In response to the COVID-19 pandemic, federal and state governments and regulators have taken hasty actions that are arguably beyond the scope of their authority in order to provide assistance to businesses and consumers during a time of high unemployment, mandatory shutdowns and reduced consumer spending. Even though the government seems to be operating under the principle that it’s better to ask forgiveness than to seek permission, businesses, particularly those in the heavily regulated financial services industry, should be cautious in relying on these regulatory gifts, which may turn out to be Trojan horses when normalcy returns.
When the intent of a statute is clear, a government agency must give effect to that intent. Only when there is a gap or some ambiguity in the legislation is an agency allowed to fill the gap or clarify the ambiguity—and even then, the agency’s interpretation must be based on a permissible construction of the statute. When it comes to its own rules and regulations, an agency is given a little more leeway but is still restricted from interpretations that are plainly erroneous or inconsistent with the rule or regulation being interpreted.
While the Supreme Court under Chief Justice Roberts has significantly limited the class of entities with standing to challenge agency regulations, there is still the possibility that a regulatory pronouncement that is inconsistent with a statute could be successfully challenged as unconstitutional or outside the authority of the regulator and ultimately invalidated, leaving those who relied on the increased flexibility with potentially draconian consequences.
Even unchallenged pronouncements could provide little cover if, for instance, a different agency, a state attorney general or a private consumer brings a claim that the temporarily permitted act or practice was unfair or deceptive. Moreover, some regulatory requirements have become so customary as to be expected in the industry or by the public at large, and any deviation could result in reputational damage, even in the absence of more direct financial impact.
As we’ve noted on multiple occasions, businesses should be extremely cautious when deciding whether to rely on regulatory pronouncements to deviate from the laws and regulations as they existed prior to the COVID-19 health crisis. Even if one regulator offers a relaxed standard, state regulators, state attorneys general and private litigants are not so limited and could disagree with some of the flexibility promised by federal regulators. Moreover, even the same federal agencies, legislators and executives could have a change of heart. This is already occurring with regard to the Paycheck Protection Program. Some businesses that followed the rules in receiving funds through the program are now being threatened with criminal liability if they do not return the funds. There are also more than a few plaintiffs’ attorneys who are watching all of this very closely and devising legal strategies to take advantage of it.
