Introduction
For decades, the political landscape in the United States, characterized by deadlock in Congress and increasingly polarized relations among the country’s major political parties, has put the responsibility of keeping the government functioning in the hands of the administrative state. An absence of regular, substantive legislation (and a President willing to sign the bills given to her by Congress into law) leaves the advancement of meaningful policy to the rulemaking functions of federal executive agencies. Agency rules, developed pursuant to Congressional commands, aim to ensure that private industries will keep air and water clean, make sure drugs are safe, and, among other things, not play fast and loose with America’s finances. Accordingly, as society becomes more complex, agencies are frequently responsible for developing a plethora of rules that can satisfactorily stand up to every intricacy that arises.
In the face of a looming stalemate with Congress in 2014, former President Obama famously said, “I’ve got a pen, and I’ve got a phone” to drive his administration’s policy goals forward. Subsequently, both the Trump and Biden administrations regularly ordered agencies to work toward advancing policy goals where Congress was unable to provide substantive solutions. Nonetheless, there is often heated debate over whether the administrative state has too much power and needs to be substantially reeled in. Recently, the Supreme Court’s decision in West Virginia v. Environmental Protection Agency, in addition to restricting the Environmental Protection Agency’s (EPA) effort to effectively combat climate change, called the future of the entire administrative state’s potency into question by effectively establishing a judicial veto over agency actions not explicitly authorized by Congress that would have previously been awarded substantial deference.
In the age of an increasingly dense administrative state, it is very attractive to have a system of reasonable practices to promulgate agency rules more efficiently. It is also important to have a regulatory landscape that is as clear and easily navigable as possible. At what point, though, do those goals cause tension with one another? Does the call for efficiency and collaboration create a situation that makes compliance more difficult and cumbersome?
One sector subject to an extremely elaborate and dense federal regulatory scheme is financial services, and rightfully so. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 (Exchange Act) to protect investors following the 1929 stock market crash that led to the Great Depression. Similarly, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act following the 2008 financial crisis. These three Acts, as well as the other federal laws regulating the financial industry, have the monumental task of safeguarding the economic wellbeing of the public by promoting efficient and fair capital markets. Tasked with carrying out and enforcing these laws, agencies like the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) developed and regularly update thorough and complex sets of rules designed to encourage frequent disclosure and prevent broker-dealers from taking advantage of members of the investing public. In 2020, the Second Circuit examined the scope of the SEC’s regulatory and enforcement authority in SEC v. Alpine Securities Corp. The court’s decision raised questions regarding the validity of certain rulemaking practices. The SEC sought enforcement of its Rule 17a-8, which incorporates separate Treasury regulations by reference. The ensuing litigation from the SEC’s enforcement action raised concerns over whether the Commission was inappropriately enforcing the Treasury’s rules and whether the incorporation by reference and automatic updating of rules from other agencies violates the Administrative Procedure Act (APA). Both questions were effectively unanswered by the Second Circuit Court of Appeals.
This Case Note argues that the Second Circuit’s decision opens the door to a new kind of federal agency rulemaking that can skirt the requirements outlined in the APA and create overlapping enforcement regimes for violations of regulations. This Case Note further argues that incorporation by reference of regulations promulgated by other administrative agencies is inappropriate in the rulemaking process. Finally, this Case Note proposes that when an agency would like to defer to the rules of another, it should borrow from the existing text when writing its own rule, thus both simplifying the regulatory landscape and remaining within the bounds of the APA’s requirements.
This Case Note proceeds in five Parts. Part I provides the background of the relevant statutes and regulations at issue. It also discusses the federal administrative rulemaking practices that will be important in this Case Note’s analysis of the Second Circuit’s holding in SEC v. Alpine. Part II describes the facts and procedural history of the case. Part III describes the issues on appeal, the Second Circuit’s holdings and rationales, as well as the arguments presented by each side. Part IV of this Case Note discusses the lingering questions created by the Second Circuit’s holdings. Part IV then analyzes the arguments regarding who has appropriate enforcement authority of the Currency and Foreign Transactions Reporting Act of 1970, colloquially known as the Bank Secrecy Act (BSA), and discusses concerns over how the SEC constructed Rule 17a-8, incorporating another agency’s rules by reference. Lastly, Part V proposes that the practice of regulatory diffusion is the best solution for agencies looking to incorporate existing regulations into their own rules. This Case Note reiterates, in conclusion, that the Second Circuit’s holdings were erroneous and create more problems than they solve.