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From Securities Regulation Daily, October 28, 2014

Think tanks ask Supreme Court to require notice and comment for federal agency interpretation

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

In a case of enormous importance to federal regulatory agencies, a number of think tanks have weighed in, with amicus briefs filed in the Supreme Court, on whether a federal agency has to conduct public notice and comment before changing a regulatory interpretation that it had previously issued. The Court is reviewing a DC Circuit panel ruling that, when an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish under the Administrative Procedure Act without public notice and comment. The case is set for oral argument on December 1, 2014 (Perez v. Mortgage Bankers Association, Dkt. No. 13-1041).

The Cato Institute, the Judicial Education Project and the Competitive Enterprise Institute filed a joint brief that went deep into the legislative history of the ABA and examined the distinction between a legislative rule and an interpretative rule. Asking the Court to affirm the DC Circuit ruling, the Institutes said that the panel’s approach correctly focuses on function over form. It asks whether the agency action, whatever its form or purported intent, has in effect amended its rule, something it may not accomplish under the APA without notice and comment. Thus, an agency’s stated intent to treat a major substantive legal addition as an interpretative rule will not by itself suffice to escape the notice and comment requirements of Section 553 of the APA.

The DC Circuit’s realistic approach would not have been foreign to the APA’s framers, said the brief. Rather, the debates in Congress and that era’s scholarship recognized that to determine whether a given rule truly is interpretative or legislative requires judgment. And the APA’s Congressional framers expected the courts to exercise such judgment based not on a rule’s nominal form or the agency’s subjective intent, but on the rule’s actual, substantive function as to regulated entities. While the Government asserts that the APA’s interpretative rule exemption is unambiguous, continued the brief, the legislative framers of the APA saw considerable ambiguity in the legislative-interpretation distinction, and they enacted a statute that accommodates the court’s practical judgment.

While the Government paints the APA as a tool of regulator convenience, noted the brief, legislative history indicates that the APA was enacted to restrain federal regulatory agencies, not to empower them. To that end, the courts must not allow the interpretative rule exception to swallow the notice-and-comment rule. The D.C. Circuit rightly asked not what the agency’s rule did in form, but what it did in effect.

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