Esoterica seem to dominate regulatory practice last week. Structure and compliance issues dominated regulatory litigation highlights with the demise of an inspection regulation for violation of constitutional standards, the affirma
nce of another rule against facial attack rather than as applied attack, and discipline of an official for refusal to violate a regulation. In agency proposals, a consortium of agencies acting jointly and a single agency published supplemental proposed rules in the more arcane reaches of finance. Finally, a host of agencies published their Regulatory Flexibility Act (RFA) agendas last Thursday.
Records Inspection as Unreasonable Search: A panel of the United States Court of Appeals for the Third Circuit unanimously held, in Free Speech Coalition v. Attorney General, that a records inspection statute and regulations promulgated by the Department of Justice (DOJ) for the “adult entertainment” industry were facially unconstitutional under the Fourth Amendment to the United States Constitution. The court held that the broad inspection authority without an opportunity to challenge an inspection in advance constituted a facial violation of the prohibition of unreasonable searches and seizures. The decision deals with much more, including a remand to the district court to determine whether the statute is facially unconstitutional under the free speech clause of the First Amendment (2 – 1 on standard), but concern here is limited to regulatory implementation of the statute, not the substance or First Amendment challenge. Critical here is the principle that plaintiffs bringing a facial challenge must (and did) establish that no circumstances exist under which the statute or rule would be valid.
To summarize, the 1988 Child Protection and Obscenity Enforcement Act requires that producers of adult entertainment media maintain detailed records on entertainers to ensure the entertainers are adults, not children. Producers “shall make such records available to the Attorney General for inspection at all reasonable times.” DOJ regulations implementing this provision specify that investigators are “authorized to enter without delay and at reasonable times any establishment of a producer where records … are maintained to inspect during regular working hours and at other reasonable times, and within reasonable limits and in a reasonable manner, for the purpose of determining compliance” with the statutes. Much more detail includes a minimum availability of 20 hours per week as “working hours.”
The Third Circuit applied the recent United States Supreme Court (SCOTUS) decision in Los Angeles v. Patel, which held that an ordinance requiring hotel operators to make their guest registries available to the police on demand was facially unconstitutional because it penalized the hotel operator for declining to turn over their records without affording them any opportunity for pre-compliance review. In a prior decision vacated on rehearing that lead to this decision, the court found that the regulations alone violated the Fourth Amendment as applied to plaintiffs. In reconsideration here, the panel, “given the similarity between the inspection provisions of the [s]tatutes and the regulation at issue in Patel, we now hold that the inspection provisions of the [s]tatutes and [regulation] are facially unconstitutional.” The Third Circuit remanded to the district court to “enter a judgment declaring that the warrantless searches authorized by” the statutes and regulation are facially unconstitutional.
► Numerous issues arise in this complicated arena, but concern here focuses on whether DOJ could have avoided the entire search and seizure set of issues by drawing the regulation more narrowly. Given the structural nature of judicial review – deciding as applied issues before facial, regulations before statutes, and statutes before any constitutional issue – DOJ might have more narrowly tailored the regulations even if it could not have created an advance review. An agency’s duty is to draft regulations that are consistent with both the authorizing (delegating) statute and the limits of the Constitution. DOJ may have been able to narrow the process sufficiently to avoid a facial challenge, but now DOJ may not be able to salvage the regulation. In any event, DOJ has not had an inspection program since 2008.
Union Election Rule Litigation Demise: The United States Court of Appeals for the Fifth Circuit, in Associated Builders and Contractors of Texas v. NLRB, held that the NLRB’s Representation – Case Procedures rule did not facially violate either the National Labor Relations Act (NLRA) or the Administrative Procedure Act (APA). The Fifth Circuit joined the District of Columbia Circuit decision in Chamber of Commerce of U.S. v. NLRB in rejecting challenges to the post-quorum adopted rule.
► The complaint was limited, and the Fifth Circuit opinion emphasized the point, to a facial challenge and the court declined to consider as applied challenges raised in passing late before it. A facial challenge to a regulation is structured by the APA’s provisions authorizing a court to “hold unlawful and set aside” agency regulations “not in accordance with law … contrary to constitutional right, power, privilege, or immunity; … [or] in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” Other process and as applied challenges are embodied in other provisions of the APA. As with Free Speech Coalition, allegations of facial vs. as applied challenges can make a critical difference and require careful attention.
Statutes or Regulation Compliance Discipline: In a statutory interpretation decision with both regulatory and federal employment implications, the United States Court of Appeals for the Federal Circuit, in Rainey v. Merit System Protection Board (MSPB), cautioned that an agency may discipline an employee for refusing to violate a regulation, but an employee is protected under the Whistleblower Protection Act for refusing to violate a statute. The Whistleblower Protection Act protects agency employees from retaliation “for refusing to obey an order that would require the individual to violate a law.” Last year, in Department of Homeland Security [DHS] v. MacLean, SCOTUS held that “law” in the “right-to-disclose” provision referred only to a statute, and not to a regulation, particularly when Congress elsewhere used but here omitted the broader phrase “law, rule, or regulation.” MacLean disclosed agency action in violation of a regulation, not a statute, and the DHS Transportation Security Administration (TSA) could not discipline him. Rainey refused to violate a regulation under the parallel refusal to obey provision and was disciplined. The MSPB and the Federal Circuit agreed.
► The point again is structural: although the canons of statutory construction or interpretation may prove difficult, statutes and regulations are structurally distinct. Federal officers must adhere first to the Constitution, then statutes, and only then to regulations consistent with the first two, and in that order. Federal duty is not easy or simple when a superior directs the violation of a regulation, which is what the Department of State (DOS) supervisor did in Rainey, and Rainey raises more questions of the gaps in agency compliance and need for further assurance that agencies will abide by their own regulations.
Regulation-Sensitive Incentive Based Compensation: A consortium of the Department of the Treasury (DOTr)’s Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRS); the Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union Administration (NCUA); and Securities and Exchange Commission (SEC) proposed anew Incentive-Based Compensation Arrangements. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) requires that these agencies jointly issue regulations (or advisory guidelines or guidance) on incentive based payment arrangements that encourage inappropriate risks by certain financial institutions, and requiring financial institutions to disclose incentive-based compensation arrangements. The agencies proposed rules in 2011 but did not finalize any rule; relying only on guidance to the industry. Since then, the agencies claim that incentive-based compensation practices have “evolved” in the industry and the agencies have gained experience in applying the guidance on incentive-based compensation. The agencies now propose a different rule, but do not withdraw the 2011 proposed rule. Public comments on the proposed rule are due July 22, 2016.
► As the agencies note that compensation practices have changed since they proposed a rule in 2011, the natural question becomes whether the proposed rule caused or at least facilitated the changes. The agencies may not be able to distinguish between anticipatory change based on the proposed rule and precautionary change based on the agencies’ guidance. Over a five-year span, the degree of inflection from each is likely to become murky if it was ever clear. The current proposal does not withdraw the 2011 rule nor does it specifically state that is supplements the proposal, which leaves the 2011 rule somewhat in limbo, although the agencies may have more flexibility in any final rule. Labels mean less than substance, but the agencies should be clear.
One additional point should be noted about a “joint” rule by these agencies – each has maintained its own point of contact, comment depository, docket (sometimes), and, of course, copies of regulatory text. Thus, a statutory requirement that agencies engage in joint rulemaking does not necessarily mean that they will do so with alacrity or with the public in mind. Perhaps joint rulemaking needs a better protocol.
Commodity Derivative Swaps: The Commodities Futures Trading Commission (CFTC) proposed a supplemental Position Limits for Derivatives: Certain Exemptions and Guidance rule in today’s Federal Register. The United States District Court for the District of Columbia vacated the CFTC’s first position limits rule in 2012. The CFTC subsequently abandoned trying to save that rule and instead proposed a new rule in attempting to implement Dodd-Frank, and now issuing a supplemental notice of proposed rulemaking. Comments are due July 13, 2016.
► Like incentive based payment arrangements, the complex derivatives market is not static but evolves dynamically in response to many different pressures. The CFTC responds to a number of comments and proposes changes based on those comments. The CFTC, unlike the consortium joint rulemaking, acknowledges the supplemental nature of this rulemaking.
Regulatory Flexibility Plans: Agencies exuded large doses of data two weeks ago in releasing the data for their regulatory agendas, and now they have release their plans in last Thursday’s Federal Register. The RFA requires that agencies publish semiannual regulatory agendas in the Federal Register describing regulatory actions in process that may have a significant economic impact on a substantial number of small entities, i.e. businesses, organizations, and governments.
The complete Unified Agenda for spring 2016, which contains the regulatory agendas for 57 Federal agencies, is available to the public at the Office of Management and Budget (OMB) / General Services Administration (GSA) Reginfo.gov. Thursday’s Unified Agenda publication consists of agency regulatory flexibility agendas, in accordance with the publication requirements of the RFA. Agency regulatory flexibility agendas contain only those agenda entries for rules that are likely to have a significant economic impact on a substantial number of small entities.
► Remember the oft-repeated caution that the Unified Agenda, in its various forms, remains a “snapshot” of agency intentions at a point in time in the near past and is subject to the shifting sands that compel policy change on a daily basis. Read, but read carefully.
The post Monday Morning Regulatory Review – 6/13/16: Records Inspection as Unreasonable Search; Union Election Rule Litigation Demise; Statutes or Regulation Compliance Discipline; Regulation-Sensitive Incentive Based Compensation; Commodity Derivative Swaps & Regulatory Flexibility Plans appeared first on Federal Regulations Advisor.