The Congressional Review Act and the Biden Administration’s Approach to Financial Regulation

Within hours of taking office, President Biden moved aggressively to begin to dismantle much of the Trump administration’s regulatory legacy—issuing a series of executive orders that either changed regulatory policy directly or directed federal agencies to do so. Indeed, the Biden administration’s work to reform the regulatory state started weeks before inauguration, with its concerted efforts to nominate and appoint leaders to run the federal agencies that would implement its regulatory agenda. Competent and loyal agency leadership, coupled with tailored presidential directives, will go a long way toward reshaping the regulatory state to better conform to the Biden administration’s vision.

But it won’t be enough. Much of the Trump administration’s regulatory legacy has been codified in regulation, including an aggressive issuance of “midnight rules” promulgated in the final months of the Trump presidency. As Dick Pierce explains, there are three main ways to reverse a prior administration’s rule. First, the agency could engage in a new notice-and-comment rulemaking to rescind (and perhaps replace) the rule. That approach requires substantial agency resources and could take months if not years to finalize. Second, the agency could just refuse to defend the rule in litigation, letting courts vacate and set it aside. This is Professor Pierce’s preferred approach. But it, too, has limitations. Especially in the financial regulation space, those who supported the rule would no doubt try to intervene to defend it. And, unless there is no reasonable ground to defend the rule, there are deeper rule-of-law questions implicated by the government’s failure to defend a rule—questions that far exceed the ambitions of this post. Third, Congress and the president could utilize the Congressional Review Act (CRA) to repeal the rule.

In this post, we explore the pros and cons of this third approach, with a particular focus on financial regulation. In light of our recent report examining the SEC’s proxy advisor rule, prepared for the U.S. Chamber Center for Capital Markets Competitiveness, we will use that final rule as a case study. Ultimately, we conclude that the CRA is a powerful and important tool for Congress to rein in the administrative state and for a new presidential administration to combat midnight rules that a prior administration promulgated that may not be consistent with the will of the voters.

Yet there are also serious downsides. As Professor Pierce notes, the CRA consumes substantial congressional resources, including precious Senate floor time, and thus may inhibit a presidential administration from pursuing higher-order objectives. But there is another, often-overlooked potential cost. When Congress repeals a rule under the CRA, that action bars the agency from promulgating another rule that is “substantially the same.” In some situations, such as the SEC’s proxy advisor rule where the final rule embraces a compromise regulatory approach, that CRA requirement may well prohibit (or at least severely limit) the agency from regulating in that area.

In this post, we first provide a primer on the CRA. We then explore how the CRA could be applied to financial regulation during the Trump administration, using the SEC’s proxy advisor rule as a case study.

The Mechanics of the Congressional Review Act

Concerned that federal agencies may adopt regulations opposed by current legislative majorities, Congress enacted the Congressional Review Act in 1996. The CRA created an expedited process for considering joint resolutions to overturn regulations, making it easier for Congress to reject agency actions it disapproves. To be sure, a CRA resolution must still pass both chambers of Congress, and is subject to presentment and a potential presidential veto. But the CRA eliminates the filibuster for such resolutions, limits Senate floor debate to 10 hours, and otherwise prohibits leadership from blocking a final vote.

The power of the CRA to rein in the administrative state, however, is temporally limited. Congress can only use the CRA within a relatively short window after the promulgation of a major regulation. Under the CRA, before any new rule may take effect, the agency must submit a report on the rule to Congress and the Comptroller General. If the regulation is deemed a “major rule”—defined as any rule that the Office of Information and Regulatory Affairs concludes will likely have an annual effect on the economy of at least $100 million, or otherwise have significant effect on the economy—it generally may not take effect for at least 60 days after its submission to Congress or publication in the Federal Register (whichever is later). With respect to midnight rules, the CRA also allows a new Congress to review any rules received by Congress within the last 60 legislative days of the prior Congress.

Importantly, the effect of a CRA resolution does not just repeal the agency rule at issue. It also prohibits the agency from promulgating “a new rule that is substantially the same” to the rule at issue “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” 5 U.S.C. § 801(b)(2). We return below to this feature of the CRA in the context of the SEC’s proxy advisor rule.

Enacted in 1996, the CRA received little attention until President Trump took office. Because CRA resolutions are subject to presidential veto, the CRA is generally only viable to rescind “midnight regulations” adopted at the end of a presidential administration. Consequently, before President Trump’s election, the CRA was only used once: to repeal the ergonomics rule adopted by the Occupational Safety and Health Administration during the Clinton administration. And this regulation was only repealed because it was created at the end of the Clinton administration, allowing a Republican Congress and the Bush administration to use the CRA.

The Trump administration and the 115th Congress used the CRA quite extensively, as tracked by the GW Regulatory Studies Center here. In 2017, Congress enacted, and the President signed, 15 resolutions of disapproval revoking major regulations. Fourteen were “midnight rules” adopted during the closing months of the Obama administration, and the 15th was a rule created in 2017 by the Consumer Financial Protection Bureau (CFPB). A 16th resolution of disapproval—targeting a CFPB bulletin issued in 2013—was passed and signed by the President in 2018. In the financial regulation space, Congress and President Trump utilized the CRA to invalidate the SEC’s conflict minerals rule.

Turning to the 117th Congress, Daniel Pérez of the GW Regulatory Studies Center estimates that, under the CRA’s 60-legislative-days rule, agency rules issued as far back as August 21, 2020, could be subject to a CRA resolution. At some point, the House and Senate Parliamentarians will provide a formal opinion on the definitive date. The Center reports that nearly 1,500 rules fall within that window (full list here; rules collected here). This includes 90 rules from Treasury, 28 rules from the SEC, and 24 rules from the CFTC. (The CRA does not apply to “monetary policy proposed or implemented by the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.” 5 U.S.C. § 807.) ProPublica has profiled a number of the Trump administration’s most controversial midnight regulations here.

Applying the CRA to Financial Regulation: The SEC’s Proxy Advisor Rule

The SEC’s proxy advisor rule is a useful case study to illustrate the CRA process, complications, and potential costs and benefits of utilizing the CRA to eliminate a prior presidential administration’s regulatory actions.

As we detailed in our report, on July 22, 2020, the SEC issued the proxy advisor rule, which is designed to increase the transparency, accuracy, and completeness of the information proxy advisors provide to investors making proxy voting decisions. This final rule was the result of a decade-long engagement by the SEC to consider questions of proxy advisor conflicts of interest and advice quality—beginning with a 2010 concept release and through a series of informal interpretations, notice-and-comment rulemaking, and engagements with proxy advisors, investors, company officials, academics, and others.

Because the SEC issued this final rule in late July, one may conclude that it would not be subject to the CRA, which only reaches back to rules issued on or after August 21, 2020. But that is not the critical date. As noted above, the relevant window for CRA purposes is “the period beginning on the date on which the report referred to in section 801(a)(1)(A) is received by Congress and ending 60 days thereafter (excluding days either House of Congress is adjourned for more than 3 days during a session of Congress).” 5 U.S.C. § 802(a) (emphasis added).

Here, the SEC submitted the final rule to the Senate on August 6, 2020 (referred to committee on August 11, 2020), and to the House on August 18, 2020 (referred to committee on August 28, 2020). So the rule appears to fall outside of the CRA’s statutory window. The Senate, however, has interpreted this “received by Congress” requirement differently. The Congressional Research Service reports:

Although not required by the statute, it appears that the Senate has established the additional requirement that the rule be published in the Federal Register (if such publication is required) before a qualifying joint resolution of disapproval may be submitted. Accordingly, for purposes of the act, a rule is practically considered to have been “received by Congress” on the later date of its receipt in the Office of the Speaker of the House, its referral to Senate committee, or its publication in the Federal Register.

The SEC submitted the final rule to the Comptroller General on August 28, 2020, and, critically, the final rule was published in the Federal Register on September 3, 2020. Accordingly, at least under the Senate’s interpretation of the CRA, the SEC’s proxy advisor rule would still fall within the CRA’s review window, based on its publication in the Federal Register. Whether this is an appropriate interpretation of the CRA is contestable.

Assuming the proxy advisor rule is subject to CRA review and the Biden administration would like to revisit the rule, there are still at least two sets of considerations that counsel against utilizing the CRA to repeal the rule—as opposed to the agency engaging in rulemaking to rescind (and replace) it or perhaps the government deciding not to defend it.

First, as noted above, the CRA process consumes substantial congressional capacity—at the committee level and then on the floors of both chambers. This is particularly true with respect to Senate floor time. Such floor time is at a premium at the start of a new administration, when the Senate must expeditiously confirm the president’s nominees to run numerous federal agencies and when the president may want to focus the remaining congressional capacity on his legislative agenda. As Professor Pierce observes, “The period immediately following President Biden’s inauguration may be the period in history in which Senate floor time is most scarce and most valuable.” That is because the nation is still confronting a raging pandemic (and accompanying economic crisis) that will no doubt require legislative action. And this Senate may also need to use substantial floor time to conduct an impeachment trial starting in February.

That said, debate on a CRA disapproval resolution is statutorily limited to 10 hours in the Senate, which while costly, takes less time than traditional legislation. Surely the Senate could find floor time for at least a few CRA disapproval resolutions. But then the question becomes whether the proxy advisor rule is worth prioritizing for CRA repeal, at least compared to the other almost 1,500 Trump administration regulations that fall within the CRA window, including nearly 150 rules issued by Treasury, the SEC, and the CFTC. As John Coffee suggests, the Department of Labor’s rule on “Financial Factors in Selecting Plan Investments” may be a more likely target.

Looking only at the SEC’s priorities, there is much to occupy the agency’s agenda in the coming years. A more likely focus of potential regulation is the disclosure of climate risks, an area of priority for the Biden administration and Gary Gensler, President Biden’s nominee to chair the SEC. More broadly, the SEC may continue to consider disclosure standards with respect to environmental, social, and governance (ESG) issues. Gensler and the SEC will also likely continue to prioritize the work of the Retail Strategy Task Force, which Chairman Clayton described in 2019 as helping to “develop data-driven, analytical strategies for identifying practices in the securities markets that harm retail investors and generating enforcement matters in these areas.” The SEC is also likely to continue focusing on enforcement of Regulation Best Interest, another rule designed to protect retail investors by enhancing the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers. Disclosure of political contributions has long been an area of potential regulatory interest, and Gensler’s knowledge and interest in cryptocurrency also suggests that the SEC may take a stronger role in regulating such assets.

Proxy advisory regulation, by contrast, just may not be a significant priority to the agency, particularly after years of work on the issue by SEC staff. And starting from scratch after a CRA repeal—as opposed to making more modest changes to the existing proxy advisor rule—would detract the agency from addressing the higher priorities highlighted above.

Second, as noted above, a CRA disapproval resolution does not only invalidate the rule at issue; absent subsequent legislative action, it also prohibits the agency from issuing “a new rule that is substantially the same.” This means that the Biden administration cannot just reissue the Obama administration rules repealed under the CRA. It could also mean, however that repealing a too-lax Trump administration rule could prevent the Biden administration from adopting more-exacting rules.

Jonathan Adler is probably right, at least as a general matter, that “these fears are overstated,” as a CRA disapproval resolution “does not bar agencies from regulating the same subject,” just “from adopting an equivalent rule.” But the “substantially the same” prohibition may complicate matters further in contexts where the invalidated final rule struck a compromise approach. In those circumstances, an agency may find it hard to promulgate a new rule that regulates the subject at all.

The SEC’s proxy advisor rule is a good example. Proxy advisors play a significant role in both magnifying and influencing shareholder voice, and investors deserve to receive “more transparent, accurate and complete information on which to make voting decisions,” as the SEC discussed when promulgating the final rule. As we detailed in our report, the SEC was careful to respond to concerns raised by the proxy advisors and their supporters, and ultimately adopted a more flexible, principles-based framework that significantly decreased the regulatory burden anticipated by the proposed rule, while still providing protection for investors concerned about advice quality and potential conflicts of interest.

For example, the final rule, compared to the proposed rule, provides greater flexibility for proxy advisors compliance and removes the provisions that would have given companies the opportunity to review and comment on proxy advice before it was sent to investor clients. All of the significant changes from the proposed rule to the final rule were made in response to concerns raised by proxy advisors and their supporters—to lessen the regulatory burden and address the costs and unintended consequences raised during the public comment period. Because the SEC’s final position is carefully measured and the regulation is relatively light, it is difficult to imagine any significant proxy advisor regulation that would not be “substantially the same” unless it were considerably more restrictive of proxy advisor activity or proxy advisors were simply not regulated at all.

Furthermore, because the final rule codified longstanding SEC interpretive guidance, including an expansive definition of “solicitation” in effect since the 1950s, a CRA repeal’s bar on “substantially the same” regulation could be interpreted as rejecting the definition of solicitation to include the regulation of proxy advisors. Indeed, repealing the final rule would not only upend established SEC regulation of proxy advisors, but potentially could also implicate other areas of securities regulation affected by the final rule, including the broad antifraud regulation of “solicitations” under Rule 14a-9. At the very least, invalidating the proxy advisor rule through the CRA has the potential to limit the SEC’s ability to regulate in a crucial area—as markets have become increasingly institutionalized, the SEC must also increasingly consider the agency costs associated with investment intermediation and those who advise intermediaries.

More fundamentally, the CRA is perhaps best suited to repeal hastily drafted and poorly developed midnight rules, rather than a rule demonstrating compromise and thoughtful agency engagement over the course of a decade. As discussed above, and at length in our report, the proxy advisor rule resulted from extensive work by the SEC staff over a decade, and the final rule also demonstrated the SEC’s careful review of the comments and concerns expressed by proxy advisory firms, institutional investors, and others concerned with the reach of the proposed rules. Although the proxy advisor rule may technically fall within the CRA’s midnight rules review window, it would be a mistake to group this final rule with what we traditionally understand as midnight rules.

Conclusion

The Biden administration faces a daunting task in dismantling the Trump administration’s regulatory legacy and implementing its own ambitious regulatory agenda. The administration has various tools at its disposal, but in a world of limited resources each has varying costs and benefits. In this post, we have focused on the Congressional Review Act, which is a powerful and important tool to undo midnight regulations. Yet the CRA too has its limitations and costs. We doubt, for instance, that the CRA would be worth utilizing to invalidate the SEC’s proxy advisor rule—assuming the Biden administration would even target this rule for reform.