The SEC should prepare for an increased number of legal challenges to its rules after the Supreme Court overturned the Chevron deference, according to a report from the agency’s Office of Inspector General.
The report, issued Nov. 4, specifically referenced the Supreme Court’s decision in June, which overturned the 40-year precedent that said judges should defer to regulators when laws are ambiguous and unclear.
“With heightened judicial scrutiny, agencies, including the SEC, must continue to develop a thorough administrative record, including meaningful opportunity for public participation and reasoned responses to public submissions,” the report said. “The SEC already invests considerable resources toward these ends, but should be prepared for additional litigation, as industry and public interest groups may take opportunities to challenge regulations.”
Litigation aimed at SEC rules has become more frequent recently, as the report noted. That includes nine different lawsuits filed against the agency’s climate disclosure rule, which will be heard on a consolidated basis in the 8th U.S. Circuit Court of Appeals in St. Louis. The SEC in April voluntarily halted implementation of the rule while the court hears the case.
In June, a federal appeals court vacated an SEC rule that required increased disclosure from private fund advisers and prohibited certain fee arrangements.
The OIG report said “the current regulatory environment may lead to increased forum shopping by petitioners,” which is when those filing a lawsuit choose to do so in a court that they think is more likely to rule in their favor.
“Given the SEC’s active rulemaking agenda, the OIG is conducting an audit of the SEC’s rulemaking processes and internal controls,” according to the report, which will focus on: “the opportunities for interested parties to participate in rulemakings”; evaluating and documenting how rule proposals could affect competition, efficiency and capital formation; and ensuring that staff with pertinent skills and experience are involved in crafting and examining proposed rules. The office expects to complete the audit in fiscal year 2025.
Separately, the inspector general report noted that “protecting Americans from crypto-asset investment fraud remains a challenge for the SEC.”
The SEC’s Office of Investor Education and Advocacy received 5,876 cryptocurrency-related complaints in fiscal year 2024 — outnumbering any other type of complaint received by more than double, according to the report. Therefore, “the need for robust enforcement is likely to increase, increasing the demands on SEC resources.”
The report also expresses concern about recruiting and retaining highly skilled staff given budgetary constraints, noting that “flat funding” for fiscal year 2024 required a hiring freeze at the agency, as well as the removal of certain bonuses and benefits for employees.
