The intricate dance between regulatory agencies and the public they oversee, particularly within the Securities and Exchange Commission (SEC), is a complex ecosystem where procedural frameworks, stakeholder engagement, and the specter of judicial review intertwine. A groundbreaking working paper, authored by a distinguished quartet of legal and finance scholars, including Adam C. Pritchard, the Frances and George Skestos Professor of Law at the University of Michigan Law School, Joseph Grundfest, Emeritus Professor of Law and Business at Stanford Law School, Yuliya Guseva, Professor of Law at Florida State University College of Law, and Irena Hutton, Professor of Finance at Florida State University College of Business, offers a compelling empirical analysis of this dynamic. Their research, focusing on SEC rulemaking from 1995 to 2024, illuminates a crucial, often overlooked connection: the public comment process is not merely a bureaucratic formality but a potent predictor of future litigation.
The Administrative Procedure Act (APA) lays the groundwork for federal agency rulemaking and the subsequent legal challenges that can arise. Stakeholders, ranging from individual citizens to powerful industry groups, engage in this process as commenters, participants in meetings, and, ultimately, as litigants. While judicial review is often perceived as a distinct phase, the scholars’ paper argues it is, in fact, the culmination of the rulemaking journey. However, much of the existing empirical scholarship has failed to bridge the gap between the initial comment period and the courtroom. This new research, built upon two novel datasets, aims to rectify that oversight, providing actionable insights for regulators and stakeholders alike.
Unpacking the Data: A Deep Dive into SEC Rulemaking and Litigation
The study’s empirical foundation is robust, comprising two meticulously constructed datasets. The first captures SEC rulemaking activity spanning nearly three decades, from 1995 to 2024. This dataset encompasses 336 rules adopted through the standard notice-and-comment procedure. Crucially, it also incorporates an immense volume of public input: a staggering 62,751 public comments and records of 4,298 meetings between stakeholders and SEC officials. To extract meaningful insights from this vast repository of information, the researchers employed advanced large language models. These tools were instrumental in parsing metadata from comments and meeting memoranda, allowing for the quantification of key variables such as stakeholder participation levels, the general sentiment expressed towards proposed rules, the degree of disagreement among commenters, the perceived risk of litigation, and the frequency of legal arguments being referenced.
Complementing this, the second dataset focuses on the judicial outcomes of challenges to SEC rules and those of self-regulatory organizations (SROs) subject to SEC approval. This dataset, meticulously hand-collected, spans an even longer period, from 1942 to 2025, and includes direct challenges to rulemaking, as well as enforcement actions, administrative proceedings, and private litigation where the validity of an agency rule was contested. In total, the researchers identified 121 judicial challenges. For the period post-1995, a significant overlap was found, with 46 unique challenges directly linked to 49 rule observations within their notice-and-comment sample. These 49 observations correspond to 27 distinct adopted rules, acknowledging that a single rule can be the subject of multiple legal battles. The data reveals that out of these 27 rules, the SEC ultimately prevailed in challenges involving 12 rules, while losing at least one challenge involving the remaining 15 rules, underscoring the significant role of judicial review.
A Trend of Increasing Scrutiny: The Gensler Era and Litigation Peaks
A striking finding of the research is the discernible upward trend in judicial challenges to SEC rules, a phenomenon particularly pronounced for rules adopted during the tenure of current SEC Chair Gary Gensler. This period has been characterized by an acceleration of rulemaking, mirroring an increase in litigation activity aimed at those very rules. The paper highlights that most challenges are direct assaults on the rulemaking process itself, with a smaller but notable portion arising in the context of enforcement proceedings or private litigation. Since 1942, the SEC has faced adverse judicial decisions in approximately one-third of its challenges, a statistic that underscores the substantial constraint that judicial review imposes on the agency’s regulatory endeavors.
The research meticulously details the types of legal arguments employed in these challenges. Traditional administrative law claims, such as those based on statutory authority, arbitrary-and-capricious review, and the adequacy of economic analysis, are the most prevalent. While constitutional claims and arguments related to the now-discarded Chevron deference appear less frequently, their impact on outcomes is not always correlated with their frequency. More technical APA-based claims, often centered on ignored comments, a lack of rational basis for a rule, or a failure to adequately define the problem a rule seeks to address, appear to be more closely associated with unfavorable judicial outcomes for the SEC.
The Power of Participation: Who Comments and Who Litigates?
Beyond the legal arguments, the research delves into the crucial question of who is participating and how their engagement influences both the rulemaking process and subsequent litigation. The findings strongly indicate that judicial challenges are predominantly driven by sophisticated, well-resourced market participants and organized interest groups, rather than dispersed individual investors. Industry groups and trade associations emerge as particularly influential actors. They not only account for the largest share of litigants in rulemaking challenges but also demonstrate significant engagement during the notice-and-comment phase itself. This pattern strongly suggests that industry participation is not merely a passive input into rule formation but an active precursor to potential legal battles.
A particularly insightful finding relates to the predictive power of stakeholder feedback. The paper reveals that the rulemaking record can effectively forecast which adopted rules are likely to face future litigation. Rules that ultimately attract judicial challenges tend to exhibit higher levels of stakeholder engagement. This manifests in a greater number of comments, more meetings with SEC officials, more organized participation campaigns, and, crucially, stronger indications of anticipated litigation. These signals are often detectable before any lawsuits are formally filed.
Signals in the Noise: Identifying Litigation Risk
The research emphasizes that the comment process, while often characterized by boilerplate objections and form-letter campaigns, also generates invaluable signals. Comments that explicitly threaten litigation, employ litigation-related vocabulary, or discuss potential legal vulnerabilities are strongly associated with subsequent judicial challenges. This suggests that stakeholders are using the notice-and-comment process not just to voice objections but to strategically highlight legal vulnerabilities and signal their intent to litigate.
The quantity of comments, in isolation, proved to be an insignificant predictor of litigation once other factors were controlled. However, the quality and nature of that feedback were highly informative. Organized mobilization, as evidenced by form-letter activity, also positively correlated with the probability of a challenge, indicating that coordinated efforts provide more than just a numerical boost.
Industry Influence and the Nuances of Judicial Outcomes
The study quantifies the significant influence of industry groups and trade associations. Feedback originating from these entities during the comment period is deemed credible and strongly predicts subsequent judicial challenges, given their disproportionate role in filing lawsuits. Interestingly, meetings between industry groups and the SEC during the rulemaking process showed a negative association with the incidence of challenges, after accounting for overall meeting activity. This suggests that direct engagement might serve as a mechanism to resolve objections or mitigate potential conflicts before they escalate to litigation.
Furthermore, industry sentiment continues to be a relevant factor in predicting judicial outcomes. Rules that receive more favorable comments from industry groups are less likely to be overturned by courts, while those facing industry opposition are more susceptible to adverse judicial decisions. This highlights the strategic importance for the SEC to carefully consider and address industry concerns to strengthen the defensibility of its rules.
While the administrative record is highly informative for predicting whether a rule will be challenged, its predictive power for the SEC’s ultimate success in court diminishes. The factors that distinguish challenged rules from unchallenged ones do not consistently differentiate between SEC victories and losses. In the sample of challenged rules, many measures of stakeholder participation, sentiment, and linguistic content lost their statistical significance in predicting outcomes. This suggests that judicial decisions are more heavily influenced by case-specific factors, including the legal theories pursued by challengers, the identity of the litigants, and the broader context surrounding the rule’s adoption. In essence, effective legal argumentation and skilled advocacy appear to play a more decisive role in the courtroom than the initial public feedback.
The Gensler Era: A Case Study in Heightened Risk
The research offers a stark comparison of the Gensler era’s rulemaking activity against previous administrations. Rules adopted during Chair Gensler’s tenure were substantially more likely to be challenged in court and, when challenged, were more frequently invalidated. Specifically, out of 45 rules adopted during the Gensler administration included in the sample, 7 (15.6%) faced judicial challenges. In contrast, only 20 out of 291 rules (6.9%) adopted during earlier administrations were challenged. The success rate of these challenges also differed dramatically: six of the seven Gensler-era rules challenged (85.7%) were ultimately struck down, compared to nine of the 20 challenged rules (45.0%) from earlier periods. This data suggests a heightened level of legal scrutiny and a greater propensity for judicial invalidation of rules promulgated under the current leadership.
Implications for Regulatory Practice and Future Research
The overarching conclusion of the working paper is that notice-and-comment rulemaking and judicial review are not discrete events but are deeply interconnected. The administrative record, far from being a mere procedural artifact, serves as a crucial barometer for future litigation. Distinct patterns of participation, organized mobilization, the articulation of legal objections, and indications of anticipated litigation all correlate with the likelihood of judicial challenges. The prominent role of industry groups, both as commenters and as litigants, further emphasizes this interconnectedness.
The findings suggest that regulatory agencies, particularly the SEC, can leverage the public comment process as an early-warning system to identify potential litigation risks. By diligently analyzing the content and context of public feedback, especially from organized groups, agencies can proactively address legal vulnerabilities and allocate resources more effectively for both rulemaking and potential defense in court. This research underscores a critical policy insight: ignoring or dismissing the signals embedded within public comments and stakeholder meetings could represent a deliberate choice to embrace a higher risk of future legal entanglements.
The study opens avenues for further research, including a deeper exploration of the specific linguistic markers that predict litigation success, the impact of different agency structures on rulemaking and litigation dynamics, and the comparative effectiveness of various stakeholder engagement strategies in mitigating legal challenges. As regulatory landscapes continue to evolve, understanding the subtle but significant signals within the administrative process will be paramount for ensuring effective, durable, and legally sound policymaking.
