Decrying “regulation by enforcement” is in vogue these days, especially in the financial sector. The phrase has popped up in discussions about consumer finance protection (“regulation by enforcement certainly is pushing the envelope”), investment adviser disclosures (“regulating without rules”), securities offerings (“regulation by enforcement is such bad public policy”), and more. Even a U.S. senator used the saying when questioning President Biden’s nominee for CFPB Director at his confirmation hearing earlier this month. The repeated use of this phrase is no coincidence; it is designed to elicit fear, uncertainty, and doubt about regulators’ motives, implying that they are breaking the law, or at least doing something untoward.
But the action these critics – largely lobbyists, think tanks, and other advocates working on behalf of industry clients – disparage is also known by another name—enforcing the law—and regulators should not fear doing so.
The phrase “regulation by enforcement” is misleading, and it is important to return to first principles and recall the purpose of regulation to understand why. Regulators are tasked with enforcing Congress’s statutes, and they bring enforcement actions on the basis that defendants violated those statutes. They may engage in notice-and-comment rulemakings to articulate their authoritative interpretation of statutes if they wish, and courts are likely to defer to these interpretations in litigation, but regulations are usually not strictly necessary under the law.
Take securities law and cryptoassets for example, where advocates argue that the failure of the SEC to enact a rule for crypto has “create[d] significant uncertainty and confusion among entrepreneurs.” Congress allows the SEC to enforce the securities laws against issuers and traders of “securities,” which are subject to the SEC’s jurisdiction. The SEC could certainly promulgate a regulation stating that certain cryptoassets, such as initial coin offerings, are securities, but doing so is not necessary. In 1946, the Supreme Court offered a four-part test for determining whether a contract is a security, and if a specific cryptoasset meets that test, the SEC can enforce the laws, whether a regulation has been issued or not. Similarly, the CFPB can bring actions against individuals engaging in unfair, deceptive, or abusive acts or practices regardless of whether it has issued a rule declaring an act unfair; and the OCC can prevent a bank from engaging in a line of business not necessary to carry on the business of banking even if it hasn’t finalized a rule declaring an activity unnecessary. Every regulator has similar authorities.
Those criticizing “regulation by enforcement” are certainly correct that regulations can bring clarity to the market; with crypto, for example, SEC rules could require disclosure of particular facts or could develop special filing forms specifically for cryptoassets. There may even be benefits to agencies in promulgating rules; the SEC’s legal interpretation that particular cryptoassets are securities is more likely to receive deference in court if it is codified in a regulation.
However, bringing enforcement actions before drafting regulations has its benefits as well. Some infractions of law may be so bespoke that it does not make sense for agencies to draft rules prior to litigation. Other areas of law may change so rapidly that rules are out of date as soon as they are promulgated. And, of course, waiting to enforce laws before regulations are enacted serves as a “get out of jail free” card for lawbreakers, with no opportunity for harmed consumers to be compensated for losses.
President Biden’s financial regulators know all this, and they are certain to bring enforcement actions for violations of statute even when prior administrations did not issue regulations. As such, we are sure to hear the phrase “enforcement by regulation” again and again over the next four years as industry advocates work to protect their clients from robust enforcers. We should be sure to keep in mind that what those using this talking point are actually decrying is something we should all support: enforcing the law.
Todd Phillips is a nonresident fellow with the Global Financial Markets Center.
Very interesting post and point of view. The need for effective implementation of the law must also be applied to other public bodies. Mainly in the field of economic law. The issue of enforcement of competition and consumer law is very important.