Judicial Review of SEC Rulemaking

The Administrative Procedure Act (APA) provides the procedural framework for both rulemaking and its subsequent judicial review. Stakeholders participate throughout this process as commenters, meeting participants, and, sometimes, litigants. Judicial review represents not a separate regulatory stage, but the culmination of the rulemaking process. Most empirical scholarship, however, does not connect the two stages.

Our empirical paper examines the relationship between the comment process, rulemaking, and litigation in the context of Securities and Exchange Commission (SEC) rulemaking. SEC rules have drawn attention in recent years as rulemaking accelerated significantly during the tenure of Chair Gary Gensler, with a parallel increase in litigation activity challenging those rules. Our paper not only makes empirical contributions but also offers an important policy insight. Namely, public comments and meetings with the SEC are not background noise filled with boilerplate objections, form-letter campaigns, lobbying activity, and industry groups posturing. The process produces reliable signals about which rules are more likely to attract future litigation from stakeholders. If the SEC reads the comments and meeting memoranda carefully enough, it can detect those signals before lawsuits are filed. In contrast, proceeding with a rule past this early-warning system may suggest a deliberate choice to face a higher litigation risk.

Our research is motivated by two questions:

1. Which parties challenge agency rules, which legal arguments are raised, and which factors are associated with the success or failure of SEC rules to withstand judicial scrutiny?
2. Does the administrative record contain information that predicts future litigation and its outcome?

To examine these questions, we build two novel datasets. One dataset captures SEC rulemaking activity from 1995 to 2024. It includes 336 rules adopted through notice-and-comment rulemaking, together with 62,751 public comments and 4,298 meetings between stakeholders and SEC officials. We use large language models to extract metadata from the comments and meeting memoranda from which we construct measures of stakeholder participation, sentiment toward proposed rules, disagreement among commenters, perceived litigation risk, references to legal arguments, and other characteristics of the administrative record.

The second dataset consists of hand-collected characteristics and outcomes of judicial decisions addressing challenges to SEC rules and to the rules of self-regulatory organizations subject to SEC approval. This dataset includes direct challenges to rulemaking, as well as enforcement, administrative, and private actions in which the validity of an SEC or SRO rule was contested. In total, we identify 121 judicial challenges decided between 1942 and 2025. Of these, 46 unique challenges post-1995 are linked to 49 case-rule observations in our notice-and-comment sample. These 49 observations correspond to 27 unique adopted rules because a single rule may be challenged in multiple proceedings. At the rule level, the SEC prevailed in challenges involving 12 rules and lost at least one challenge involving the remaining 15 rules.

We find that judicial challenges to SEC rules become increasingly common over time, particularly among rules adopted during the recent administration of SEC Chairman Gary Gensler. Most challenges directly target rulemaking, with a smaller number arising in enforcement proceedings or private litigation. Overall, since 1942 the SEC has lost approximately one-third of judicial challenges, underscoring the importance of judicial review as a meaningful constraint on SEC regulatory activity.

Our findings indicate that the mode of communication matters and so does the identity of challengers. Judicial challenges to SEC rules are driven primarily by sophisticated and well-funded market participants and organized interest groups, not by dispersed investors. Industry groups and trade associations play a particularly prominent role. They account for the largest share of litigants in rulemaking challenges, appear even more frequently in the notice-and-comment subsample, and are among the most active participants during the rulemaking process itself. This pattern strongly suggests that industry participation is relevant not only to the formation of rules through comments and meetings, but also to subsequent litigation over those rules.

We document the nature of the legal challenges. The legal arguments raised in SEC litigation typically follow traditional administrative law claims. Challenges based on statutory authority, arbitrary-and-capricious review, and economic analysis appear more frequently than constitutional claims or arguments involving the now discarded Chevron deference.

The frequency of an argument does not necessarily correspond to its success. Some commonly raised theories are associated with only moderate SEC loss rates, while more technical APA-based claims involving ignored comments, lack of rational basis for a rule, failure to identify the relevant problem, or failure to connect the rule to that problem appear more closely associated with adverse outcomes for the SEC. Constitutional claims, by contrast, are relatively unsuccessful despite appearing with some frequency.

Our analysis next distinguishes between two interrelated inquiries: which rules attract challenges and which challenged rules the SEC ultimately wins. On the first question, the rulemaking record helps predict which adopted rules later become the subject of litigation. As one would expect, challenged rules attract more stakeholder engagement than unchallenged rules. We quantify the extent to which they receive more comments, generate more meetings with SEC officials, attract more organized participation campaigns, and contain stronger indications of anticipated litigation. These differences are measurable before litigation is instituted. Meeting activity is the most consistent participation-based correlate of judicial challenge. Total comment volume is insignificant after adjusting for other features of the administrative record. Form-letter activity is positively associated with the probability of challenge, suggesting that organized mobilization provides information beyond the number of comments. In sum, although the comment process may naturally generate uninformative noise, it also produces signals that may help the SEC understand its litigation risk, potentially indicating the resources the Commission needs for both rulemaking and defending its rules in court.

The content of stakeholder feedback is especially informative. Comments that contain explicit threats of litigation, litigation-related vocabulary, or discussion of potential legal vulnerabilities are strongly associated with subsequent judicial challenges. These findings suggest that the stakeholder feedback can credibly signal future litigation long before a regulation is adopted. The relevant information is not simply that a rule generates public attention, but that stakeholders use the notice-and-comment process to highlight legal objections and to signal the threat of litigation.

Our results also help quantify the influence of industry groups and trade associations. Decomposition of stakeholder participation shows that feedback from industry groups is particularly important. Threats of litigation originating from industry groups during the notice-and-comment stage are credible and associated with subsequent judicial challenges, as industry groups file a disproportionate share of lawsuits that challenge SEC rulemaking. Industry group meetings with the SEC are negatively associated with challenge incidence after controlling for overall meeting activity. This finding suggests that direct engagement with the Commission during rulemaking may substitute for litigation or reflect efforts to resolve objections before final rule adoption. Although many variables that predict challenges lose their explanatory power for judicial outcomes, industry sentiment remains informative: rules receiving more favorable comments from industry groups are less likely to be rejected by courts, whereas rules opposed by industry are more likely to face adverse judicial outcomes.

Finally, the notice-and-comment record is more informative for predicting whether a rule will be challenged than for predicting the SEC’s ultimate loss in court. The characteristics that distinguish challenged rules from unchallenged rules do not always differentiate the SEC’s victories from losses in court. In the challenged-rule sample, many measures of stakeholder participation, sentiment, and linguistic content lose statistical significance. Judicial outcomes appear to depend more heavily on case-level features, including the legal theories deployed by the challengers, the challengers’ identities, and the context in which the challenged rule was adopted. It seems good lawyering and arguments matter more in court.

Our overall results do not track the rules adopted during the Gensler era of active rulemaking. Those rules were far more likely to be challenged and, if challenged, were far more likely to be invalidated by the courts. Of the 45 rules adopted during the Gensler tenure in our sample, 7 (15.6%) were challenged in court, compared with 20 of 291 (6.9%) rules adopted during earlier administrations. And of the seven Gensler-era rules challenged in court, six (85.7%) were ultimately struck down, compared with 9 of the 20 challenged rules (45.0%) adopted during earlier administrations.

Notice-and-comment rulemaking and judicial review are closely connected. The administrative record sheds light on future litigation incidence and outcomes. Rules that later attract judicial challenges are associated with distinctive patterns of participation, organized mobilization, legal objections, and anticipated litigation. Industry groups and trade associations participate extensively before adoption and appear frequently as challengers post-adoption. Judicial review, therefore, should not be understood as wholly separate from rulemaking. It is part of a broader process in which stakeholders contest SEC regulation before the agency and, for a smaller set of rules, before the courts. This whole process contains important signals about stakeholder behavior before and after a rule is adopted, as well as about the agency’s risk of litigation.

The full draft of the paper is available here.