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From Banking and Finance Law Daily, December 1, 2014

Justices consider requiring notice and comment for agency interpretations

By Jim Hamilton, J.D., LL.M

The U.S. Supreme Court heard oral argument today in one of the most significant cases in decades for federal regulatory agency process. The case potentially has enormous consequences for the SEC, CFTC, and all federal regulatory agencies. The Court is reviewing a DC Circuit ruling that, when an agency has given one of its regulations a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended the regulation, something it may not accomplish under the Administrative Procedure Act (APA) without public notice and comment. The case invokes a construction of the APA, and the Department of Labor (DOL) is the agency in question. But any ruling by the Court would presumably apply to the SEC, CFTC, and other federal regulatory agencies (Perez v. Mortgage Bankers Association, December 1, 2014).

Some justices expressed concern that federal agencies could be using interpretations of regulations as a way to bypass the APA’s notice and comment requirement for adopting regulations. Other justices pointed out that the regulatory landscape has changed fairly dramatically since the enactment of the APA, which intertwines with traditional judicial deference to agency expertise.

Justice Stephen Breyer posed the issue before the Court as whether notice and opportunity for comment is required when a federal agency issues an authoritative interpretation of a regulation that squarely conflicts with the same agency’s prior interpretation. Justice Antonin Scalia added that the question boils down to whether an interpretation that radically alters a prior interpretation is a substantive rule requiring notice and comment. Counsel for the Mortgage Bankers Association (MBA), Allyson Ho, agreed with that submission.

Counsel for the DOL, Deputy Solicitor General Edwin Kneedler, argued that an interpretation does not get transformed into a substantive regulation simply because a prior interpretation interpreted a regulation. You simply have two interpretations of a regulation, said counsel, with the same form and the same agency intent to be interpretive.

The Court is interpreting the APA in this action, but the doctrine of judicial deference to agency expertise may also come into play.

Under the APA, as noted by DOL counsel, a regulation implementing legislation passed by Congress, what is called a legislative regulation, has the force and effect of law, and regulated parties can be sanctioned or held liable for violating the regulation. But that is not true with regard to the interpretation of a regulation by the agency, which is giving the agency’s view of what a provision of law means. The former requires notice and comment, while the latter does not.

Things have changed since the enactment of the APA, noted Justice Scalia. The original APA envisioned that substantive rules would have to be adopted through a public notice and comment process because they would have to be judicially reviewed with deference on the basis of an abuse of discretion. But, the APA envisioned that an agency interpretation of a regulation would not be given deference by the courts and hence did not require notice and comment. Here, we have flip-flopping interpretations of a regulation, noted the justice, and maybe the Court should not give deference to an agency interpretation of its regulations; and that would be a way to solve the problem of this case. Justice Scalia established in a colloquy with counsel for the DOL that the government wants the Court to give the same deference to legislative regulations and to interpretations.

Justice Elena Kagan expressed concern that more and more federal agencies are using interpretations and guidance to make law, thereby essentially doing an end run around the notice and comment provisions of the APA. On that theme, Justice Sonia Sotomayor said there is a fundamental concern that agencies are bypassing the notice and comment process by using interpretations when they should be using legislative regulations.

Justice Breyer pointed out that, with regard to a legislative regulation, Congress allows the agency to expand the statute through rules. In that case, the agency is exercising delegated congressional authority and courts give quite a lot of deference because the agency knows more about the statute, about what went on in its enactment and what Congress intended. When an agency issues an interpretation of the regulation and then changes its mind, he said, then that deference “sinks quite a lot,” something that would not happen with a legislative regulation.

Agreeing, Justice Kagan said that an agency interpretation that has been unstable over time and created an unfair surprise for private parties should not get deference.

Counsel for the MBA contended that, when an agency issues an authoritative interpretation of one its regulations, that meaning is what the regulation now is, such that to change that meaning with a subsequent interpretation is to change the regulation itself, thereby requiring notice and comment.

Justice Kagan reasoned that this would also apply to the initial interpretation as well as to the revised interpretation. If you posit that an agency interpretation somehow changes the legislative regulation, then that change happens at the moment the interpretation takes place. According to the justice, judicial deference is actually stronger with regard to the initial determination then with respect to a revised interpretation. Both interpretations could be viewed as changing the regulation such that notice and comment is necessary.

The case is No. 13-1041.

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