Guidance Against Guidance

The Implications of the Administration’s Directing Departments and Agencies Not To Rely On Guidance In Enforcement

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The Trump Administration has made clear that it is engaged in a regulatory reform effort. One stated goal of that effort is to ensure that administrative enforcement actions rely on legally binding authority such as laws and regulations and that enforcement actions are not brought for “violations” of non-binding materials such as guidance or staff views. The Department of Justice, which is the prime litigating authority for the federal government, has issued statements disclaiming department or agency guidance as legally binding authority. More recently, independent agencies, including the Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Bureau of Consumer Financial Protection issued an interagency statement stating that “guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance." And, most recently, the Chairman of the Securities and Exchange Commission stated that “all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties.” While potentially a positive step, significant questions remain about the scope of the statements and how they will be implemented in practice.

This Teleforum will discuss the implications of these statements and this effort. Will this step rein in regulation through adjudication? Will this step reduce the issuance of guidance itself leading to enforcement against behaviors that could have been redirected through guidance? What role should the federal enforcement authorities play in signaling through guidance and statements what they find problematic when the laws are broad enough to not provide a clear message?


John C. Richter, Partner, Special Matters and Government Investigations, King & Spalding LLP


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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Practice Groups, was recorded on Wednesday, October 24, 2018 during a live teleforum conference call held exclusively for Federalist Society members.     

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is Guidance Against Guidance: The Implications of the Administration’s Directing Departments and Agencies Not To Rely On Guidance In Enforcement. My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the expert on today's call.


      Today we are very fortunate to have with us Mr. John C. Richter, who is Partner at King & Spalding in Special Matters and Government Investigations practice group. John Richter is a trial investigations partner with King & Spalding, where he represents companies and individuals under investigation by the federal government. John spent a decade as a prosecutor, rising from the line to serve as the U.S. Attorney for the Western District of Oklahoma and the Acting Assistant Attorney General for the Criminal Division. In 2016, Law360 named John White Collar MVP of the Year. In 2017, he was recognized as one of the top 100 trial lawyers in America by Benchmark Litigation and as a Life Sciences Star for Litigation by LMG Life Sciences.


      After our speaker gives his remarks today, we will move to an audience Q&A, so please keep in mind what questions you have for him. Thank you very much for sharing with us, John. We're privileged to have you. The floor is now yours.


John C. Richter:  Right. Thank you, Wesley. Good afternoon, everyone, or good morning depending if you're calling in from points west of us. I appreciate you joining. As many of you may have read or heard, the current administration has made it very clear that it is seeking to roll back and engage in a significant regulatory reform effort. And one of the stated goals of that effort is to ensure that administrative enforcement actions rely on legally binding authority like statutes and regulations, and are not brought based on alleged violations of non-binding materials, such as guidance or statutes or policy pronouncements.


      The Department of Justice, which is our primary litigating authority at the federal level, as issued statements disclaiming department or agency guidance as legally binding authority. Most recently, a number of independent agencies that regulate the financial industry, including the governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Bureau of Consumer Financial Protection have issued an interagency statement providing that, quote, "guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance," unquote. Even more recently, the chairman of the Securities and Exchange Commission stated that, quote, "All staff statements are non-binding and create no enforceable legal rights or obligation of the Commission or other parties," unquote.


      So that's the backdrop which brings us to this teleforum today. In the time that we have, I'm going to first briefly describe the policy impetus and background for this effort. Second, I'll describe in greater detail these recent statements and the implications for those agencies and people dealing with those agencies. Third, I'll endeavor to prognosticate a little bit about the future of these efforts, and then we'll open the floor for questions and comments from you, the audience.


      So turning first to sort of a policy impetus here. Obviously, there are many observers who have commented and comment presently and raise deep concerns about the extraordinary growth and scope of the federal government in the past 90-plus years or so. And many fingers can be pointed and explanations given as to why this as happened, and there certainly remains active, healthy, ongoing debate about the role of federal government in our lives and whether and to what extent it should have or should continue to happen.


      There's certainly two key features at a structural level that have been contributors and were recognized by many commentators in the area. First, the greater incidents by Congress in passing laws that delegate to the executive branch departments and agencies and delegate broadly to such agencies, which, in turn, has led to significant increases, not only in the number of agencies, but in their authority, and also, then, the amount regulations that they are promulgating underneath. I'm told from some of my reading that the current code of federal regulation contains roughly 200,000 pages of agency-generated rules, and that that's approximately 9 to 10 times as many pages as the congressionally-passed statutes listed in the United States Code. So not to put too fine a point on it, there're at least 220,000 pages of statutes and duly promulgated regulations covering almost all aspects of American life that are on the books and available for potential enforcement against us. Needless to say, therefore, when we're talking about guidelines and policy pronouncements, those presumably are in even greater supply since there tend to be more of those than even statutes or regulations. And guidelines certainly can be seen a bit, therefore, as icing on stop of a very large cake.


      The second factor that I think is recognized as contributing structural factor is what is subject to a fair amount of criticism, at least in the courts and by some notable judges, as too much judicial deference to agency exercise of authority. Not only so critics contend has Congress failed to exercise fully its prerogative to truly make the law, but the judiciary is deferring unduly to executive agencies, thus allowing for even greater growth and inappropriate growth, and it's argued, unconstitutional growth, in some instances, of the federal regulatory state; and certainly, adding to an aggrandizement of power to executive branch officials who are obviously not directly elected by the people.


      Justice Gorsuch has opined, quote, "transferring the job of saying what the law is from the judiciary to the executive unsurprisingly invites the very sort of due process, fair notice, and equal protection concerns the Framers knew would arise if political branches intruded on judicial functions," unquote. Now, many of you I'm sure are quite familiar with what's called Chevron deference, named after the Supreme Court's decision in Chevron U.S.A v. National Resources Defense Council. And the Chevron rule -- we don’t have time to get into all of this today, needless to say. But the Chevron rule, reduced to its essence, essentially requires federal courts to defer to reasonable agency decisions in implementing an agency's statutory mandate when the particular statutory language is ambiguous and the agency's actions are not clearly at odds with the statutory language. So effectively, it gives ambiguity in a statute, the tie goes to the executive branch agency rather than requiring a clear statutory language to empower and support the agency's regulation. And Chevron then also instructs courts to assess administrative judgments for their reasonableness. Thus, when a court finds that Congress did not instruct specifically about what an agency must do and instead granted discretion in some respects about the implementation of the law, a court should review only for reasonableness and consistency with the law.


      And, of course, Chevron doesn't operate alone as precedent. The other big Supreme Court case in the area is Auer v. Robbins, and at its core, Auer extends the branch that Chevron grew to begin with even further. And it stands for the proposition that courts should not only defer to statutory ambiguity to the agencies but also defer to any agency interpretation of ambiguous agency rules no matter the nature of the ambiguity or the means or timing for later interpretation. And Auer, obviously, therefore, is an important extension from Chevron as deference to ambiguity in an agency's action is further afield from the congressional commitment of authority to the agency and agency officials are not, supposedly -- are not supposed to be able to confer discretionary authority upon themselves.


      I won't get into too much about the Administrative Procedures Act, but there is certainly plenty of commentary that suggests that this line of cases is not supported by the plain language of the Administrative Procedures Act. Obviously, all of this to say that there are certainly strong objections to the current delegation jurisprudence, and that is a large part of the general concern about the law as it pertains -- and use of law as it pertains by administrative agencies that underlies this guidance against guidance effort that is taking place in the current administration. Obviously, the concern that critics have is that deference in this context provides a potential incentive to those who might choose a less-clear rule so as to allow greater flexibility—read that as lack of fair notice—for different applications in the future than may have been contemplated at the time of promulgation. And certainly such flexibility may be seen less charitably as ambiguity that fails to provide sufficient notice and accords unelected executive officials to pick and choose with a degree of discretion that is not authorized under Article I of the Constitution which vests "all legislative power granted herein" to Congress.


      So it's in that context that the Trump administration is taking a run at the role of agency guidance. So let me turn now to the current actions by the administration and describe those briefly. In early 2017, the President signed an executive order entitled "Enforcing the Regulatory Reform Agenda," which instructed agencies to reform the regulatory structures and reduce burdens on the American public. The Order specifically instructed agencies to review their, quote, "guidance documents, policy memoranda, rule interpretations, and similar documents," unquote, with an eye toward what should be eliminated. Attorney General Sessions, then, in turn, in November of 2017 issued a memorandum to all Department of Justice components entitled, quote, "Prohibition on Improper Guidance Documents," unquote. And that memo essentially prohibits DOJ from issuing itself guidance documents that purport to create rights or obligations binding on persons or entities outside the executive branch. And so that any guidance -- and says that any guidance issued by the Department of Justice must now disclaim any force or effective law.


      The Attorney General, also in that memo, instructed the Associate Attorney General to work with the Department components to identify and rescind past guidance documents that are not consistent with the principles outlined in his memo. So in turn, then, the Associate Attorney General, Rachel Brand, in January of 2018 then issued the memorandum entitled, quote, "Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases," unquote. Not too surprising. We just all call it the Brand meme now. While the Attorney General's memo limited DOJ's issuance of guidance documents, what is notable about the Brand memo is that it really limits DOJ's reliance on guidance documents issued by any federal agency. And as the chief litigating authority for the federal government, that means that the Brand memo for present has the potential reach far beyond DOJ. Needless to say, it shouldn't be lost on us the irony that it's a guidance memo that is directing how to deal with guidance. But I'll leave that metaphysical discussion for a later time.


      Specifically, the Brand memo prohibits the civil litigating components of the Department and the U.S. Attorney's Offices from, quote, "using enforcement authority to effectively convert agency guidance documents into binding rules," and what this means, therefore, is the Department of Justice litigators may not use noncompliant with guidance documents as the basis for proving violations of applicable law in affirmative civil action cases. And obviously, the principle that is being sought to be elevated here is that enforcement actions should simply be based on statutes and duly promulgated regulations, not on nonbinding guidance.


      So in the wake of that, then, what has happened next is in September of 2018 these agencies that regulate -- these independent agencies that regulate the financial industry that I mentioned earlier – the Federal Reserve, FTIC, NCUA, Comptroller Currency, and CFPB – issued an interagency statement, and it clarifies the role of supervisory guidance—and remember, all of these agencies have supervisory authority over financial institutions—and outlined the effects by the agencies to establish that role. And the statement defines supervisory guidance to include, quote, "interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions," unquote, that are directed to the agencies.


      The statement makes clear the belief that supervisory guidance has a legitimate role to play in providing examples of practices the agencies consider consistent with safety and soundness standards in financial institutions; that it has a legitimate role to play in outlining the agencies' priorities, and to some degree, they suggest in providing transparency about current agency thinking. And the statement certainly does not completely walk away from guidance. It affirms that supervisory guidance does not have the force in effective law and agencies do not take enforcement actions based on super regardants but makes it clear that it can have a legitimate role to play.


      So in the context, therefore, of supervision of financial institution, then, this interagency statement notes that the agencies intend to limit the use of certain specifics, certain numerical thresholds, and other bright lines in describing expectations. That said -- and it also directs examiners not to criticize, supervised financial institutions for violations of supervised regardants. So they direct examiners to only issue citations for violations of law, regulation or noncompliance with enforcement orders or other truly enforceable conditions. However, it makes the statement -- the interagency statement still makes clear that examiners may identify other practices that are seen to be unsafe or unsound or risky, and provides that examiners may reference supervised regardants to provide examples of safe and sound appropriate consumer protection and risk management practices and kind of thing. So while it certainly does seek to restrict, it certainly suggests that guidance is here to stay nonetheless.


      Turning to the Securities and Exchange Commission's actions also in September, Chairman Jay Clayton reemphasized in a public statement the Commission's longstanding positon that all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties. And, of course, when it comes to SEC, the staff regularly issues statements, compliance guidelines, letters; they speak, they issues responses to frequently asked questions, and they certainly responded to specific requests for assistance. And so the Chairman stated that public engagement on staff statements and staff documents is important and will assist the Commission in developing rules and regulations that most effectively achieve the SEC's mission, and reiterated, however, that it is the Commission—and only the Commission—that adopts rules and regulations that have the force and effect of laws.        So, again, the SEC's statement is trying to make clear what guidance is and is not but certainly recognizes that guidance still has a role to play.


      Chairman Clayton also instructed the Division of Enforcement and the Office of Compliance Inspections and Examinations to reinforce to the staff the distinction between staff views, which are not legally binding, and regulations and laws, which are.


      So I think at the end of the day when we're looking at these kinds of actions, there're a couple of implications that flow from this effort and what we've seen so far during this administration. These actions certainly represent one part of the effort to implement regulatory reform and roll back the regulatory state at some level. Questions certainly remain, however, whether the rollback will actually play out in reality.


      So, for example, while the Brand memo requires the Department of Justice not to rely on affirmative civil enforcement -- not to rely in affirmative civil enforcement on guidance as a standard for bringing in action, the Brand memo certainly reserves the right for the Department to rely on a target of an investigation's awareness of particular guidance as potential proof of knowledge or notice that that target had about the law and the risk of their particular conduct that's under scrutiny. And the distinction between, then, what is being relied on as the standard for bringing the action versus what is simply being relied on is one piece of proof in an action may be a distinction that is lost on the target of a particular investigation.


      Likewise, the interagency statement that I talked about from these various independent agencies that supervise financial institutions provides that enforcement action should not be taken based on supervisory guidance. On the other hand, of course, as I noted, examiners may point to supervisory guidance to highlight unsafe or unsound practices in risk management. And, again, presumably in a situation in which the Department of Justice will bring an affirmative civil enforcement action against a bank, if there was evidence that personnel at the bank in the financial institution were aware and given notice of certain supervisory guidance they may use that potentially as proof of knowledge or notice of the potentially troubling conduct.


      So there's arguably a pretty blurry line that separates the bringing of an enforcement action based on a, quote "violation," unquote, of guidance, which is improper under this new guidance from the bringing of an enforcement action based on a violation of a statute or regulation as interpreted in guidance in which the guidance itself may just simply be proof within the case. And, of course, despite the recent statements, supervised entities still, we can expect, are going to be looking at supervisory guidance, even if it's not couched as legally binding. And that may be true of various numerical standards or bright lines since oftentimes regulated entities are desiring as much certainty as possible to know where bright lines are. So we can certainly expect that there will be desire within regulated entities to seek clarity, and therefore to be able to tailor their behavior to avoid crossing clear standards or lines. And so we can expect influential effective guidance notwithstanding this effort.


      In terms of -- and, of course, the SEC statement is even more modest than the interagency statement because it certainly describes the distinction between nonbinding staff views and legally binding regulations and laws. But it's pretty clear that MARC (sp) participants hungry for guidance watch the staff statements very closely as do lawyers like me who's clients are attempting to follow the rules. And so one of the potential perverse effects of this guidance that we'll have to see if it transpires is whether this leads to less guidance or fewer bright lines, which effectively leads to less transparency into the SEC staff's thought processes regarding the various complex rules and regulations. And while as a matter of sort of constitutional jurisprudence and a sort of general philosophical standpoint, this may be seen as appropriate. I would expect that there would be potential players in the marketplace who are regulated entities who may find the lack of clarity or as much guidance potentially not a positive for them. So, again, this remains a work-in-progress, and we'll have to see how it plays out.


      I think at the end of the day, despite those criticisms, what we do know is that this is an effort to effectively try to return to some first principles regarding applying a legally binding authority when engaged in enforcement of laws. And it should go without saying in the United States that before an enforcement action may be brought that a prohibition must actually exist in statute or regulation. But there are clearly circumstances in prior cases in which the guidance has been unduly relied upon in bringing actions, and that has led to some very difficult circumstances and certainly raised real questions about the fair notice of what Americans are hearing about what the law is and that they're subject to.


      So, obviously, it remains to be seen whether these memos and statements will change behavior and decision making in a fundamental way. Regardless, of course, for advocates, the memos and statements provide an additional ground for advocacy in challenging potential actions. Certainly, companies and individuals have, now, these memos, this guidance against guidance, to provide support when attempting to dissuade Department of Justice civil attorneys or financial agency staff, examiners, and attorneys from pursuing theories of liability that are not clearly within the statutory or regulatory text. And these guidance memos, therefore, may provide some new avenues for appeal within agency leadership if line-level personnel are not dissuaded. Whether this will be in whole cloth or just merely, occasionally at the margins, of course, remains to be seen.


      In terms of -- turning to some final -- a little bit of prognostication. I think one thing that is unclear is how long and how much this effort will persevere. I'm certainly not privy to the internal imaginations that have caused this guidance to be issued. And it's not clear that all of the efforts in this area have been made public; there may be other internal memoranda at other agencies that have not found their way into the public domain, but nonetheless sound a great deal like these memos and statements do. But it's clear that, of course, this has been driven by the first generation of key lawyers within this administration. And we know, of course, that there is turnover so it remains to be seen whether they will be -- this will continue as the years unfold. And so whether this will make a difference just in these agencies is a question, and then will this be transferred to other agencies and perused remains to be seen.


      So I'll close there with those brief questions for the future, and let me open it up, now, to questions and comments. And I appreciate everyone's patience and attention as I've laid this out today.


Wesley Hodges:  Thank you so much, John. While we wait for any audience questions, John, I did want to ask you, you mentioned that this guidance against guidance you've seen in many departments and agencies so far. Would you mind commenting on the departments and agencies that haven't issued guidance against guidance, and what some of those circumstances might be?


John C. Richter:  A good question, Wesley. I think, again, we don’t know what we don't know. But certainly there are some prominent agencies that haven't obviously -- we had some independent financial regulatory agencies that issued this interagency statement and the SEC has spoken on the issue. But the Department of Treasury has not, so far as we know. Likewise, you've got large agencies that are known to regulate a fair bit. There's a huge long line of the Washington alphabet soup, of course, but a few that come to mind certainly the Department of Health and Human Services, which contains, obviously, CMS, and OIG, and the FDA. We're not aware that they have spoken on this issue, and, of course, particularly the FDA has been well-known for relying on guidance over the years and issuing a great deal of guidance. Likewise, CMS is constantly issuing rules and taking actions with regard to the healthcare space, wherein they are not proceeding under notice-and-comment rulemaking. And likewise, OIG regularly is issuing various opinions and statements about the law, particularly under the Anti-Kickback Statute about what it thinks should and should not be pursued and what types of behavior may fall within safe harbors or not, which are being recognized, notwithstanding -- and abided by, notwithstanding the lack of actual or regulatory authority for some of their statements.


      And whether that's a good thing or a bad thing is a bit in the eye of beholder. Obviously, from a constitutional perspective, there're certainly critics who would say that's not how the Framers intended, and it is allowing, essentially, these agencies to proceed and exercise, effectively, legislative authority in the executive branch, which is contrary to the separation of powers and the allocation of powers under our Constitution. That said, of course, most of the regulated entities and people who work in these companies are pragmatists. They live in the here and now, and they're less worried about the aspiration of what people might wish. And what they really want to know is what's the rule, and how do I factor the rule into my business decision making?


Wesley Hodges:  Thank you, John. It looks like we do have a question from the audience, so let's go ahead and move to our first caller.


Rob Rando:  Hi, thank you. Rob Rando here. I was just curious if you have any input on the Department of Commerce?


John C. Richter:  I don’t. Again, obviously, that's another area with a broad swath of jurisdiction. And I think one of the real questions -- I think my understanding is that this effort has been driven out of the White House Counsel's Office, and that in various quarters, it's been met with greater degrees of support and greater degrees of resistance depending on the circumstances. I don’t have any particular insight into the Commerce Department, but it's a very good question given the span of regulatory authority that Commerce has.


Rob Rando:  Well, sure. I mean, I'm particularly interested in the USPTO.


John C. Richter:  Right. And that's an area where it's probably worth asking, and of course the Patent Bar would be tremendously interested in how that might apply. And, of course, the Patent Office itself – the USPTO – has been subject to a fair amount of scrutiny over the years on itself, on its operations, and so it remains to be seen. But this is -- I think one of the open questions is whether and to what extent this effort is going to be fully implemented across all agencies and departments and the degree to which the current political appointees will prioritize this effort in their respective agencies in the context of all the other priorities that they are trying to deal with on a day-to-day basis.


Rob Rando:  Sure. Well, thank you.


John C. Richter:  Yep. Thanks for your question.


Wesley Hodges:   Thank you, caller. All right, seeing no audience questions, John, I turn the mic back to you. Is there any subject you'd like to cover in more detail or any remarks you'd like to make before we end today?


John C. Richter:  Well, Wesley, just one brief thing to follow up. One thing I would say to the gentlemen who asked the question about the Department of Commerce is obviously there will be the opportunity to argue by analogy, and one would think that even if an agency has not issued guidance itself to the degree that you're able to identify a circumstance in which an agency may be relying unduly on guidance, that you may be able to get transaction up the chain at a political appointee level, at least during this administration.


      Likewise, we can certainly expect the possibility that the Supreme Court will be taking cases in the near future that may be looking at the question of deference more broadly, and we certainly -- just this week, there was a case out of the Sixth Circuit that deals with that and has a good articulation on both sides of the argument on the deference standard. And there seems to be a lot of statement coming out of -- at least four members of the Court that there's an interest in revisiting the line of jurisprudence. When that might happen, if that might happen, obviously remains to be seen. But there's a lot of noise in the system right now, if you will, along those lines. And so, I think it remains to be seen how this will all fall out.


      It also remains to be seen whether and to what extent political leadership can truly change the culture and thinking within career levels who've been relying on their judgments as it pertain to guidance and their opinions that information the guidance for many years. Obviously, changing that overnight is not easy if the goal is to make the change. And that's why it raises the question as to whether and to what extent over the long term this effort will make a meaningful difference as it pertains to the way in which our administrative state thinks and acts when it comes to enforcement actions.


Wesley Hodges: Thank you, John. Any last comments for the audience?


John C. Richter:  No, I think that sums it up for the day. I wish everyone a great rest of the day, and thanks, again, for your attention.


Wesley Hodges:  Excellent. Well, John, on behalf of The Federalist Society, I'd to thank you for the benefit of your valuable time and expertise today. We welcome all listener feedback at Thank you all for joining. This call is now adjourned.


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