If there were a Playboy magazine for sexy federal laws, the Administrative Procedure Act would not be in it. I seriously doubt that any “Law and Order” episode or plotline of “The Good Wife” has been built around the 1946 statute that governs how federal agencies may establish new regulations, and yet judicial interpretations of the APA are what determine if new regulations live or die. Consider, for instance, the Dodd-Frank financial reforms. Congress got all the credit or blame (depending on your perspective) for passing the umbrella law in 2010, but its actual implementation depends on the rule makers at the Securities and Exchange Commission and Commodity Futures Trading Commission, enacting regulations in accordance with the APA.
Business groups including the U.S. Chamber of Commerce have sued to overturn five new Dodd-Frank rules the SEC and CFTC approved, each time claiming that the agencies did not follow proper procedures. Specifically, the challenges — both to two CFTC rules expanding regulation of derivatives trading and to the SEC’s proxy access, extraction issuer and conflicts mineral rules — have asserted that the SEC and CFTC did not engage in sufficient analysis of the costs and benefits of the new regulations.
That theory received a powerful endorsement from the District of Columbia Court of Appeals in July 2011, when a three-judge appellate panel struck down the SEC’s proxy access rule, which would have required public corporations to provide investors with information about shareholder-nominated board candidates. In a harsh assessment of the agency’s rule-making process, the District of Columbia Circuit found that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” the opinion said. The appeals court concluded that the SEC had been arbitrary and capricious in enacting the proxy access rule, violating the APA.
The proxy access rule challenge, led by the Business Roundtable and the U.S. Chamber, was the first to be filed and decided, so it’s no surprise that subsequent suits seeking to overturn Dodd-Frank rules also argued that the agencies were arbitrary and capricious in passing the regulations — even though the agencies said they’d learned from the Business Roundtable ruling and revised their rule-making processes. In September, U.S. District Judge Robert Wilkins of Washington didn’t reach the question of the agency’s compliance with the APA, since he found that the CFTC violated the Commodity Exchange Act by failing to determine whether limits on derivatives tied to physical commodities were necessary before it imposed them. From the tenor of his ruling, though, Wilkins had doubts as well about the process by which the CFTC drafted and approved the new regulation, lending more credibility to such challenges. (Last month, the CFTC announced that it would appeal Wilkins’s ruling.)
But if business groups thought the APA was a silver bullet to kill off Dodd-Frank regulations, a ruling this week by U.S. District Judge Beryl Howell of Washington provides some bullet-proof armor to federal agencies. Howell was considering a challenge by the Investment Company Institute and the U.S. Chamber to the CFTC’s rule requiring registration of mutual funds that engage in derivatives trading. The business groups made the familiar arguments that the agency had not adequately considered the costs of the new rule or the benefits of requiring mutual funds already regulated by the SEC to submit to another regulator. Howell resoundingly rejected the theory, concluding that under the U.S. Supreme Court’s 2011 ruling in Judulang v. Holder, the “mere fact” that a regulation carries costs and burdens does not make that rule arbitrary and capricious.
