Unknown Unknowns after Loper Bright? Flexibility as the Best Fix

Other specific actions financial advisors can do to prepare for the unknown unknowns created by the new Supreme Court rulings include reviewing past compliance projects and updates to look for historical data. This may help identify pain points where a change in compliance processes could cause extra work or delay responsiveness to clients.

We, and what might feel like everyone else in your inbox, have been talking about two vital Supreme Court opinions that landed this summer.[1] Jarksey, which involved the power of a federal agency to bring a jury-less enforcement action, and Loper Bright, which involved whether a grant of deference to a federal agency in ambiguous regulatory issues was valid. These two cases may have injected an enormous punch of uncertainty into most financial advisor’s plans. It could be the ultimate unknown unknown. But fear not, advisors may have a friend in flexibility.

For anyone who missed the two rulings, it may be helpful to have a general, beyond brief review of the cases.The Jarksey case is especially important as it involved whether a federal agency could conduct trial within its administration. There, the defendant claimed that the SEC tried a securities fraud case within its administration that was not based on violation of securities regulations, but general theories of fraud. The Supreme Court held that Congress cannot move a matter from the courts to an agency through assignment to an agency. Even when new causes of action, such as those created by new laws or the creation of new agencies, the right to adjudication by a court (not agency) will still hold if the case involves an issue of law not public right.[2]  

The Loper Bright case involved the extent a federal agency can dominate an understanding of how a federal law should be implemented when the law left some ambiguity. Previously, the Supreme Court had ruled that the agency’s rulings must be held even when a federal court would interpret the law differently. That previous ruling created the Chevron Doctrine, so named based on the opinion creating it. Many have said that the ruling in Loper Bright may create confusion over how the system of regulation implemented administrative agencies, like the Department of Labor or the Securities Exchange Commission, will change. However, the Supreme Court’s ruling was noticeably clear: first, the Chevron Doctrine was overruled completely; yet second, all previous decisions by regulatory agencies will stand. That means, to date, nothing has changed. As the Court stated in its summary of the case: “By overruling Chevron, though, the Court does not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful—including the Clean Air Act holding of Chevron itself—are still subject to statutory stare decisis despite the Court’s change in interpretive methodology.”[3]

Read together, the two cases effectively telegraph to those in highly regulated industries, including financial investing, that regulatory agencies may have less power over their day to day operations and those regulated may have greater access to independent federal courts for a review of enforcement actions brought against them. However, there are a lot of “mays” in that statement. It is likely that there may be increased litigation around how this new regulatory-lite scheme may play out. That means, there are more unknown unknowns for financial advisors to consider in the months and years to come.

We’ve explained how known unknowns and unknown unknowns impact client investing plans in the past. There we mentioned that Unknown unknowns are those things that could come up but can’t be planned for. Public relations companies in 2007 knew that the Internet would change how they captured the news cycle but would have no way of predicting the influence Facebook and its progeny would have on how news is made (by you) and disseminated (by you not them).[4] Extent and kind of changes to investment regulation are unknown. That they will happen is certain. For example, Congress is currently considering two approaches to curtail the DOL’s ability to implement its new Retirement Security Rule, which could change the definition of fiduciaries under ERISA. At the same time, regulations that were in progress, such as the DOL’s ESG rule could be permanently tabled for lack of jurisdiction.

How to prepare for the unknown unknowns? Flexibility. Project managers have often called on a flexible approach to creating workable strategies in the face of many unknown unknowns. “Consider allowing changes to how things are done rather than what is done. Taking a pragmatic view often reveals tasks that can be scaled back, freeing resources for others with unexpectedly large challenges. For example, if procurement is moving smoothly perhaps people can be switched into other roles such as training.”[5]

Other specific actions financial advisors can do to prepare for the unknown unknowns created by the new Supreme Court rulings include the following:[6]

1.     Review past compliance projects and updates to look for historical data. This may help identify pain points where a change in compliance processes could cause extra work or delay responsiveness to clients.

2.     Plan and calendar frequent reviews of trends, news, and legal updates to verify that no changes to regulatory dates or compliance deadlines have changed. This may also help find what some project managers refer to as floating tasks, those that can change in delivery time, freeing up more time for employees to work on other tasks.

3.     Plan and add frequent meetings with compliance and legal counsel to your calendar now, rather than having to scramble to fit them into your schedule if new issues arise. Early check-ins with your compliance team can help create standard agendas of topics that need coverage and assessment prior to those meetings.

[1] https://www.bcgbenefits.com/blog/penalties-without-a-jury

[2] https://www.supremecourt.gov/opinions/23pdf/22-859_1924.pdf

[3] https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf

[4] https://www.bcgbenefits.com/blog/future-proofing

[5] https://ims-web.com/the-critical-role-of-flexibility-in-project-management-processes

[6] https://teamdeck.io/project-management/flexible-planning

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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