Under the longstanding Supreme Court precedent of Bowles v. Seminole Rock & Sand Co. and Auer v. Robbins, a federal agency has the power both to write an ambiguous regulation and to require the federal courts to defer to the agency's interpretation of that ambiguous regulation. This is the case despite the fact that the agency's interpretation was not subject to notice-and-comment rulemaking. Moreover, deference is required even if the agency's preferred interpretation is not the "best" interpretation of the ambiguous regulation.
In Kisor v. Wilkie, the Supreme Court is currently considering whether to overrule this longstanding precedent. While the implications of overruling Seminole Rock and Auer would be broadly felt across the regulatory landscape, the consequences would be particularly significant for highly-regulated financial institutions that are subject to voluminous and often ambiguous regulations.
Last year, for example, the Ninth Circuit held in California Pacific Bank v. FDIC both that the FDIC's regulation setting forth the "four pillars" of Bank Secrecy Act ("BSA") compliance is ambiguous, and that the court was required by Auer to defer to the FDIC's preferred interpretation of that ambiguous regulation. The FDIC's preferred interpretation was set forth in the Federal Financial Institutions Examination Council's Bank Secrecy Act/Anti-Money Laundering Examination Manual ("FFIEC Manual") – a 400-plus page interagency examination manual that has never been subject to notice-and-comment rulemaking. As a result of the deference it applied to the FFIEC Manual, the Ninth Circuit upheld the FDIC's BSA cease-and-desist order against California Pacific Bank and rejected the bank's arguments that it had complied fully with the "four pillars" regulation.
Pinchus D. Raice and Jeffrey Alberts, Co-Chairs of Pryor Cashman's Financial Institutions Group, and Associate Dustin Nofziger analyzed the potential implications of the Supreme Court's reexamination of Seminole Rock and Auer on BSA enforcement actions in an April 2019 article for The Banking Law Journal. They concluded that Seminole Rock and Auer have a high probability of being overturned by the Supreme Court's five-member conservative majority, explaining that "[i]f federal judges are no longer required to defer to the [federal banking] agencies' interpretations of their respective 'four pillars' regulations under Auer, it may be difficult for the agencies to successfully defend BSA enforcement actions that financial institutions appeal to the federal courts for review."
Oral argument was held in Kisor on March 27, 2019, just before the publication of The Banking Law Journal article. A decision is expected later this year. The Supreme Court appears to be divided on ideological lines, suggesting that the probability that Seminole Rock and Auer are overruled by the Court's conservative majority continues to be high.
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