Unprecedented: How New SCOTUS Decisions Affect Financial Planners

Journal of Financial Planning: October 2024

Peter Parlapiano, CFP^®, AEP, EA, is a partner at Franklin, Parlapiano, Turner and Welch LLC (www.fptwllc.com), a firm that specializes in serving high-net-worth clients from Fortune 500 energy companies. He earned his Bachelor of Business Administration in finance at Texas Christian University and went on to receive both a Master of Science degree in personal financial planning and an MBA from Texas Tech University. He is also a member of the Financial Planning Association of Houston and the Houston Estate and Financial Forum.

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In its most recent session, the U.S. Supreme Court decided two historic cases that overturned many decades of precedent. The Supreme Court issued rulings in Loper Bright Enterprises v. Raimondo and SEC v. Jarkesy that have ramifications that will be felt by the financial planning community. These court cases and the recent history of the Supreme Court are changing the legal landscape and will shape how future regulations are drafted and implemented. These decisions could have major effects on how advisers work with clients, employment contracts between advisers and their firms, along with how advisers work with the Securities and Exchange Commission (SEC) and other government agencies. 

Recent History

In June 2022, the Supreme Court in West Virginia v. EPA¹ decided that Congress had not granted the Environmental Protection Agency authority to impose new regulations to regulate greenhouse gas emissions. The major questions doctrine notes that expectations of agencies regarding “decisions of vast economic and political significance” should be made clear by Congress.²  West Virginia v. EPA states “the agency must point to ‘clear congressional authorization’ for the authority it claims.”³ 

The Supreme Court recently has seen a string of cases that have challenged legislation that were not initially passed by Congress. For example, if the Department of Labor (DOL) passed a fiduciary rule, which has “vast economic and political significance,” could it be said that the DOL has the authority to legislate rules that Congress has never enacted? There are $35 trillion in retirement related accounts⁴; it could be easily argued any rules related to retirement accounts would be of vast economic and political significance. 

Chevron Deference

To understand the current legal landscape, it is important to travel back in time. In 1984, Chevron U.S.A. v. Natural Resources Defense Council⁵ gave judges the ability to defer to government agencies when regulations passed by Congress were unclear or ambiguous. The concept of judges deferring to government agencies is known as “Chevron deference.” The logic was that government agencies (like the DOL, SEC, and others) had better knowledge than judges when trying to fill in the gaps of legislation that Congress created. 

The challenge to Chevron deference is that the U.S. Constitution grants all judicial power to the judicial branch. The role of the judicial branch is to interpret laws and regulations and to determine and apply their meaning. The political party that is in power could determine who runs various government agencies, who can insert their own interpretation of how legislation should be viewed, or “reimagined” as the current popular saying goes. Additionally, research shows that 88 percent⁶ of agency rule drafters agreed that Chevron deference allowed drafters to adopt a more aggressive interpretation. One study⁷ found that the government had a 20 percent higher success rate in cases that used Chevron deference. 

The Latest Court Decisions 

Loper Bright Case 

In the most recent Supreme Court session, Chevron deference was tested in a case called Loper Bright Enterprises v. Raimondo.⁸ In 1976, Congress passed the Magnuson–Stevens Fishery Conservation and Management Act. The main purpose of the act was to prevent fisherman from overfishing. The Magnuson–Stevens Act (MSA) is administrated under the National Marine Fisheries Service (NMFS) and requires fishers to pay a monitor to ensure the fishermen were complying with the federal regulations. The legislation laid out which fishing businesses would be subject to the MSA. A group of Atlantic fisheries sued as they believed the legislation left out their specific fishing group and therefore they were not subject to the legislation. It should be noted that the cost of hiring monitors was not inexpensive either. The estimated cost to hire monitors was $710 per day, which reduced the profit margins of the fisheries by up to 20 percent.⁹  Initially, two separate district courts had upheld the rule under Chevron deference. However, recently the Supreme Court in a 6-3 decision overruled the Chevron deference doctrine principal and agreed with the Atlantic fisheries that “courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority”¹⁰ and “may not defer to an agency interpretation of the law simply because a statute is ambiguous.”¹¹ The Loper Bright decision has no effect on state laws; however, states could choose to adopt similar rules in the future. This could pose an issue for state-registered firms whose state may or may not adopt the same legal principles as the Loper Bright decision. 

According to attorney David Foster, a partner in the tax practice group of Kirkland Ellis LLP, “One of Loper Bright’s primary effects will be to create uncertainty regarding the validity of regulations. Even before Loper Bright, the courts have been increasingly skeptical of sub-regulatory guidance.”¹² 

The Loper Bright case could also have an effect on the SEC as well. Attorney and founder of My RIA Lawyer Leila Shaver believes “with the Loper Bright ruling, the SEC will face even more challenges to its interpretation of certain rules and regulations, giving RIAs an opportunity to battle the SEC in court. At the end of the day though, it comes down to the adviser’s willingness to pull out their wallet and invest in the time and cost associated with fighting in federal court.”¹³ 

According to Marcia Wagner, managing partner at The Wagner Group, “one possibility in light of Loper is that agencies will issue more sub-regulatory guidance. The tradeoff with the issuance of sub-regulatory guidance is that it cannot provide the very detailed type of guidance that can be presented in regulations.”¹⁴ 

SEC v. Jarkesy 

George Jarkesy Jr. established two hedge funds that had more than 100 investors and managed $24 million in assets.¹⁵ Jarkesy appeared on the SEC’s radar due to the passage of the Dodd–Frank Act in 2010 that allowed the SEC to regulate firms that weren’t registered with the agency. The SEC alleged that Jarkesy made misrepresentations in terms of how much in assets he managed in an attempt to increase the amount of fees he could charge investors. The SEC brought the charges in house through an administrative law judge. The administrative law judge found Jarkesy guilty of securities fraud, and he was ordered to pay a civil fine of $300,000.¹⁶ 

To add insult to injury, since 1972, any defendants that settle with the SEC are barred from speaking out against the charges defendants may face ¹⁷ (however, a current lawsuit is challenging this as a violation of First Amendment rights¹⁸). What is ironic is that even though the SEC brought the claim, Jarkesy’s hedge fund businesses didn’t fall under the authority of the SEC.¹⁹ (Hedge funds can be exempt from registering with the SEC if they meet certain requirements.)

Jarkesy argued that since the penalty came from an SEC administrative law judge and that he was not given a jury trial, his Seventh Amendment right was violated. Ultimately, the Supreme Court in a 6-3 decision agreed with Mr. Jarkesy and ruled in his favor. 

According to My RIA Lawyer’s Shaver, the SEC v. Jarkesy decision will increase the burden for both the SEC and defendants. She believes having to file cases in federal court (as opposed to administrative proceedings) will “put more of a burden on the SEC from a financial perspective and may lead them to be more particular in what cases they pursue. This also means that defendants will be facing higher legal costs, but we may also see more defendants successfully defending themselves in federal court.” ²⁰ The SEC under federal court, she explains, will “give more visibility into the SEC’s prosecution processes and subjects them to the federal rules of evidence.” 

An analysis showed that the SEC won 90 percent of its cases when tried through the SEC administrative court, according to the decision.²¹ However, the SEC only won 69 percent of its cases when the agency had to go through federal court. The SEC had between 15 and 25 million pages of information in the Jarkesy case, which is estimated would have taken two attorneys working 12-hour days four decades to review. Also, it is important to note that under SEC administrative law, prosecutors can present hearsay or unauthenticated documents as evidence that would be inadmissible in federal court.²²

Not only will the SEC v. Jaresky case affect the SEC, but it has a broader impact on how other government agencies impose penalties for violations. According to Supreme Court Justice Sonia Sotomayor, the ruling could have an impact on more than two dozen agencies.²³  This would include the EPA, Food and Drug Administration, Department of Justice, Commodity Futures Trading Commission, and many other agencies as well. 

Ramifications for Planners 

Tax Issues 

The case could potentially even have ramifications with tax law as well. After Loper Bright, “courts no longer are bound to uphold IRS regulations as authoritative interpretations of ambiguous statutes. The reinterpretation and litigation of issues could trigger a generational upheaval in tax law.”²⁴  This could present an opportunity for taxpayers, corporations, CPAs, and tax attorneys to challenge tax regulations if they believe the IRS strayed too far from their statutory interpretations. According to attorney David Foster of Kirkland Ellis, “the Courts of Appeals within the next few years will give clear signals how they will apply Loper Bright’s new standard to Treasury regulations, which should decrease the zone of uncertainty that currently exists.”²⁵ However, regarding tax issues, attorney Jonathan Black of Caplin and Drysdale believes that of “the Treasury regulations that are currently applicable, many have been interpreted by case law, and the court was clear in the opinion that it will not be revisiting settled issues on the grounds that they were decided under the Chevron framework.”²⁶ 

DOL Fiduciary Rule 

Advisers by now are familiar with the fiduciary rule. The rule was proposed back in 2010 by the DOL in an effort to amend the Employee Retirement Income Security Act of 1974 (ERISA). The rule has gone through multiple changes and is on its fourth version in 2024.²⁷ The final fiduciary rule was supposed to take effect September 23, 2024.²⁸ However, a July 2024 ruling from the U.S. District Court for the Eastern District of Texas put the effective date of the fiduciary rule on hold. The lawsuit was brought by insurance agents who believed the definition of a “fiduciary” was stretched a little too far in order to include them. The district court judge concluded that the DOL “once again ‘exploit[s] an exemption provision into a comprehensive regulatory framework,’ ‘impermissibly bootstrap[ping] what should [be a] safe harbor criteria into “backdoor regulation”.’”²⁹ The judge added that the DOL rule was “unreasonable and arbitrary and capricious.”³⁰ The judge also cited the freshly decided Supreme Court opinion of Loper Bright in his decision. 

Commenting on the recent decision, attorney Julie Stapel, a partner at Morgan Lewis, said, “The court found that the coalition of insurance agents who brought the challenge are likely to succeed on the merits of their claim that the retirement security rule conflicts with ERISA and was an arbitrary and capricious exercise of the DOL’s regulatory power.”³¹ 

The ruling didn’t come as a surprise given the venue selected. However, according to Allie Itami, a partner with Lathrop GPM LLP, “Finding a court in Texas that believes there is room in the statute [ERISA] for one-time recommendations to be fiduciary is going to be a challenge for the DOL, and it may need to hope for a suit in a different jurisdiction to get a favorable outcome.”³²

Principal David Levine from Groom Law Group believes that it can take some time to get clarity on the DOL rule as “it will be regulation-by-regulation, but I think we’ll start to see some court decisions in the benefits space in the coming months.” Also, he feels that the decisions from Loper Bright and West Virginia v. EPA will pose “significant risk” to the DOL rule’s ability to stand up.³³ 

According to a post from Dan Aronowitz, president of Encore Fiduciary, “It is hard to argue, even though many financial advisors do, with DOL’s well-intentioned premise that IRA rollover clients should have advisors who act in their best interests. But IRAs are not part of ERISA’s mandate. The DOL does not have the power to regulate IRAs. Even if DOL’s regulation was well-intentioned, they lack the power over IRAs.”³⁴ 

Congressional Response Post Loper Bright 

The other element to consider is how Congress will react and how it will craft legislation. According to attorney Marcia Wagner, she feels that in the wake of the Loper Bright decision, Congress will have to be more precise with its language. According to Wagner, the more precise language “will cause greater delay in enacting legislation than in issuing regulations implementing that legislation. That is, to the extent that legislation must be more precise, it may be more difficult to reach agreement on the specific language.”³⁵ 

Federal Trade Commission and Financial Adviser Impact 

A major impact for financial advisers is the recently proposed noncompete rule by the Federal Trade Commission (FTC). The FTC in April 2024 issued a rule that made noncompete agreements unenforceable for the vast majority of employees (the rule doesn’t apply to nonprofits³⁶ or certain senior executives who already have a noncompete agreement in place). One potential alternative to noncompetes are trade secret and nondisclosure agreements (NDAs) that allow both employees and employers to protect sensitive and proprietary information. It is estimated that 95 percent of workers with a noncompete agreement already have an NDA.³⁷ The rule is supposed to take effect nationwide September 4, 2024; however, a federal judge in late August 2024 ruled the ban on noncompete agreements was unenforceable. The judge stated the FTC didn’t have the authority to enact the ban, which was “unreasonably overbroad without a reasonable explanation.”³⁸ The FTC is appealing the ruling.

Bringing It All Together and Final Thoughts 

Loper Bright in addition to SEC v. Jarkesy could create a legal paradigm shift for advisers and firms that hasn’t been seen before. The court cases will have an impact potentially on the DOL fiduciary rule, tax rules, noncompete contracts, and much more. According to Leilia Shaver, “Between Loper Bright and Jarkesy, the SEC and other administrative agencies have suffered a one-two punch: Administrative regulatory interpretations will no longer receive deference, and the ability to enforce those regulations administratively is likely to face serious constitutional challenges.”³⁹

The Supreme Court in its most recent session and over the past couple of years has changed the legal landscape for both advisers and people in their everyday lives. Although it is too early to know how everything will play out, it will take many lawsuits, years, and legal bills with many commas and zeros to determine what the ultimate fate will be. The legal and political environment will ebb and flow, which could temporarily create uncertainty until the Supreme Court rules for further guidance. Advisers and compliance officers will have to keep close tabs on how the rules change. The Supreme Court signaled it favors plain-written rules in a complex world, however, it may be many years and court cases before we know what the rules actually are. 

Endnotes

1. West Virginia et al. v. Environmental Protection Agency, 597 U.S. ____ (2022). www.supremecourt.gov/opinions/21pdf/20-1530_n758.pdf.
2. West Virginia v. EPA, p. 11
3. West Virginia v. EPA, p. 4 
4. Ortolani, Alex. 2023, June 14. “US Retirement Assets Grow to $35.4 Trillion in Q1.” PLANADVISER. www.planadviser.com/us-retirement-assets-grow-35-4-trillion-q1/.
5. Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). Law. https://supreme.justia.com/cases/federal/us/467/837/.
6. Bodoh, Devon, Joseph Pari, Alex Dobyan, and Grant Solomon. 2024, July 1. “Clear as Mud – Chevron Irreverence and Tax Law.” Weil Tax [blog]. https://tax.weil.com/insights/clear-as-mud-chevron-irreverence-and-tax-law/#_ftn8.
7. Gold, Rich, Andy Emerson, Amy O’Brien and Alexandra E. Ward. 2024, May 20. “U.S. Supreme Court May Soon Discard or Modify Chevron Deference.” www.hklaw.com/en/insights/publications/2024/05/us-supreme-court-may-soon-discard-or-modify-chevron-deference.
8. Loper Bright Enterprises et al. v. Raimondo, 603 U. S. ____ (2024). www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf.
9. Ibid.
10. Ibid, p. 35.
11. Ibid, p. 35.
12. E-mail correspondence with author 
13. E-mail correspondence with author
14. E-mail correspondence with author
15. Securities and Exchange Commission v. Jarkesy, et al. 603 U. S. ____ (2024). www.supremecourt.gov/opinions/23pdf/22-859_1924.pdf.
16. Greenberg Traurig LLP. 2024, June 28. “SEC v. Jarkesy: A Groundbreaking Supreme Court Decision with Significant Implications for Securities Enforcement.” www.gtlaw.com/en/insights/2024/6/sec-v-jarkesy-a-groundbreaking-supreme-court-decision-with-significant-implications-for-securities-enforcement.
17. Stradley Ronon. 2024, February 8. “SEC’s ‘Gag Rule’ Faces Increased Scrutiny.” www.stradley.com/insights/publications/2024/02/securities-lit-and-enforcement-alert-feb-2024.
18. Schaerr, Gene C., Cristina Martinez Squiers, Aaron Gordon, Tyler S. Badgley, et al. 2024. “Brief of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Petitioners.” U.S. Court of Appeals for the Ninth Circuit. No. 24-1899. www.uschamber.com/assets/documents/U.S.-Chamber-Amicus-Brief-Powell-v.-SEC-Ninth-Circuit.pdf.
19. Shapiro, Ilya, Jennifer J. Schulp, Russell G. Ryan, Ashley C. Parrish, et al. 2021. “Amicus Curiae Brief for the Cato Institute in Support of Petitioners.” United States Court of Appeals for the Fifth Circuit. No. 20-61007. www.cato.org/sites/cato.org/files/2021-03/jarkesy-v-sec.pdf. 
20. E-mail correspondence with author
21. SEC v. Jarkesy, et al. 603 U. S. ____ (2024). 
22. The Editorial Board. 2023, November 26. “The Supreme Court Considers the Right to Trial by Jury.” The Wall Street Journal. www.wsj.com/articles/the-supreme-court-considers-the-right-to-trial-by-jury-sec-jarkesy-regulation-civil-rights-5abde7e7.
23. SEC v. Jarkesy, et al. 603 U. S. ____ (2024). www.supremecourt.gov/opinions/23pdf/22-859_1924.pdf.
24. Bodoh, Devon, Joseph Pari, Alex Dobyan, and Grant Solomon. 2024, July 1. “Clear as Mud – Chevron Irreverence and Tax Law.” Weil Tax [blog]. https://tax.weil.com/insights/clear-as-mud-chevron-irreverence-and-tax-law/.
25. E-mail correspondence with author
26. E-mail correspondence with author
27. Stiegemeier, L. 2024, March 8. “DOL Fiduciary Rule - NAFA.” NAFA. https://nafa.com/advocacy/dol-fiduciary-rule/.
28. Horowitz, Uri, Mary Cassidy, Douglas S. Pelley, Kathleen Wechter, Kathryn Geoffroy, and Pari Sitaula. 2024, May 21. “DOL Releases Final Investment Advice Fiduciary Rule.” Arnold & Porter. www.arnoldporter.com/en/perspectives/advisories/2024/05/final-investment-advice-fiduciary-rule.
29. Fed’n of Americans For Consumer Choice, Inc. v. United States Dep’t of Labor, 6:24-cv-163-JDK (E.D. Tex. Jul. 25, 2024). www.napa-net.org/sites/napa-net.org/files/FACC_fiduciary%20rule%20stay_072524.pdf. p. 35.
30. Ibid., p. 2.
31. E-mail correspondence with author
32. Resnick, A. 2024, July 29. “DOL’s Retirement Security Rule Stayed Ahead of Effective Date.” PLANSPONSOR. www.plansponsor.com/dols-retirement-security-rule-stayed-ahead-of-effective-date/.
33. E-mail correspondence with author
34. Aronowitz, Daniel. 2024, July 11. “The Overreaction to the End of Chevron Deference.” The Fid Guru Blog. https://encorefiduciary.com/the-overreaction-to-the-end-of-chevron-deference/. 
35. E-mail correspondence with author
36. Seyfarth. 2024, June 11. “FTC Non-Compete Ban: What You Need to Know.” www.seyfarth.com/news-insights/ftc-non-compete-ban-what-you-need-to-know.html. 
37. Federal Trade Commission. 2024, April 23. “FTC Announces Rule Banning Noncompetes.” www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
38. Mekelburg, Madlin. “FTC Ban on Worker Noncompete Deals Blocked by Federal Judge. 2024, August 21. WealthManagement.com. www.wealthmanagement.com/regulation-compliance/ftc-ban-worker-noncompete-deals-blocked-federal-judge.
39. E-mail correspondence with author