise of congressional oversight authority and, where appropriate, through the appropriations process.
In addition, there is currently proposed legislation entitled the “Financial Regulatory Responsibility Act of 2011” that picks up where the D.C. Circuit left off in Business Roundtable. The proposed law would require an economic analysis for every proposed rulemaking by federal banking, securities, commodities, and other financial regulators, establishing a minimum of 12 elements every agency would need to incorporate -- including why the private market cannot adequately address the perceived regulatory issue and the adverse impact on regulated entities and other market participants. Under the legislation, an agency rule could be finalized only if its benefits outweighed its costs. Furthermore, the proposal would also require agencies to evaluate the actual economic impact of every final rule within five years of its going into effect.
Although it remains uncertain whether such legislative measures will ultimately be adopted, the popularity and buzz surrounding these kinds of proposals does send a clear message to agencies that Congress is monitoring their rulemaking processes. I think we can expect similar developments as new regulations are directed at the pharmaceutical, energy and other sectors.
Published December 19, 2011.
