SEC Inspector General Warns of More Lawsuits After Chevron

The Securities and Exchange Commission is likely to face more pressure both in and out of the courts.

This week, the SEC’s Office of the Inspector General, an independent auditing and investigations body, released its annual report, which stated that the regulator should expect increased litigation regarding rulemaking, in part due to the Supreme Court overturning a long-held precedent by which federal courts defer to administrative agency rules.

Meanwhile, on the morning after Donald Trump’s presidential victory—which many expect will shift the current SEC regulatory regime—a financial trade group has called on SEC Chairman Gary Gensler to resign.

Chevron’s Tail

In terms of the inspector general’s warning, released on Monday, the auditor warned that the “SEC should anticipate increased litigation by parties challenging current and future rulemakings and ensure that new regulations will withstand judicial scrutiny.”

The inspector general cited the Supreme Court’s decision in the Loper Bright Enterprises v. Raimondo case, which overturned about 40 years of precedent known as the Chevron doctrine, which had required federal courts to defer to administrative agencies. Now, courts will hold more power in how to rule on challenges to agency rulemaking, include rules from the SEC and the Department of Labor.

“The current regulatory environment may lead to increased forum shopping by petitioners and extended periods of uncertainty about the permissible scope of agency action,” the inspector general wrote.

In response to the post-Chevron environment, the auditor called on the SEC to “continue to develop” a rigorous administrative process, including getting public feedback on rulemaking and giving “reasoned responses” to public comment.

Howard Fischer, a partner in Moses & Singer LLP, believes one byproduct of Loper Bright may slow the pace of SEC rulemaking and reduce the volume of litigated enforcement actions by the regulator.

“The Supreme Court’s recent rulings on administrative agency powers and restraints seem to have opened the floodgates to litigation against the SEC,” Fischer wrote via email. “We are likely to see a plethora of rules challenged—even ones that have been implemented for a significant period of time. In addition, rulings limiting the SEC’s use of administrative proceedings are likely to force more cases to federal court—which will involve lengthier, and more expensive, proceedings.”

Earlier this year, the SEC’s top enforcer, Gurbir Grewal, stepped down after implementing what many experts saw as a rigorous regulatory period. At the time, experts expected his replacement to continue a similar level of enforcement—with the election results now potentially shifting that calculus.

Gensler’s Future

SEC Chair Gensler has received industry pushback on various regulatory areas during his tenure under the administration of President Joe Biden.

For example, during a recent conversation with Gensler at the Securities Industry and Financial Markets Association’s annual conference, SIFMA CEO and President Kenneth Bentsen noted, for example, the “growing frustration” among advisers at the heavy enforcement of so-called off-channel communications by advisers. Gensler defended the regulator’s push to enforce rules on adviser communications, noting that many firms were ignoring them, potentially to hide bad practices.

On Wednesday morning, after Trump’s election win, the American Securities Association called for Gensler to step down from his chair post.

“Last night the people voted for this country to take a new direction, and Chairman Gensler should respect that vote by stepping down from his position immediately,” ASA President and CEO Chris Iacovella wrote in a statement. “This is the only way for America’s working families, retirement savers, and small businesses to rebuild their trust and confidence in the institution of the SEC.”

The ASA has fought back against numerous SEC policies in recent years, along with criticizing the speed and efficiency of enforcement.

The SEC did not immediately respond to a request for comment.

In its annual report, the inspector general also noted improved staffing and attrition rates in 2024, as compared with the year prior. Those improvements, however, have come with increased costs, as personnel expenses increased to 70% of the SEC’s budget in 2024, up from 64% in 2023. The auditor noted that the agency may need to implement “austerity measures,” including hiring freezes, depending on its fiscal 2025 budget.