The importance of this decision cannot be understated, and the impact
will be felt throughout every industry, says Matthew John McNally, Managing Partner, Evolved Tax & Advisory
Q - Can you explain the recent US Supreme Court ruling regarding the overturned Chevron Deference, and what it means for compliance teams?
On June 28, 2024, the US Supreme Court overturned Chevron Deference, which was derived from the 1984 case Chevron USA v Natural Resources Defense Council. That doctrine determines how federal agencies interpret ambiguous language in their regulations when a dispute arises, so the court’s decision is a momentous one. It used to be the case that when a law was written by government, the three-letter agencies like the Securities and Exchange Commission and the Internal Revenue Service would interpret the law, come up with what they thought the House of Representatives was trying to get across, and then enforce that interpretation. The courts determined in 1984 that if a statute was unclear, Chevron deference meant federal agencies had the authority to decide how to interpret and carry out the law.
In ending that Chevron deference, the Supreme Court has restrained the powers of federal bureaucracy and opened Pandora’s box. The importance of this decision cannot be understated, and the impact will be felt throughout every industry and has altered the legal landscape in which agencies like the SEC and IRS operate. Most of the tax rules written today were never written into law but were written by the IRS
itself, for example, so I think we are going to see a lot of litigation challenging a lot of different rulings.
Q - What is the immediate impact of the ruling?
Other than the SEC’s Private Fund Adviser Rules, which were vacated by the Court of Appeal such that regulated parties no longer have to follow those rules, nothing will change immediately. But the Supreme Court ruling will have an immediate and extensive impact on all ambiguous interpretations of federal statutes, as well as thousands of prior decisions that were based on Chevron deference grounds. If compliance teams are thinking about laws they don’t like, they cannot stop following them, but companies that are willing to fight in court now have a much more plausible route to challenging the agencies.
People should maintain what they’re doing and make no rash decisions, but this is going to play out over the next three to 10 years and potentially lead to some dramatic changes.
Q - What will the decision mean for internal governance and investor relations teams?
In private funds, teams can look at the SEC’s private fund rules that were thrown out in June and consider potentially ceasing to follow those. The ruling may permit compliance teams to suspend and even discontinue preparations for these rules, significantly reducing the immediate compliance burden and accompanying costs. It is important that any decisions made by compliance teams are taken in conjunction with advisers.
When it comes to investor relations, though, many funds had already started to provide the additional disclosures to investors, which creates an issue because investors may well want to continue receiving that information. So if you have started a precedent of providing information to investors in a certain way, it may be that you need to continue doing that. Otherwise, if you were yet to start changing your practices in line with the rules, you no longer need to do anything.
The other point is that different organizations may interpret the overturning of the deference in different ways, so investors may see different approaches from different managers. In that sense, market practice and LP demands are key, rather than the rules necessarily.
“We are going to see a lot of litigation”
Q - What is the impact on financial institutions?
There is a shift in the legal landscape, particularly for financial institutions and professionals. This ruling introduces uncertainty regarding future regulatory actions by the SEC, the IRS and other agencies. The potential for varied interpretations of statutes, the loss of protection provided by following administrative agency interpretations and the potential for increased litigation all contribute to a more uncertain and riskier environment.
Q - What should the market be most concerned about regarding future compliance?
In the near future, it is unlikely that much is going to happen on this until the other side of the presidential
election in November. But people are going to start to look at regulators differently, and the bigger organizations that have the resources to possibly fight some of these regulations should consider doing that.
After the election, we are going to see a heightened litigation environment with more lawsuits and more legislation coming out to clarify issues. We may have a situation where the incoming president has control of both houses, in which case they may go back and push the power back to the agencies to reinstate their ability to make those decisions. But that seems unlikely to happen.
We don’t really know how this is going to work out, but we can definitely anticipate a lot more legal battles as the people that wish to challenge rules find themselves with more grounds on which to fight them.
In the case of tax, for example, everything that is written in the regulations by the IRS is now open to challenge, so there is a huge amount that could be fought. The future looks like a lot of lawsuits.
Q - Finally, what are the broader implications for SEC rulemaking?
The court’s interpretation of the SEC’s authority may also limit the agency’s ability to enforce or introduce similar rules in the future, particularly those relying on the same statutory provisions. The SEC will have to go back and look at all the rules they have already set in place and potentially review them all. They are definitely hampered on making any rules in the same way in the future, because they are no longer considered to be the interpreters of the laws.
In general, they are going to have to go back and revisit a lot of decision-making, and then look at any future laws that come out and see how they can either push them back to the House of Representatives or to Congress for clarification on any areas of ambiguity. This opens the door to legitimately reining in the power of all the three-letter agencies, including the SEC. Control of rulemaking will go back to the people we actually voted for, rather than these bureaucratic organizations.
