The Securities and Exchange Commission may have to rethink its approach to rulemaking, following back-to-back rulings by the U.S. Supreme Court that will further circumscribe the agency's regulatory and enforcement powers.

The Supreme Court on Friday overturned a 40-year-old legal decision, known as the Chevron Doctrine, which guided courts to give deference to regulators when interpreting ambiguous statutes. And on Thursday, the Court ruled that the SEC cannot rely on its administrative law process when pursuing financial penalties from defendants.

The two rulings together will likely set the SEC up for more legal challenges and make it harder to enforce rules, lawyers told FundFire. The SEC declined to comment.

"Bottom line, the SEC is going to be rethinking its enforcement and rulemaking processes, because together these decisions potentially hamstring what has recently been an aggressive rulemaking and enforcement agenda," said Meghan Flinn, a partner at K&L Gates.

"We could see the SEC pull back, slow down, be more intentional regarding its rulemaking agenda to minimize resources spent on defending legal challenges, now the SEC can't use the tool of Chevron deference in defending its rulemaking," she added.

The 6-3 ruling on the Chevron Doctrine could have a wide impact on rules already in place by multiple federal regulators. In many cases, an industry's interpretation of the law will now be viewed as just as valid as the agency that regulates it, said K&L Gates Partner Varu Chilakamarri, in an emailed comment.

"It will be some time before we see the effects of this decision on the lawmaking process, but going forward, agency action will be under even greater scrutiny and there will likely be more opportunities for the regulated community to challenge agency rules and adjudications," she added.

The decision is "likely to produce large-scale disruption" given Chevron's pervasiveness, wrote Justice Elena Kagan, in a dissenting opinion with Justice Sonia Sotomayor and Justice Ketanji Brown Jackson.

The earlier "Jarkesy" ruling, also 6-3, will make it harder for the SEC to get defendants in front of its in-house judges after the court recognized their constitutional rights to have their case heard before a federal jury when the agency seeks financial penalties. The decision could make it harder for the SEC to secure large-dollar settlements from accused wrongdoers.

The SEC's aggressive rulemaking and enforcement drive has faced pushback from firms and industry trade groups that have questioned the scope of the agency's authority and raised concerns about the interconnectedness of many of the rules that have caused compliance challenges.

The regulator will now have a harder time defending against claims of overreach in legal challenges to its lawmaking, including in challenges to the climate disclosure rule for public companies and the private funds rule.

Earlier this month, the Fifth Circuit U.S. Court of Appeals ruled that the SEC exceeded its statutory authority when it adopted the sweeping private fund disclosure rule package last year and vacated the new regulation in its entirety.

Part of that Firth Circuit opinion held that the SEC's interpretation of a term in the Dodd Frank Act was incorrect and that it exceeded its authority by expanding the meaning of the term "investor," noted Genna Garver, a partner at Troutman Pepper.

"The fact that the Supreme Court ... shot down the Chevron doctrine.... that is not boding well for an appeal" to the Fifth Circuit's private fund ruling, she said. "It is not looking favorable for the SEC to pursue that, in my opinion."

The SEC may also reevaluate and reopen comment periods for its proposed predictive data analytics and custody rules following the Supreme Court's rulings, said Garver. The agency had already been considering whether to re-propose the two rules to fortify them against litigation, compliance professionals told FundFire in May.

The SEC has not historically relied "explicitly" on Chevron deference in much of its rulemaking compared to other Federal regulators, said Jeremiah Williams, a partner in Ropes & Gray's litigation and enforcement practice group.

However, the SEC is now facing a "cumulative effect" from successive court decisions.

The agency has had "so much of their framework and the way they operate challenged in the last couple years," he said. This is "yet another restriction that they're going to face."

Chevron Ruling May ‘Hamstring’ SEC Rulemaking Agenda: Lawyers

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