Recent Supreme Court Rulings Expected to Impact Communications Compliance in Financial Services


INSIGHT
Published
Jul 3rd '24
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The U.S. Supreme Court is making national (and international) headlines for their rulings and decisions this summer. While one ruling is drawing the most attention, those in the financial services sector should be paying attention to a few others.

 

Those rulings have led to a variety of reactions and opinions, including:

 

  • “The end of regulatory enforcement of ambiguous rules”
  • “A victory for the forces of deregulation”
  • “The latest round in 200+ years of sparring between the executive and legislative branches of government”
  • “A flood of litigation to follow”

 

What just happened?

The ink is barely dry on a week of U.S. Supreme Court decisions, opinions and dissents that can be best summarized by paraphrasing from one of the justices themselves: “Just wow.”

 

Three issued rulings will impact financial regulatory actions, each shifting power from regulatory bodies to courts and judges to determine outcomes of regulatory enforcement actions.

 

Each decision needs to be unpacked to truly examine its significance, and what remains to be determined in assessing its impact on digital communications compliance. Let’s start with the most impactful.

 

Loper Bright vs. Raimondo

 

At a glance:
The court invalidated a long-standing ruling (known as the “Chevron deference”) that gave power to federal government agencies in interpreting “ambiguous” regulatory obligations.

 

What’s the impact?

In this decision, the Supreme Court has stripped existing regulatory bodies (including the SEC, FINRA, CFTC and others) of their current regulatory enforcement powers.

 

This changes a process in place for over 40 years in how compliance executives interact with regulatory bodies. Previously, the interaction relied upon the subject matter expertise gained in a process that accumulates over years and many enforcement actions.

 

What happens now is determined by the federal judge of each case, who may lack the subject matter expertise to interpret ‘ambiguous’ rules. Take artificial intelligence and cryptocurrencies as examples. We can only wonder how a judge would address questions pertaining to rules with terminology like “business as such” that were defined long ago and are now being applied to modern communications modalities like whiteboards, voice recordings and generative AI.

 

Corner Post vs. Federal Reserve

 

At a glance:

The court ruled that challenges against agency rules can be created within six years of the date of the alleged infraction, and not based upon the date the rule was issued.

 

What’s the impact?

So, while the Chevron defense doesn’t change underlying rules, Corner Post can reach back and challenge rules that had proven to be ‘ambiguous’ over time or were controversial from the start.

 

Allowing challenges to existing regulatory mandates will significantly increase legal cases through long and expensive court proceedings. It’s only a matter of how soon. Can we find examples of unpopular rules and mandates written generations ago that are now misfit to the technologies of today? Of course.

 

SEC vs. Jarkesy

 

At a glance:

The court’s ruling invalidated the SEC’s use of its internal enforcement system (known as Administrative Law Judges, or ALJs) in pursuing civil fraud penalties.

 

What’s the impact?

For some, the biggest concern of current regulatory enforcement mechanics is the process of resolution, which lacks even the basic provisions guaranteed under the Seventh Amendment of the Constitution, including the rights to have your case heard in front of a jury.

 

For some individuals and firms, the answer may continue to be to leverage the ALJ process for faster decisions, confidentiality and to just move on. For others, managing the production of evidence through the courts may now be the better answer.

 

Key takeaways

While an analysis of the Supreme Court’s decisions on the above cases this early may include speculation, we can conclude several key implications:

 

  • Refactoring of regulatory bodies: The decision may result in a significant shift in how the SEC approaches regulatory enforcement, potentially leading to a more cautious and court-oriented approach in its operations. Regulators will need to modify their “regulation by enforcement” strategy to adapt to new legal realities. Enforcement actions are a funding source for regulators, so how they are rebalanced toward support of an exploding volume and backlog of legal cases is yet to be seen.
  • Uniformity of enforcement: The shift to federal courts will likely lead to more uniformity in the application of securities laws as case precedents are established, even as different federal judges and juries may interpret laws differently.
  • Cost shifts from compliance to litigation: Communication obligations shift from regulators to courts and litigation, increasing the value of proactive governance of communications to enable stronger litigation defense. Those continuing to manage discovery tasks reactively as they arise will see a spike in document collection, preservation and production when contesting enforcement actions through the courts.
  • Higher burdens of proof: Rigorous evidentiary standards compared to administrative proceedings will increase demand for products and services to govern and control documents, policies and records in preparing for litigation.
  • Systems capable of dealing with communications volume and variety: Increased litigation will require investment in technology capable of capturing, storing and analyzing larger volumes of digital communication data across various platforms (email, instant messaging, social media, etc.).
  • Enhanced compliance monitoring: Uncertainty of how courts will interpret regulations will cause firms to increase monitoring and analysis of digital communications to ensure they are aware of gaps and can demonstrate proactive compliance postures.

 

Despite the changes, firms will need to maintain cooperative relationships with regulatory bodies to demonstrate compliance and avoid litigation. It will require a flexible approach to financial service regulations, enabling rapid response to court decisions and legal precedents while staying in step with the latest technology innovations impacting the industry.

 

Just wow.

 

  • Featured Brief: Exploring the Future of Off-Channel Communications in Financial ServicesRead more.

 

Source: Smarsh. Authors: Robert Cruz and Tiffany Magri

 

Robert Cruz Vice President, Information Governance at Smarsh

Robert Cruz is Vice President, Information Governance for Smarsh. He has more than 20 years of experience in providing thought leadership on emerging topics including cloud computing, information governance, and discovery cost and risk reduction.

 

Tiffany Magri Regulatory Advisor at Smarsh

As a Regulatory Advisor at Smarsh, Tiffany Magri monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.

 

About Smarsh

Smarsh® is the recognized global leader in electronic communications archiving solutions for regulated organizations. Smarsh provides innovative capture, archiving, e-discovery, and supervision solutions across the industry’s widest breadth of communication channels.

 

Scalable for organizations of all sizes, the Smarsh platform provides customers with compliance built on confidence. It enables them to strategically future-proof as new communication channels are adopted, and to realize more insight and value from the data in their archive. Customers strengthen their compliance and e-discovery initiatives and benefit from the productive use of email, social media, mobile/text messaging, instant messaging and collaboration, web, and voice channels.

 

Smarsh serves a global client base that spans the top banks in North America and Europe, along with leading brokerage firms, insurers, and registered investment advisors. Smarsh also enables state and local government agencies to meet their public records and e-discovery requirements. For more information, visit www.smarsh.com.

 

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