An increasingly common response by regulators to what they view as undesirable market trends or challenges has been a sharp turn toward litigation to introduce novel legal theories and frameworks that could have been the product or subject of legislative or administrative rulemaking. The decision to do so has been met by calls claiming such administrative action to be unfair, and in some instances, illegal.
This Article revisits the New Deal origins of regulation by enforcement, and its more recent incarnations, and explains that as a legal matter, regulators generally enjoy discretion as to whether to make policy through rulemaking, adjudication, or by filing a lawsuit in federal court. However, there are some exceptions to this principle, as well as some reasons to believe that recent doctrinal developments hostile to agency adjudications could reduce the discretion of agencies to choose their policymaking tool, especially when their actions are understood to be naked attempts to grab turf or circumvent democratic norms embedded in the Administrative Procedure Act. In this Article, we analyze the incentives facing agencies when choosing to regulate by enforcement, consider some of the new risks, and lay out a framework for thinking about when agencies should regulate by rule, and when they should regulate by enforcement.
INTRODUCTION
One visible response by regulators to what they view as persistent—or particularly fast-moving—market challenges has been a sharp turn toward litigation to introduce or test out novel legal theories and frameworks that could have been the product or subject of legislative or administrative rulemaking. This approach, popularly termed “regulation by enforcement,” prompted fierce critiques from commentators and the marketplace, often from the standpoint of fairness—and based on an implicit assumption that such regulatory conduct might be illegal, or at the very least, politically motivated. In response, defenders of agency action have called the criticisms “bogus,” “misguided,” and lambasted politicians, market participants and even academics, for uttering the phrase.
In this Article, we work to give substance to what is all too often a nebulous term of art. In Part I, we provide an overview of how this particular species of regulatory intervention—visible across multiple issue areas such as the oversight of cryptocurrencies, environmental and social governance (“ESG”), insider trading and antitrust—tests certain assumptions about the nature of the administrative state. Specifically, we show that the work of regulatory agencies is traditionally understood as consisting of creative and destructive functions, mapped along axes of rulemaking and enforcement, respectively. Rulemaking by enforcement, however, blurs the lines between the two, both disrupting and supplementing the rulemaking toolkit. Thus, while creating important opportunities for advancing regulatory priorities, it invariably raises normative questions about its appropriateness as a matter of legal and historical precedence.
In Part II, we take a closer look into rationales explaining why a regulator might choose to create policy by means of enforcement rather than through more traditional rulemaking. To begin, we first identify what “regulation by enforcement” has meant historically, starting with key precedent and decisions introduced at the twilight of the New Deal era, and moving toward more recent iterations in the last quarter century. Next, we identify what can be understood as a spectrum of possible incentives and motivations behind regulation by enforcement. These range from the necessary—where agencies act because they have no other option, such as when notice-and-comment rulemaking is not possible owing to the absence of clear legislative authority—to the optional, where regulation by enforcement (rather than detailed rulemaking) offers a faster or more expedient pathway to exercise or expand oversight. Underlying these motives driving regulation by enforcement, we highlight opportunities for regulators to achieve a variety of laudable goals, such as promoting the realization of their institutional missions, delivering desirable marketplace outcomes in relatively expeditious ways, and offering a statement of intent on the part of authorities about preferred policy positions in a manner designed to arrest misconduct before it can wreak actual damage. However, we also point out other less savory possible incentives to pursuing rulemaking through enforcement, as opposed to through administrative processes, including an interest in reducing or circumventing the transparency and accountability intended by traditional administrative processes, and extending an agency’s authority in ways that might otherwise be impermissible, politically costly or even illegal.
In Part III, we investigate the legality of regulation by enforcement and explore these trade-offs in greater depth. In analyzing applicable case-law, we suggest that its legality is more complicated than scholars and commentators might appreciate. On the surface, the strategy of regulation by enforcement is perfectly legal and stands on solid legal ground—well within the authorization afforded to agencies by governing case law. Looking deeper, however, courts have been silent on a more fundamental question: whether regulation by enforcement is legal when it involves more than filling gaps in administrative and legislative dictates, and it is used as a substitute for detailed rulemaking or, even more extreme, in a way designed to undermine the procedural safeguards put in place to ensure informed rulemaking. With this in mind, Part III then moves to examine the appropriateness (rather than just the legality) of regulation by enforcement. Here, the Article inspects under what circumstances this regulatory strategy is (and is not) in line with normative rule-of-law values that underpin the administrative state, as well as expectations that rulemaking be informed and loyal to the values of legitimacy and procedural fairness.
We observe that regulation by enforcement can enable regulators to achieve a range of positive outcomes. It gives agencies teeth to promote their institutional mandates and to generate confidence among the public that the agency is, in fact, doing the job it is charged to do. Regulation by enforcement can thus create efficiencies in agency administration when it produces sought-after policy results (for example, improved investor protections, more competitive markets) at relatively lower bureaucratic cost (for example, with greater speed and encompassing fewer procedural steps). On the other hand, the strategy can also come with notable shortcomings. When enforcement attempts to circumvent longstanding norms of procedural fairness, informed rulemaking, deliberative analysis, and the quality of the policymaking can be diminished, with lower informational content, shallower expertise, and limited public engagement underlying decision-making. Regulatory effects may be scattershot, where high-profile actions target certain actors but leave others alone. These procedural and outcomes-driven effects can mean that regulation by enforcement can end up suffering from a perception of limited legitimacy, increasing the reputational risks to agencies, as well as raising the critique that agency action may be excessively political and not grounded in the rule of law. Regulatory agencies thus risk being viewed as less technocratic and expert and driven more by selfish, rather than public interests. In such cases, concerns can filter into the judicial review mechanism, and ambitious attempts to engage in regulation by enforcement can run around in which courts rule against the government’s position—or even more dramatically, roll back the general authority being asserted by the litigating agency.
Against this backdrop, this Article provides a framework for understanding regulation by enforcement, and examines the historical precedent, legal basis, and tradeoffs that undergird the practice. Throughout, we recognize the complexity of agency decision-making, tasked with maintaining stability, integrity, as well as entrepreneurialism within the market. Our Article situates regulation by enforcement as part of a spectrum of tools deployed by regulators looking to fulfill the demands of their institutional mandates, within tight budgets and under the eye of political critics and an engaged public. As such, the strategy comes with a number of significant advantages and benefits. But it also presents notable risks and costs for advocates of governmental authority, especially given recent Supreme Court decisions on separation of powers jurisprudence that have privileged settled expectations as a check on regulatory innovation. Rather than taking a particular side—and seeking to overcome the ideological tensions that have polarized discussion on this topic—we offer an account that highlights the legal and normative trade-offs involved, in a bid to contribute to a more thoroughgoing understanding of regulation by enforcement as an administrative phenomenon of the 21st century regulatory state.
I. THE RULEMAKING/ADJUDICATION DICHOTOMY
The modern regulatory agency has two principal ways to make policy with the force of law. It can promulgate rules of prospective application and general applicability that interpret the statutory authority given to it by Congress. This is defined in the Administrative Procedure Act as “rulemaking,” and almost always takes the form of “notice and comment” or “informal” rulemaking. Alternatively, it can enforce those rules, and its other statutory authorities, through adjudications pursued either through administrative adjudicatory proceedings or by filing suit in federal court—or through informal settlement negotiations with entities charged with illegal conduct. In this section, we describe the basic implications and processes required to engage in rulemaking and adjudication. We then illustrate them with some examples from the SEC’s halting efforts to regulate cryptocurrencies, which have been undertaken largely through enforcement actions that are adjudicated either by agency officials or in the federal courts, rather than through rulemaking. In the following section we consider some of the incentives the agency must consider when it decides how, exactly, it should make policy—and what the tradeoffs are of making policy through adjudication—that is, by suing the entities that it regulates, rather than via the rulemaking process.
Conceptually, rulemaking and adjudication are distinct exercises. Rulemaking can be understood as a “creative act.” It might be analogized to legislation—or at least “legislation” in an agency-specific area subject to a particular set of procedural requirements. When Congress passes statutes, it is making laws of prospective application and general applicability, as opposed to a backwards-looking individualized determination. When making rules, agencies are doing the same thing. Regulatory agencies embark on a process that is intended to be both open to public observation and comment, and that is conducted on the basis of the expertise that the agency can mobilize in developing the rule, both from resources developed within the agency, and from whatever knowledge that can be harnessed outside of it. The agency drafts the rule, publicizes the proposal, seeks and responds to public comment from interested parties, revises the rule, obtains approval for promulgation from the political leaders of the agency, and then publishes the final rule, making it subject to judicial review.
Policymaking through enforcement, by contrast, can be interpreted as more of a “destructive” act. Successful agency litigation stops conduct by a regulated industry, through a cease-and-desist order, for example, a censure, license suspension, or fine. It imposes sanctions in most cases in which the agency wins in court. Agency adjudication is the administrative law version of a judicial proceeding—it looks backwards at conduct that has already occurred and, if it concludes that the conduct violated the law, it imposes penalties. As with a judicial proceeding, adjudication begins with an investigation by the agency’s personnel, and then the filing of a lawsuit or an administrative proceeding. The government and the defendants then participate in a process of discovery (usually very limited in the administrative law context), briefings, arguments, and a decision rendered old by an adjudicator as to whether a violation has in fact occurred.
As a general heuristic, “rulemaking” refers to an action when an agency behaves like a legislature, and “adjudication” occurs when it acts like a court. However, there are complications. Enforcement through adjudication can take place in courts of law, or in in-house administrative proceedings run by agency officials, the administrative law judges who preside over formal adjudications, or the myriad other kinds of agency judges who decide various kinds of agency adjudications. And, of course, it can take place through settled enforcement actions. In such cases, the agency is not acting like a court at all, but rather like a prosecutor extracting a plea deal, at times before even bringing a charge.
Crucially, policymaking for the future—which is ultimately, the point of rulemaking—can also take on guises that escape simple dichotomies. In other words, agencies can exercise authority through a sophisticated, “softer” range of levers that, while carrying persuasive and expressive power, wield lesser formal intensity and legal obligation than notice-and-comment rulemaking or adjudication. Agencies can spotlight their positions using mechanisms like no-action and exemptive letters, interpretative guidance, and even press releases and public statements. Interpretations of law, and in the case of no action letters, the application of law to specific facts—while avoiding the process of rulemaking—can set expectations and impact market behavior. At the same time, such intermediate measures do not possess the hard finality offered by rulemaking or enforcement. Agency staff can always reconsider positions taken in the letters and adjust course (and even abandon it) when necessary. Indeed, verbiage accompanying such letters makes clear that staff disseminating them speak only for themselves, and not the agency as a whole.
Moreover, adjudication can involve the application of law to facts in a way that can result in new interpretations with binding effect on how the law is pertains to like circumstances, effectively creating prescriptive direction for regulators and industry alike. Adjudication can, in the process, draw on the soft law tools noted above, like staff guidance or answers to frequently asked questions, all the way to previous formal rulemaking, to create new support structures for the law that themselves carry legal effect. Similarly, even findings of fact—like whether certain behavior meets a condition precedent for establishing an illegal act or violation of the law—may involve interpreting and expanding black-letter legal requirements, even as fact-finding ordinarily ranks as the least law-oriented task of an adjudicator.
Securities law offers no shortage of examples illustrating just how consequentially law making can be performed by adjudicators. In what is widely considered to be the most important case for establishing the perimeter of securities law, SEC v. W. J. Howey Co., the Supreme Court (not Congress) defined the bedrock concept of an “investment contract”—a “catch-all” type of “security” falling outside of more traditional categories (for example a stock or a bond). Drawing on prior judicial interpretations of states’ Blue Sky Laws, Howey laid out a broad set of standards with which the SEC would, quite literally, prosecute the shifting parameters of its authority for the next eight decades. The 1946 case, which concerned real estate transactions involving orange groves in Florida, declared that an investment contract arises where there is (i) an investment of money; (ii) in a common enterprise; (iii) for profit; and (iv) derived from the efforts of others. This court-created framework was intended to anchor a facts-and-circumstances based analysis, and was flexible enough to apply to situations in which investor-risks arose from novel or new financing arrangements. But in detailing these four prongs in 1946, even the Supreme Court could not have possibly imagined the sheer range of schemes and assets to which the Howey test would eventually be applied, from animal breeding arrangements to contracts for death benefits. Invariably, these individual requirements have each been subject to a multitude of interpretations over time as Howey prongs have been thoroughly litigated by parties contesting the ambit of the market’s regulatory perimeter—and whether a particular kind of issuer should be included, or not.
To take one example, the Howey Court itself left unresolved how the common enterprise prong should be interpreted. In other words, it did not lay out specific and exclusive criteria to define what a common enterprise should be, and the elements needed to constitute one. To fill this gap, the lower courts have created different tests for the type and intensity of “common enterprise” required to be found to establish that a contract is an investment contract subject to SEC oversight. In Howey, the common enterprise could be found through the service contract, which gave the servicer “full and complete” possession of the land specified in the contract, and permitted the servicer to pool the investors’ money and to then distribute returns from selling oranges to them on a pro rata basis in accordance with their contribution. In this scenario, the Howey contract purchasers enjoyed so-called “horizontal commonality” with one another, as the returns to the investors were pooled and correlated with one another pro rata. When seeking out such commonality, the analysis looks at the relationship between the investors themselves to determine whether they were all facing similarly shared risks, collective action burdens and information asymmetries that could be mitigated by the presence of SEC regulation.
But courts have also found other kinds of commonality sufficient to satisfy Howey’s common enterprise prong. Specifically, “vertical commonality” examines the relationship between investors and a promoter or issuer. Vertical commonality can exist even if investors receive diverging returns as among each other (in contrast to horizontal commonality). Some courts have divided vertical commonality into a “broad” and a “strict” variance. In the case of “broad vertical commonality,” investors need not show any kind of intertwined risk between themselves and a promoter as long as they are dependent on the promoter’s efforts with respect to money management (in other words the promoter gets paid regardless of whether investors make money). “Narrow vertical commonality,” on the other hand, requires showing shared risk between the investors and the promoter (that is, the promoter only gets paid if the investors make money).
The common enterprise components of the Howey test affect different securities-adjacent businesses in different ways. Consider cryptocurrencies in their various forms. For example, a crypto-token that is digitally developed by a promoter to raise money for a venture and sold to buyers with the promise of future returns from the business might look like a pretty conventional type of common enterprise. Money is pooled. And the fortunes of the purchasers are linked to each other and to the success of the promoter’s efforts. But relatively more “decentralized” cryptocurrencies like Bitcoin look quite different. There is no typical promoter as such. That said, purchasers of the crypto-token will see their fortunes rise and fall depending on whether the currency is adopted widely and appreciates in value. Because of this shared state, it may be argued that holders are part of a kind of common enterprise, but one that happens to be a uniquely decentralized one. Does that satisfy the definition of an investment contract? Or does the absence of pooling by a central issuer as well as its apparent absence for the purposes of vertical commonality mean that the definition of common enterprise is unable to reach relatively more decentralized cryptocurrencies?
The definitions of an investment contract—and interpretations of the Howey test—provide one important example of how SEC enforcement through adjudication can make policy—and why incremental litigation against one sort of coin can still leave important questions unanswered with regard to other kinds of coins. But additional examples abound of critical policy derived by or generated through litigation. For example, it has been courts that have not only defined what counts as “material” information but have also defined its application for industry standards and practice. What a reasonable investor would find important given the “total mix” of information is both a fact based inquiry and court policymaking that, while based on the specific circumstances of litigants in a dispute, ultimately define the outer reaches of securities law and the agency’s jurisdiction. The meaning of materiality has thus been worked out through a number of enforcement actions, as well as through other adjudications. For example, the SEC has worried that ordinary investors will not understand the material risks posed by cryptocurrency investments.
In these instances, the line between “finding the law” and “creating the law” can become blurry as the law intersects with unanticipated, real-world operations of new technologies. Cryptocurrencies offer plenty of obvious examples: do staking services constitute an “investment of money,” where the customer maintains control and ownership of staked digital assets? Does it matter when those wishing to stake their crypto assets do so to protect the integrity and continuity of a blockchain rather than for the reward of additional tokens? Does the presence of a permissioned blockchain, in which participation in its infrastructure is restricted rather than open to all—necessarily mean that its native cryptocurrency is “dependent on the efforts of others”? Can an instrument that begins life as a security become so decentralized in its underlying governance that, eventually, it no longer qualifies as one? And if so, what constitutes the legal inflection point at which this transition occurs? Just as these questions involve the application of long-standing principles to new fact patterns, they can also involve exercising judgment about how entire domains of technology, and their supporting operational systems and transactions should be categorized, and under what circumstances. Thus, they represent issues that could well be clarified as a matter of administrative rulemaking or more informal guidance (for instance, through no-action letters). But at the same time, they could also constitute questions that are sufficiently substantive and related to precedent or statute that they end up being adjudicated in court.
II. WHY WOULD AN AGENCY SEEK TO CREATE LAW THROUGH ENFORCEMENT?
Regulation by enforcement, while effective in times of crisis, is usually a choice, something regulators have themselves explicitly acknowledged. In this section, we review the discretion traditionally afforded to regulators, and the logic behind it. We then explore the criticisms and incentives faced by regulators who choose to engage in regulation by enforcement.
A. Policymaking by Enforcement: The Historical Endorsement
So, why should agency leadership choose to make policy through adjudication rather relying on a more formal rulemaking process?
Regulators do not spend much time justifying their choice of policymaking tools. But courts have identified reasons why making policy on a case-by-case basis is useful. The traditional view, as we have observed, is that adjudication creates a common law regime where precedents produced by a series of enforcement actions can give regulated industry direction about the concerns of regulators, while giving regulators the flexibility to take a different approach in the next enforcement action.
The case most famously associated with this proposition is Chenery v. SEC. Chenery involved a breakup of a utility company holding company scheme that allowed insiders to control the utility despite having a tiny amount of equity in the enterprise by a pyramid corporate structure. The Supreme Court considered the case twice, and on the first occasion in 1943, invited the SEC to promulgate a rule setting forth limits on minority control through the holding company structure, something to which the dissent objected.
When the agency declined to do so, the Court, reviewing the case a second time in 1947, took the refusal in stride. It held that “the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.” As the Court observed,
Not every principle essential to the effective administration of a statute can or should be cast immediately into the mold of a general rule. Some principles must await their own development, while others must be adjusted to meet particular, unforeseeable situations. In performing its important functions in these respects, therefore, an administrative agency must be equipped to act either by general rule or by individual order. To insist upon one form of action to the exclusion of the other is to exalt form over necessity.
The idea is that administrative agencies should be able to engage in discrete, incremental lawmaking via litigation if this happens to be their preferred choice. Like common law, where judges are tasked with making rules on a case-by-case basis, adjudication allows courts and agencies to engage in problem-by-problem or issue-by-issue analysis, building on precedent to create a well-established body of law. For the Court, this sort of phased analysis may be appropriate when a rule may not obviously be the best approach or if the risks in implementation are unknown. This scenario may arise if there is a novel administrative scheme, or if the costs and benefits of a particular formal rule may not be clear. In such cases, regulators may decide to establish rules via courts as they recognize shortcomings, as opposed to putting forward an entire regulatory framework from the outset, or so the administrative law traditionalists have put it.
The limits to agency discretion, at least by this classical account, are few. Most important has been something akin to a regulatory “eye test”: as the First Circuit has put it, “an agency cannot merely flit serendipitously from case to case, like a bee buzzing from flower to flower, making up the rules as it goes along.” Especially when adjudications are made in-house, a showing of very different outcomes for similarly situated cases could form the basis for a conclusion by a court that the agency has been acting arbitrarily, and thus violating basic procedural norms and rules that authorize its work. Still, inaction by agencies—indeed a decision to pursue an enforcement action in one case, and not to do so in a similar case—is largely protected. As discussed below, the Supreme Court has held that an agency’s decision not to pursue an enforcement action is presumptively unreviewable, as such actions are “committed to agency discretion by law,” under § 701(a)(2) of the Administrative Procedure Act (“APA”), with very narrow exceptions, such as when an agency is totally abandoning its statutory responsibilities.
B. The Contemporary World of Regulation by Enforcement—and its Critics
Fast forward eighty years, and the deployment of regulation by enforcement has grown in ways unanticipated by the Court in Chenery. Some government officials have explicitly, and proudly, identified their willingness to use litigation as a means of progressing novel legal theories to change the law, rather than merely addressing unexpected or unanticipated facts with which agencies have limited experience. Others have leveraged enforcement proceedings to make policy after abandoning a failed notice and comment processes. Yet others highlight an interest in sending strong signals to the market, seemingly prioritizing innocuous but “high profile” cases with media personalities to drive home their policy points and underscore their authority in contested fields. In doing so, commentators have argued that they depart from at least the tone and tactics taken on some other issues in similar circumstances in the past.
Not surprisingly, the flexibility to choose between making rules or making policy through a case-by-case adjudicatory process, has had its share of critics dating back to Chenery. In the last forty years, they have slowly earned greater prominence in both academic and regulatory circles. As early as 1982, Former SEC Commissioner Roberta Karmel argued that the SEC was using its enforcement powers to enlarge its regulatory turf, and suggested that rulemaking was better for predictability. A decade later, former SEC Chair Harvey Pitt and Karen Shapiro similarly concluded that regulation by enforcement was deployed to “utilize enforcement proceedings to develop new legal theories and remedies.” For Pitt and Shapiro, the enforcement paradigm, which emerged once the Supreme Court created a private right of action through doctrine rather than an explicit legislative rule, incentivized the agency to try to expand its regulatory powers through enforcement actions that sought to push at the existing edges of the doctrine. This created fertile ground for a consequential but otherwise fairly “amorphous” body of law, epitomized by the prohibition against insider trading, which has evolved in its application largely through litigation, rather than rulemaking.
The criticism has intensified recently, especially in the context of cryptocurrency, as well as climate-related and environmental-social-governance-related (“ESG”) rulemaking. Critics argue that the agency has made notable attempts to police what it has perceived as “green-washing” and illegal issuances of securities by cryptocurrency sponsors without first offering actionable or coherent rules on the implementation of standards for ESG principles or concrete guidelines to outline when a crypto-asset is a security. The criticisms, recently encapsulated by the Wall Street Journal, lament that the SEC’s “regulation by enforcement isn’t working and merely fuels market uncertainty.” For cryptocurrencies, SEC Commissioner Mark Uyeda has criticized his own agency for pursuing enforcement actions instead of making rules. “This is an example of a situation where regulation through enforcement does not yield the outcomes achievable through a process that involves public comment, because without the benefit of comments from crypto investors and other market participants, the commission is unable to consider their perspectives in developing an appropriate regulatory framework.” Another Republican SEC Commissioner, Hester Pierce, also complained that the agency has “tried to cobble together a regulatory framework through enforcement actions.” Not surprisingly, cryptocurrency entrepreneurs have also loudly criticized an approach driven by regulation by enforcement as regulatory technique.
The criticisms have bothered the SEC under the Biden administration. For example, the agency’s enforcement director has characterized the agency’s approach to emerging technologies and novel investment contracts as something that involves enforcement, but that is not using enforcement as a particular policymaking tool. As Director Gurbir Grewal noted in a keynote address, “this is not ‘regulation by enforcement.’ This is not ‘regulation by enforcement.’ This is not ‘regulation by enforcement.’ There. I have said it thrice and what I tell you three times is true.”
Notwithstanding such statements, accumulating critiques have set the stage over the years for considerable push-back striking at regulation by enforcement.. As, for example, the SEC diverted more cases to administrative adjudicatory proceedings, the securities bar responded with a successful effort to characterize these proceedings as technically unconstitutional based on the relative independence of agency adjudicators from political oversight. And even more recently, defendants have pushed to vacate civil monetary judgments based on the structure of regulatory agencies and “unprecedented agency action that ignores fundamental constitutional principles.” These tactics, grounded in separation of powers arguments, have found a receptive audience at the D.C. Circuit Court of Appeals, and ushered in a reduction in agency independence.
C. A Continuum of Agency Incentives Driving Regulation by Enforcement
Many attempts to undermine regulation by enforcement are indirect and at times lead to outcomes eroding governmental supervision that are, in our view, inconsistent with the best interests of regulators and industry alike. Still, the rising tide of criticism is important insofar as it highlights an underappreciated theoretical and practical reality—namely, that there are a range of possible incentives that can drive the adoption of regulation by enforcement, or at least make it more attractive. Sometimes these incentives push agencies to enforce for the right reasons—regulators are unsure how to proceed, and so make policy on a case-by-case basis. By taking this careful approach, the damage of a bad choice is limited. In other cases, however, viewed more skeptically, regulators can use enforcement to avoid the burdens of other kinds of rulemaking—processes designed to make policymaking decisions better informed and more accountable.
We think that when regulators turn to adjudication, their incentives to do so can thus plausibly be characterized as lying along a continuum ranging from an interest in cautious case-by-case refinement and regulatory modulation to attempts to bypass administrative controls intended to enhance public participation and review. We have identified the bull case for regulation by enforcement as an essential gap filler and crisis response mechanism. For example, such an approach can reap gains where rulemaking still lags in its early stages or if its application and impact may be unclear. Regulation by enforcement can step in to tamp down on public harms in the absence of a clear rule or one that is under development. We have also explained that, as a matter of administrative law, courts have generally deferred to agency choices to prosecute, instead of legislating. But it is worth highlighting that there is a bare case, with tradeoffs that extend beyond the more usual concerns about whether regulation by enforcement makes for an unpredictable, unclear, and more ad hoc regulatory system.
First, agencies could pursue adjudications, or at a minimum find adjudication attractive, insofar as it enables rulemaking in ways that avoid the kind of public scrutiny and involvement entailed in administrative procedure. Normally, the rule writing process is just that—a process that, by definition, is intended to attract attention and inspection. The most visible and significant element of such review is the notice-and-comment process, designed to encourage commentary on rulemaking in ways that expose it to critique, criticism, and refinement. During notice-and-comment, new proposals are exposed to review by industry and civil society, and agencies are often required to, at a minimum, respond to the concerns raised in the review.
While this is how rulemaking is meant to work, the standard process can create political obstacles that draw negative media attention, private sector pushback, and can end up diluting or strengthening proposals in ways that might be out-of-sync with the views of agency leadership. The potential for such frictions provides one reason why adjudication can be such an attractive administrative tool. Adjudications limit the required responsiveness of agencies to the sort of wide-ranging assessments and suggestions that notice-and-comment rulemaking entails. Furthermore, they channel primary responsibility of dissent to the particular defendant selected by an agency to be the subject of an enforcement action. In this way, agencies can choose to set the terms of a debate, and even rope in other actors without necessarily giving them their day in court or a direct opportunity to participate. They can also potentially extract negotiated settlements from weaker or vulnerable actors without even ever having to go to court, and by publicizing the terms of the settlement and the infraction shape the public perception as to what the law “is.”
Practically, adjudication can also enable agencies to bypass some internal restraints accompanying administrative rulemaking. Following the decision of the DC Circuit in Business Roundtable vs. SEC, agency rulemaking must be supported, in most instances, by a detailed cost-benefit analysis in order for it to pass muster. The demand to produce such analyses in the promulgation of a rule means that agencies must demonstrate that their rule has been developed in a way that considers costs, if not numerically, then at least seriously. As the D.C. Circuit put it, “the Commission 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,” it risks reversal for failing to follow its legal requirement that it consider efficiency, competition, and capital formation in its rulemakings. Often, this means employing experts (for example, economists) that can develop an unimpeachable economic case to support the rule. Otherwise, the rule might be challenged and struck down in court as one that is arbitrary and capricious. All the while, most of the records involved in the analysis are “FOIAable,” enabling any member of the public the right to access scrutinize them—and use them as the basis for potential criticism of agency leaders or even litigation. In particularly contentious, ideological or high-stakes areas of oversight, playing offense by litigating—as opposed to engaging in rulemaking and waiting to be sued—can present a lower risk route to making policy.
Additionally, adjudication need not be as rigorous as typical administrative processes. As Jim Cox has observed, “when the SEC brings enforcement actions, it does not have to do cost-benefit analysis.” Additionally, while litigation itself consists of a (potentially long and winding) process, it does immediately signal the policy posture of the agency without opening the agency up to the same kinds of risks entailed in rulemaking. The administrative checks of rulemaking, for better or worse, can be mostly avoided by pursuing an enforcement action.
Adjudication also enables agencies to shift responsibility for rulemaking to the courts, a shirking strategy. In short, regulatory agencies, especially when faced with politically difficult choices, may wish to punt the ultimate responsibility for crafting particular rules to other actors. To the extent that legislation is not forthcoming, agencies may view courts as more optimal forums for hashing out difficult questions in ways that relieve agencies of the pressure, or responsibility, associated with “making law” through the administrative process. As a part of this balancing process, agency administration may also be tempted to view an enforcement decision as a way to relieve relevant leaders of the need to confront the criticism involved in taking on contentious rulemaking. Generously, adjudication may arguably be seen as an expression of administrative modesty. More critically, it may be viewed as a kind of shirking or avoidance in cases in which regulators should really be coming forward to engage in detailed and ambitious rulemaking.
In other situations, agencies could alternatively turn to adjudication as an expressly political act. Litigation is, by definition, a confrontational exercise, whether in order to enforce existing rules or to make new policy. As a result, regulation by enforcement presents an opportunity for agencies to signify their interest in taking action in ways that conform with certain policy or ideological moorings. Litigation can be designed to bolster or echo the Executive’s priorities or the priorities of key members of Congress to demonstrate high performance and in the process, enhance the career prospects of agency leaders. Alternatively, agencies could perceive certain forms of conduct as especially odious or dubious, and as a result, wish to engage in litigation as a more effective route of bringing media attention to the issue than the rulemaking process.
Finally, regulation by enforcement, even in the case of unsuccessful or discredited lawsuits, offers a means to extend the regulatory perimeter in ways unavailable under more conventional administrative rulemaking. To fully understand this particular strategy, it is important to understand that enforcement actions, particularly when exercised in novel ways, can freeze activity in the sector targeted by an agency. For example, by asserting that a particular digital asset is a security, a lawsuit can cool or temper the production or trading of that and similar digital assets. One question raised by the SEC vs. Wahi litigation, for example, was whether the mere claim by the SEC that a token was a security might prompt platforms that offer trading to preemptively delist it and any others deemed similar to avoid any potential punishment for themselves. This kind of preemptive deterrence effect takes place the moment the litigation is filed and can remain in effect for as long as the litigation is arising. As a consequence, the act of litigation can have an injunctive impact on actors, regardless of its merits, but with potentially high upside for a regulator. If successful, the suit helps to establish precedent that cannot be undone by future agencies; if unsuccessful, the suit chills politically undesirable but legal activities in ways that can extend far beyond its regulatory perimeter.
III. THE LEGALITY AND TRADEOFFS OF REGULATION BY ENFORCEMENT
The turn to arguably more ambitious and consequential forays into regulation by enforcement raises two key questions. First, does this trend violate the strict letter of the law? And second, even if regulatory action is legally justified, does it offer a more effective means of governance – in other words, do the trade-offs justify the move? These inquiries are not mutually exclusive. For example, to the extent that the first question may not yield a straight-forward answer, the greater or lesser benefits of pursuing regulation by enforcement might impact judicial (in)tolerance for its continued use within the administrative canon. To state things differently, even if the practice might be acceptable legally or is at least ambiguous in this regard, it might yet fall foul of norms that underlie a deeper administrative commitment to the rule of law, such that the continued reliance on regulation by enforcement warrants further scrutiny.
A. The Legal Question: Does It Violate the Law?
As described earlier, it is now well-established that courts afford expansive latitude to agencies in determining how best to forward rulemaking. But while Chenery supports the proposition that agencies should be given discretion to pursue lawmaking through the judicial system, it is not without its complications. Perhaps the most important of these is the APA. Outlined earlier, the APA governs the process by which federal agencies develop and issue regulations. A bedrock of administrative practice and good governance, the APA includes requirements for agencies to publish notices of proposed and final rulemaking as well as to offer the public opportunities to provide comment on notices of proposed rulemaking. In this way, the APA provides a systematic form of an “external” check on the processes and procedures that govern administrative agencies charged with carrying out the grunt work of implementing congressional statutes and that exercise extensive latitude to do so under Chenery.
Enacted in 1946, just months before the release of the Chenery decision, the APA explicitly directs agencies to engage in a particularized and defined process when developing and writing rules. The process is intended to (1) ensure that agencies keep the public informed of their organization, procedures, and rules, (2) provide for public participation in the rule-making process, (3) prescribe uniform internal, organizational standards for the conduct of formal rule making and adjudicatory proceedings, and (4) restate the law of judicial review. As Ed Rubin writes, the APA is far from perfect. Some scholars suggest that it goes too far in its strictures, while others advocate that it does not go far enough. What is clear, however, is that it imposes a range of internal organizational norms alongside external checks that were devised as a way to respond to the rapid expansion of the administrative state following the New Deal reforms of the 1930s.
But what does the APA mean for regulation by enforcement? In particular, does it curtail the ability of agencies to govern through litigation? Chenery, as noted above, does allow agencies considerable discretion to engage in both rulemaking and adjudication. But what about in more murkier instances? Specifically, could an agency willfully circumvent the APA, and its public policy goals, by engaging in regulation by litigation rather than through detailed rulemaking?
At least at first glance, the APA should make little difference to an agency’s ability to engage in regulation by enforcement, even if this reflects a deliberate strategy to circumvent the act. That is, because the APA lacks an anti-evasion clause, it should allow agencies to pursue a workaround its provisions. Moreover, courts have tended to interpret their ability to intervene in enforcement-related issues as being highly constrained. In Heckler v. Chaney, perhaps the most cited example of this principle, inmates sought redress after had been sentenced to death by lethal injection. They petitioned the FDA to take enforcement action to prevent the use of a specific drug protocol in capital punishment cases, alleging that use of these drugs constituted a violation of the Federal Food, Drug, and Cosmetic Act (FDCA). The FDA refused to intervene. Seeking review under the APA, the inmates filed suit in District Court asking that the FDA be required to stop the use of the drugs. The Court of Appeals held that the FDA’s refusal to take enforcement action was both reviewable and an abuse of discretion and remanded the case with the directions that the FDA be required “to fulfill its statutory function.” When the case was finally appealed to the Supreme Court, Chief Justice Rehnquist held that an agency’s decision to refrain from taking enforcement action should be assumed to be insulated from judicial review under the APA. That is, the FDA’s determination to avoid intervening was perfectly legitimate.
Looking deeper, however, it is worth asking whether Heckler is the last and complete word on the question. Crucially, it is silent on the issue of whether an agency’s decision to proactively enforce—rather than to refrain from enforcing – constitutes a potential violation of the APA. Heckler speaks to an agency refusing to deploy its resources in a case—the implication being, that by dint of its inaction, it chooses to leave the existing parameters of the law unchanged. By contrast, the Court in Heckler does not address what happens when an agency decides to bring a case—that is, to use its power, authority, and resources to sanction a regulated entity in a bid to further a specific interpretation of the law. Stated differently, Heckler leaves open the question of what legal consequences follow under the APA when an agency takes steps to either “make law” or “find law” through an active deployment of its enforcement power. As detailed in this Article, agencies might decide to pursue enforcement for any number of reasons. Chenery provides considerable latitude allowing such a strategy. But, as noted above, agencies may opt for launching litigation over rulemaking for reasons that might reflect a more cynical motive to affirmatively avoid the requirements of the APA. What happens then? Heckler, arguably, does not provide an answer.
To be sure, there are serious difficulties involved in identifying that line between an agency’s decision to pursue sanctions as part of its expected exercise of enforcement authority, and one in which its choices lie in deliberately (or recklessly) skirting the APA’s administrative process. Perhaps the most obvious is the challenge of finding evidence that might point to this administrative intention. As any lawyer knows, the task of uncovering “proof” that points to a state-of-mind is notoriously difficult. First, agencies are complicated creatures, staffed by many people, and it is difficult to attribute a single intent to so many individuals. Second, it requires looking for incriminating materials like internal memos, emails, or evidence of conversations had between decision-makers that could suggest a nefarious motive, and obtaining discovery against an agency in an APA case is very difficult. Obtaining this kind of material is challenging in the best of times. But it is especially difficult when agencies decide to pursue adjudication. Notably, the APA affirmatively shields agencies from having to publish their own internal organizational processes and rulemaking for public consumption. That is, there is no need for an agency to subject its own in-house enforcement deliberations to notice-and-comment. This leaves agencies relatively unconstrained in their abilities to develop their own procedures and processes without having to first subject them to outside scrutiny. Without such affirmative disclosure about internal policies, those looking to understand why agencies might be acting as they do have to rely on costlier measures. Discovery within litigation offers one expensive pathway, if a court is willing to allow it. Or, when possible, observers could also try to gain informational access through Freedom of Information Act requests that might yield clues as to agency process—but which itself has notable constraints as to what information must be provided by government. As a result, understanding whether an agency’s enforcement decisions are being driven by a wish to deliberately avoid the APA is, ironically enough, a task made more difficult by the very application of the APA itself.
In short, the question as to whether regulation by enforcement is legal under the APA is not entirely settled, even as most of the foundational principles are. On the one hand, agencies clearly have wide latitude under Chenery. And according to Heckler, the decision to avoid enforcing is essentially unreviewable. However, Heckler is incomplete: it does not address the scenario in which agencies affirmatively choose to bring a case. Moreover, there is little in either Chenery or Heckler that addresses a much more foundational inquiry, namely whether the pursuit of enforcement to circumvent the APA deliberately or recklessly is permissible, especially when it is intended to establish novel legal arrangements or dictates normally reserved for the rulemaking function.
B. Legal Scrutiny Beyond the APA
The APA is but one vector of risk for agencies dependent on regulation by enforcement for rulemaking. Even where the APA offers few restrictions on agency action, perceptions of agency abuse or mischievousness can create considerable perils for the administrative state. Some commentators and scholars have noted that regulation by enforcement may lead to Congressional oversight hearings and the politicization of agency action—whether in the form of traditional rulemaking or litigation. But we think the consequences may be far greater, and perceptions of overzealous regulation could, over time, catalyze court reactions that ultimately undermine the very authority of the agencies to pursue their missions. At a minimum, litigation efforts can backfire, creating unfavorable precedent for the particular regulatory action or claim in question. But far more ominously, agency overreach can become grounds for courts to rein in the larger administrative authority. To be sure, normatively, imposing checks and balances on agencies constitutes the preserve of the judiciary. However, an ambitious agency pushing novel rules and doctrine in ways found to be unfair, unvetted, or unaccountable can increase the risk to itself of attracting judicial ire, and ultimately undermining the scope of its authority and sphere of influence.
Risks are particularly acute given the recent arc of Supreme Court decisions and posture. One possible target lies in the Chevron doctrine, a Constitutional principle many scholars argue was designed to get the courts out of the policing of agency policymaking. The Supreme Court has formally agreed to review its constitutionality, with a decision likely to be delivered in summer 2024, placing in jeopardy a critical lever by which agencies have exercised their authority with relative legal confidence over the decades. The doctrine, named after “the most cited case in administrative law,” outlines the standard of review courts must exercise when reviewing agency actions. For the first step, the reviewing court must ask whether, after “employing traditional tools of statutory construction,” it is evident that “Congress has directly spoken to the precise question at issue.” If so, the statute is “unambiguous[],” and the agency must not differ from Congress’ clearly expressed command. If, however, the court decides that the statute empowering the agency action is ambiguous, it then moves to step two of the inquiry. That step requires the court to uphold the agency’s interpretation so long as it is “based on a permissible construction of the statute.”
The standard was popular in the courts for decades, but increasingly seems to have fallen out of favor at the Supreme Court. Although the Court has not expressly overruled the case, it has unanimously restricted certain aspects of agency deference for in-house adjudication, and has not deferred to an agency interpretation of its government statute in six years. The Court did not cite Chevron in a majority opinion during the 2021 term, and cited it only three times in 2020, raising the likelihood that the Justices may have soured on the idea that courts should defer to agencies in most matters of legal interpretation. No agency would wish for the end of deference. But the seeming diminishing of Chevron at the Supreme Court opens up questions about what kinds of agency conduct may have irritated the Court sufficiently into taking a much closer and critical look at agency behavior. Here, the pursuit of enforcement, if designed or interpreted to bypass administrative norms, could provide an easy target for fully unwinding judicial deference.
And Chevron is not the only source of legal scrutiny. Notably, the Court has recently emphasized that an agency, when it breaks new policymaking ground, must “be cognizant that longstanding policies may have engendered serious reliance interests that must be taken into account.” An agency that has used enforcement actions to expand its regulatory turf, or to try out novel legal theories, might be particularly vulnerable to a charge that it arbitrarily failed to consider the settled expectations of a regulated (or previously unregulated) industry. Reliance interests are not dispositive, but they must be part of an agency’s reasoned decision-making. As the Supreme Court has explained, an agency “may determine, in the particular context before it, that other interests and policy concerns outweigh any reliance interests,” but “that difficult decision [is] the agency’s job.” An agency that proceeds through litigation is going to find it difficult to establish that its enforcement action included some sort of attention to the reliance interests of the defendant in the action.
Another possible vector of risk involves the “major questions doctrine,” which holds that courts should not defer to agency statutory interpretations that concern questions of “vast economic or political significance.” In 2022, the Court indicated that it intended to take the major question doctrine seriously with a last-day-of-term effort to gather the few cases applying the doctrine into a coherent whole. In West Virginia v. EPA, a case concerning the EPA’s power to encourage power plants to shift away from coal, and toward gas, wind, and solar, the Court explained that “in certain extraordinary cases . . . something more than a merely plausible textual basis for the agency action is necessary” to permit a new agency to go forward. To do so, the “agency instead must point to clear congressional authorization for the power it claims.” So far, the major questions doctrine has only been deployed by the Supreme Court to reverse rules—which incentivizes agencies like the SEC to avoid rulemaking and make policy through enforcement. Nonetheless, to the extent that regulation by enforcement is turf expansive, there is some risk that the courts could get frustrated and sanction regulators who move beyond their usual remits, however they do so, including by enforcement. Indeed, in the Wahi litigation outlined above, when the SEC sought to sanction defendants engaged in insider trading, arguing that the tokens traded are securities—led to a tussle on the major questions doctrine in court. In the Wahi case, defendants argued that the determination of tokens as securities constituted a major question, one that the SEC should seek Congressional permission to answer.
This set of concerns, then, leads to what is perhaps the most fundamental question: whether agencies even have constitutional basis on which to bring their claims. In other words, agencies face the risk that the legal basis for their very authority to legislate and enforce comes under challenge. This risk is not theoretical. Already the courts of appeals have invoked two rarely invoked constitutional provisions, the nondelegation doctrine and the appropriations power, to stop relatively novel exercises of agency power, in a sort of thermostatic constitutional response to policymaking perceived as overzealous.
The nondelegation doctrine prohibits Congress from delegating its legislative powers to other entities—including the President, administrative agencies or, perhaps most disapprovingly, private organizations. In J.W. Hampton v. United States, the Court ruled that Congress must give its delegates an “intelligible principle” on which to base their legislative-like regulatory actions; and that, if it did so, it could appropriately transfer some of its legislative responsibilities to someone else. The doctrine has not been used to strike down legislation since 1935, so it is a doctrine that has, as Cass Sunstein has put it, had “one good year, and 211 bad ones (and counting).” The Fifth Circuit turned to the doctrine nonetheless to reject an enforcement action brought administratively by the SEC. The appellate court objected to the absolute discretion, per Chenery and Heckler, the agency thought it enjoyed when it came to choosing its forum for enforcement actions. When Congress did not create a standard about when to bring an enforcement action, if “the intelligible principle standard means anything, it must mean that a total absence of guidance is impermissible under the Constitution,” the court concluded, meaning that the decision to bring the case administratively had been made without any congressional guidance. That in turn meant that the enforcement proceeding had to be dismissed.
In Community Financial Services Association of America Ltd. v. CFPB, trade associations sought to challenge how the Consumer Financial Protection Bureau is funded, arguing the agency’s financing model—where it receives its working budget from the Federal Reserve rather than via the Congressional appropriations process—was unconstitutional. The plaintiff trade associations made the argument that the CFPB’s Payday Lending Rule was invalid owing, amongst other things, to its unusual funding process. The Fifth Circuit agreed, opening the door for plaintiffs to now contest any number of rules and enforcement actions delivered by the CFPB. While this case relates specifically to the workings of the CFPB, its implications can arguably extend much farther.
When agencies pursue litigation in ways that depart cavalierly from Chenery, and in ostensible circumvention of more traditional notice-and-comment rulemaking, their actions, however well intentioned, risk judicial pushback and may prove to be fertile grounds for rollbacks of administrative power more broadly. Stated differently, regulation by enforcement, while largely permissible under Chenery, does not mean that it is always allowed, and miscalculations carry risks for not only discrete cases, but also for the very powers of the regulatory state.
C. The Normative Question: (When) Are the Trade-Offs Worth It?
Recapping, we earlier described the bull case for regulation by enforcement. Regulation by enforcement, rather than rulemaking, enables important gap filling and incremental rule-giving. Regulators can reduce errors and respond to unforeseen situations and even emergencies when necessary. In pushing high-profile litigation, agencies can additionally send a powerful signal of their intent to police the marketplace. This can foil activities by reckless risk-takers that become fearful of punishment and being publicly shamed in the media. A litigation-focused strategy—being public and liable to deter widely—can also instill confidence in the agency’s competence and its commitment to the cause it has been created to forward.
But there are deeper normative risks—both to the quality of the rulemaking, as well as to the underlying legitimacy of the regulatory framework. As we discuss below, regardless of the ultimate legality of rulemaking via litigation, its deployment can have costs to the quality of resulting rules, as well as to its acceptance as legitimate and fair. Furthermore, by shifting rulemaking to courts rather than agencies, the approach invites judicial interpretations and interventions that can ultimately undermine, rather than expand, regulatory authority. In other words, the courts can reject an agency’s adjudicatory efforts, and leave regulators red-faced, equipped with a much lighter reserve of institutional power that the agency might have wanted.
1. Informational Costs and Rulemaking Quality
Favoring ex post adversarial litigation over formal ex ante rulemaking creates the possibility of a much lower-quality, lesser-informed policy intervention. The content of the new law can end up being less sophisticated substantively and more thinly informed.
There are internal-to-the-agency advantages of rulemaking. The act of developing a new rule requires an agency to engage in extensive research, crafting, analysis, and careful drafting even before it is presented to the public for scrutiny. This rulemaking process is designed to generate a deep reserve of information, opinion and analysis that exposes new proposals to various forms of expertise and the exigencies of real-world application. It requires agencies to engage substantively with the industry they are seeking to regulate, understand the risks, model the various directions that implementation might take, calibrate the costs that firms will have to pay when seeking to comply with the rule, as well as calculate the overall aggregate effect of the rule on the market (for instance through cost-benefit analyses). Well before the rule takes shape, then, it must be developed through an internal process designed to collect information, make a case for its benefits, to substantiate this argument for a potential challenge in the courts, and then to draft a rule that can coherently reflect the most optimal statement of the agency’s concerns versus the costs involved in execution.
There are also outside-of-the-agency benefits to rulemaking. Rulemaking can prompt extensive dialogue between the public and agencies even before proposals reach the notice-and-comment stage, opening up pathways for information to flow between agencies and others well before any drafting begins. Envisioning future rulemaking (because it is mandated by a Congressional statute), members of the public often try to engage with agencies early in a bid to see their interests reflected in upcoming proposal drafts—ahead of when the proposal is ready for publication in the notice-and-comment period. Lobbying by certain interest groups offers the most visible example of such a practice, where industry or citizen representatives seek out opportunities to make their views heard at early stages of drafting. In her study of the Volcker Rule—a post-2008 Financial Crisis measure designed to restrict how freely banks could engage in risk-taking for their own account—Kimberly Krawiec examined 8000 comment letters received by the Financial Stability Oversight Council in the pre-proposal stage. In addition to industry input, her study observed a surprising degree of private-public interest, bolstered by organizations like Americans for Financial Reform or Public Citizen. To be sure, scholars diverge on whether such public commentary is, in fact, expert and informative for agencies. However, as Krawiec notes, the fact of receiving such input can often be informative in its own way, notwithstanding concerns about substantive content.
Litigation, by contrast, involves fewer informational inputs. In lieu of notice-and-comment, it offers informational opportunities through three critical tools: the discovery process, testimony, and amicus briefs. Discovery, for its part, creates the parameters for dispute and comprises the occasion where parties to the process supply information to one another. But discovery is an imperfect proxy for detailed policy-based research. It is centered on the case itself and, therefore, on the alleged conduct of the defendant. Its data gathering and analysis may not reach the interests of the industry as a whole, or offer a rigorous public analysis conducted by the agency about the merits of the case. And even where it is collected, not all data will be presentable during a dispute and could be disregarded for any number of legal or procedural reasons.
Amicus briefs or “friends of the court” briefs, by contrast, enable expert and interested third parties to offer instruction and insight to the court. However, like litigation, amicus briefs do not involve the opportunity for policy engagement, much less counterproposals. Instead, they represent occasions for authors to provide legal theory or partial legal analyses courts may or may not deem to be relevant to assigning liability or guilt. As a result, full scrutiny need not be brought to bear on specific rulemaking agenda items. And there is also no requirement or even expectation for agencies to respond to amicus briefs, unlike in the case of rulemaking, where regulators are expected to consider and address input gathered through the notice-and-comment process. For these reasons, even as the number of briefs issued has grown, scholars have long debated whether they really impact the decision-making of judges in practice. On the one hand, their contribution has been noted in cases where they offer judges specific expertise (for example, statistics) that is not included as part of the record. Briefs can be cited in decisions, showcasing their significance. On the other, judges are, as mentioned above, under no duty to heed such briefs. Unlike agencies that must be cognizant of the comments they receive and cannot just ignore them, judges can exercise far greater discretion. Indeed, one study points to a divergence in attitude to amicus briefs between judges. While some welcome the interventions, others like Judge Richard Posner have been openly hostile. Ultimately, the receptivity toward amicus briefs, even in their limited utility, can depend on a number of factors, such as the particular court in which they are filed, the judge in the case, the kind of brief offered (for example, offering specific expertise), as well as whether the person submitting is respected and trusted by the court.
Testimony, as a final source of information, comprises statements gathered by critical parties to the dispute. It can take place in the form of pre-trial depositions or in-court testimony. Like both discovery and amicus briefs, testimony is generally tied to specific facts. And in order to be admitted into deliberations, it, like discovery, must meet procedural and substantive requirements, like avoiding hearsay and other requirements—standards inapplicable to notice-and-comment. Moreover, larger questions deemed irrelevant to the dispute, even if critical or central to policy considerations, will have no sanctioned weight in the adjudication—even where agencies engage courts in order to regulate by enforcement.
2. Fairness and Legitimacy
Regulation by enforcement, as opposed to regulation by administrative process, also raises important fairness and legitimacy concerns. The APA aims to create a system of procedural fairness around the rulemaking process to ensure that authorities govern through proper, transparent, well-evidenced, and objective processes. Through publicity, notice-and-comment, and mandatory agency engagement, those that may be bound by new legislation —as well as anyone else—is invited to provide input and contribution. Judicial review of rulemaking offers the ultimate check on the implementation of the process. Though agencies enjoy considerable deference, they do confront the possibility of being challenged, for example, where regulations are found to be arbitrary and capricious. Moreover, the process is intended to give regulated entities and the public a preview of the expectations and rules that will apply to them.
By pursuing an enforcement action as a first means of creating new law, policymakers raise the risk of doing so in a way that, justified or not, could appear to give those affected scant prior notice of illegality or expected punishment. Or even where parties ought to understand or expect enforcement, the absence of a rule can create unequal compliance opportunities for firms. Some firms will have greater resources to track potential regulatory actions. Moreover, certain defendants are better positioned to bear these costs than others. Smaller companies may have few resources to defend themselves, while larger actors might be better placed to withstand and contest the action. The Wahi case again offers an example. Rather than target large entities like crypto trading platforms or issuers, the SEC chose to bring a case against three individuals, whose capacity to direct vast resources to the litigation was arguably extremely limited. This asymmetry leads to the potential for procedural unfairness (or perceived unfairness) in situations where smaller defendants or individuals may be specifically selected as test cases, owing to the likelihood that they fail to contest the claim (because they are small firms) or, conversely, if they are sufficiently high profile that agencies can generate the needed buzz, publicity, and wider deterrent effects on smaller players in order to make the case for a new jurisprudence. Because rulemaking in such cases arises by dint of an adversarial process, it arguably necessitates an even greater need to show procedural fairness. As enforcement implies the need for defendants to fight back, it makes sense to consider whether those subject to new rules have the capacity, notice, and opportunity to take on the contest.
Finally, fairness norms may also call into relief the motives of agencies to make new rules and ultimately their authority and technocratic credibility. As Kevin Stack observes, achieving coherence within the law represents an essential value within the regulatory system. Agencies, he notes, have a key role in implementing coherence to facilitate the creation of a legal “system” that aims to be internally and philosophically consistent. They are expected to deliberate and execute policy in a way that can connect into and reflect the wider administrative/legal system of which it is a part, to offer continuity with past practice as well as contemporary policy priorities.
When policy is generated through litigation that does not derive from clearly articulated rulemaking, or that is designed to shape industries or punish particular actors without prior notice and guidelines, there may be doubts about the agency’s adherence to these rule of law norms. For example, in August 2023, the Court of Appeals for the D.C. Circuit ruled against the SEC in the agency’s decision to deny asset manager Grayscale’s application for a bitcoin exchange-traded fund. Strikingly, in reviewing the legality of the SEC’s decision, the D.C. Circuit unanimously determined that the agency had acted in an “arbitrary and capricious manner” when it refused Grayscale’s petition. In other words, there emerges, in short, a difference between “filling a gap” and “filling a legislative void.” The former involves targeted elaboration of existing legislative or administrative processes and thinking. The latter attempts to create a legal artifice in the absence of such groundwork. Eliding the rigors of information gathering and public input can, in short, have costs. Rather than being perceived as fair, impartial, and guided by their public interest mission, deficiencies within the rulemaking process can fuel negative views of agencies as being excessively political, insufficiently motivated by internal expertise and lacking technocratic professionalism. Ultimately an erosion of trust in the fundamental norms governing agency rulemaking can curtail confidence in the mission of the agency and its ability to execute it successfully and legitimately.
III. WHEN SHOULD AGENCIES REGULATE BY ENFORCEMENT?
Enforcement is a critical function of the regulatory state, and for the most part noncontroversial. Government agencies are charged with mission-critical responsibilities aimed at serving the public and undertaking actions that preserve the integrity of rules designed to protect investors, consumers, and even the overall economy. For what purpose enforcement is used can, however, vary. At times, agencies may seek to utilize their enforcement powers in ways that preserve the integrity of existing law; at others, they may seek to establish new legal theories, or even regulatory regimes, powers, or jurisdiction. In all cases, discrete and expansive, regulatory action may be considered essential, or even vital and a necessary action to send powerful signals to the market in a timely manner. Or it could deliberately enable what are ultimately abusive practices by agencies.
The sheer variety of ways and motives driving regulation by enforcement raises a number of pressing doctrinal questions. Overall, regulation by enforcement is a firmly established and jurisprudentially sanctioned practice. Still, precedent has not to our knowledge distinguished among the different scenarios in which it is practiced. This void offers the courts, and especially a Supreme Court skeptical of broad remits of administrative authority, considerable leeway to respond in ways that regulators may find surprising. Agencies also risk the possibility that their actions could have serious reputational consequences, and provide fodder for legislative actions clipping their budgets, and legal decisions eroding their very authority.
Enforcement by regulation should thus be undertaken with a clear understanding by regulators as to its risks and exercised in ways that optimize the long-term interests of agencies, their stakeholders, and regulated entities. From this standpoint, we foresee a number of helpful rules of thumb. Ultimately, some of the same kinds of cost-benefit and data analysis compelled in rulemaking should be institutionally embedded in agencies for enforcement actions. Here, coordination among enforcement and rulemaking staff might be helpful. We understand that the distinction between preserving and creating law can be murky, but cases in which serious questions arise, the cost benefit analysis should, in turn, likewise increase in its rigor. A practical understanding of the divergent incentives of staff in each office is warranted, as well as the incentives of agency stakeholders in approving and guiding enforcement actions.
Additionally, enforcement actions in novel policy areas should be ideally initiated as early as possible in the lifecycle of the disputed market practice as to mitigate subsequent market disruption. If an entity is selling what an agency believes is an unregistered security, or if an entity is violating rules as an unregistered securities exchange or unlicensed bank, enforcement activity should be brought to bear early—or a rulemaking initiated. Waiting years to bring an enforcement action can be misinterpreted, as well as heightens perceptions of agencies acting only when convenient, politically palatable, or for other than merits-based reasons.
At the same time, regulation by enforcement is likely to be most accepted as legitimate when it is understood to be a last, rather than first resort. The APA is designed to enable not only democratic participation and accountability, but also predictability. Taking the pains to articulate the agency’s expectations, even if only through soft law tools like staff guidance and no action letters, are more likely to set the stage for more broadly accepted enforcement actions with high policy throughput. Yet even here, in order to be effective, the guidance should be coherent, thought through, and offer a clear set of expectations for market and industry participants built on top of established legal principles, precedent, and rulemaking.
Finally, enforcement actions designed to promote policy should embrace some of the public facing norms of administrative process. Adjudications are, as mentioned, by their very nature confrontational, and usually represent a zero-sum game for participants. Nevertheless, regulatory agencies should, when possible, respond to amicus briefs and other interventions by industry and civil society, even in the context of legal proceedings. By conferring voice to a broader set of stakeholders, agencies can relieve the pressure generated by opting out of administrative process.
Ultimately the increasing attention directed toward regulation by enforcement creates a rich research area for academics, policymakers, and the press. Commentators would do well to keep an eye out for developments that suggest such strategies risk decisions that not only create bad precedent, but also risk decaying the very authority of the agency.
At the same time, the drivers behind regulation by enforcement deserve greater scholarly and popular attention. To some extent, the turn to enforcement can be attributed to partisan politics. Litigation can further the political objectives of democratically elected representatives who have appointed personnel to the administrative state. And it can be used to bolster the bona fides of officials and regulators seeking greater visibility, and perhaps, professional promotion. And in such cases, the incentives of a regulator may not necessarily conform with their agency, with the regulator having moved on when the agency faces potentially adverse litigation or judicial weakening. Still, regulation by enforcement may also reflect how changes in the reception of administration of policy may drive the exploration of a greater toolbox for regulators. In this sense, litigation may beget litigation, and proliferating lawsuits by private actors to agency rulemaking incents regulators to sue preemptively instead, creating a doom loop of legal challenges that not only stifle courts, but also ultimately add to regulatory uncertainty.
In the end, identifying and disentangling motives will not always be easy. Though attempts to do so will continue to abound—if not by courts, then from legislators and the public. In this process, the credibility of all actors will be tested. The ability of government to solve problems resides in trust, just as does the ability of the private actors to sell their goods and services. The outcry from “regulation by enforcement,” however well or ill-informed, at a minimum indicates that the trust is no longer always there. The key for regulators, lawmakers, and courts will be to see just what is responsible for its decay, and how to restore it in ways that advance the public interest.
96 S. Cal. L. Rev. 1297
† Yesha Yadav is the Milton R. Underwood Chair, Associate Dean and Professor of Law at Vanderbilt Law School.
‡ David Zaring is Elizabeth F. Putzel Professor of Legal Studies at the Wharton School, University of Pennsylvania. For their invaluable insights, perspectives and comments, we are most grateful to Anita Bandy, Anupam Chander, Patrick Corrigan, Elizabeth de Fontenay, Keir Gumbs, Kathryn Judge, Don Langevoort, Jai Massari, Donna Nagy, Peter Molk, Alex Platt, Todd Phillips, Adam Pritchard, Elizabeth Pollman, Bob Rasmussen, Adriana Robertson, Kevin Stack, Bob Thompson, Anne Tucker, Yuliya Guseva, and to participants at the BYU Winter Deals Conference, the Digital Transformation in Business and Law Symposium sponsored by the Southern California Law Review at USC and the University of Pennsylvania Institute for Law and Economics (ILE) Roundtable (Spring 2023). We thank Alex Ang Gao for excellent research assistance. Errors are our own.