WASHINGTON — Banks have long been eager to see regulators knocked down a peg in the courts, but now that it might actually happen under President Trump, some are beginning to wonder if it might ultimately boomerang against the financial services industry.
At issue is a judicial principle called the Chevron doctrine, named after a 1984 Supreme Court ruling that said courts should defer to government agencies when in doubt about an interpretation of a law, specifically in cases where the law is vague.
It's “really a debate about how much authority federal courts should feel they have to interpret [a] statute,” said Peter Shane, a law professor at Ohio State University.
That principle is under attack by conservatives, who argue it gives federal agencies too much power. House Financial Services Committee Chairman Jeb Hensarling has targeted the Chevron decision in his Dodd-Frank rollback bill, while Supreme Court nominee Neil Gorsuch has expressed open skepticism of the doctrine in recent court cases.
In a decision last year, Gorsuch referred to the deference afforded to regulators as an “elephant in the room” that should be rolled back.
It “permit[s] executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framers’ design,” he wrote.
Banks are already celebrating the prospect of agencies losing their ace card in court.
“We think it's a pain in the neck,” said Wayne Abernathy, executive vice president for policy and regulatory affairs at the American Bankers Association. “We would rather be without it than with it.”
Many bankers view the Chevron doctrine as a deterrent to filing lawsuits challenging rules they oppose. It has also arguably made financial institutions more likely to settle in enforcement action cases.
“Discretion goes to the agency,” said Ashley Taylor, a partner at Troutman Sanders. “Once the agency puts out a reasonable position, it's just very difficult to win those cases and settlements reflect that.”
But some industry observers argue that it performs an essential role to ensure that laws are implemented in an coherent way — particularly in cases where their interpretation is not cut and dried.
“Congressional statutes are broadly written because they have to achieve a consensus," said Michael Krimminger, a partner at Cleary Gottlieb and former general counsel at the Federal Deposit Insurance Corp.
If the Chevron doctrine were repealed, “regulators would be more reluctant to issue rules," Krimminger said. They "probably would have more narrowly drawn rules, but they would be expecting to have lawsuits on the rules they file no matter what.”
Such an environment could result in a constant shifting of the goal posts, which could play out in favor of consumer groups as much as banks.
“If you're in favor of more regulation or less regulation — either way, there are uncertainties created," Krimminger said.
The fundamental argument underlying the Chevron doctrine is that regulators are the best informed to determine how laws should be implemented.
“Judges don't live their lives with the National Bank Act or the Clear Air Act,” Shane said. “Whereas an agency lives with it all the time.”
That is why the principle of judicial deference to government agencies goes deeper than the Chevron precedent, Shane said. It is also the result of a calculus made at the appellate court level, where judges prefer to avoid undermining the uniform application of a federal rule by challenging it in a single jurisdiction.
“You may have conflicting interpretations in different circuits, unless it gets resolved by the Supreme Court," Shane said.
Indeed, if courts cease to apply the Chevron doctrine, it could also lead to differing implementations of more laws at the state level.
“If you undo Chevron deference at the federal level, you have a ripple effect through the entire country. … These fights all move to the states,” Taylor said. “Deregulation at the federal level is going to make life more difficult for companies.”
Of course, a potential rollback or full-out repeal of the Chevron doctrine will take some time to come into effect. For one, though Gorsuch appears to be hostile to the Chevron doctrine — unlike his predecessor, Justice Antonin Scalia — that doesn't mean the rest of the high court shares his views.
Still, his philosophy on this could drive a subtle change in how the Supreme Court addresses challenges to regulatory decisions.
“It shifts things to what does the law say rather than what the agency says,” Abernathy said. “But only at the margin.”
Meanwhile, the latest draft of Hensarling’s deregulatory plan, which appeared in a memo circulating in Washington last week, included a new twist to the Chevron doctrine repeal measure.
In Hensarling's original bill, the Chevron doctrine was repealed immediately, but the memo suggested delaying that by two years. That change would theoretically give the executive branch more leeway to implement a rollback of the Dodd-Frank Act.
“It may well have to do with the effort to give the Trump administration … a chance to do what Hensarling would like it to do,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics.
Barring a full-blown repeal of the Chevron doctrine, conservatives would still like to see it revisited.
Scalia “applied the same Chevron approach whether the agency was trying to increase or decrease regulation,” said J.W. Verret, a senior scholar at the Mercatus Center. Instead, “you can establish a baseline of no regulation — requiring agencies needing to prove their basis for more regulation.”
But among Wall Street critics, any weakening of the Chevron doctrine is a cause for concern.
“There is this great push to force more agencies to use quote-unquote cost-benefit analysis more often,” said Simon Johnson, a professor at MIT. But “the idea of financial regulation is to reduce the chance of a huge financial crisis. … Such financial crises don't happen that often.”
Johnson added that if banks are given a chance, they will use the courts not only to win cases against rules they oppose, but also to buy themselves time while the political winds shift in their favor.
“They would love to be able to challenge everything more comprehensively to create delay strategies,” Johnson said.
Kate Berry contributed to this article.