December 22, 2016 / 9:28 PM / 7 months ago

Even Carl Icahn can’t sink administrative ship of state

7 Min Read

(Reuters) - Carl Icahn, the billionaire investor appointed to serve as President-elect Donald Trump’s regulatory czar, believes overregulation is strangling American businesses. “Business owners have been crippled by over $1 trillion in new regulations and over 750 billion hours dealing with paperwork,” Icahn said in the Trump press release announcing his appointment. “It’s time to break free of excessive regulation and let our entrepreneurs do what they do best: create jobs and support communities.”

Icahn and his new advisee, the president-elect, are about to find out that it’s not so easy to undo federal regulations. In their businesses, Trump and Icahn are accustomed to quick execution of their decisions. Administrative law is pretty much the opposite of that. The administrative state – a catchphrase for the giant federal-agency bureaucracy that interprets and executes laws – is like an oil tanker. It moves, but slowly and deliberately.

There are, of course, some Obama administration policies President Trump can rescind without much trouble. When the president instructs a federal agency through an executive order or when a federal agency issues a guidance letter, a new president can overrule it, according to four law professors who specialize in administrative law, Ronald Levin of Washington University, Andy Grewal of the University of Iowa, Aaron Nielson of Brigham Young University and Bernard Bell of Rutgers.

So, for instance, the Trump administration need not be bound by the Obama Education Department policy on school bathrooms for transgender students because that policy was set in a mere letter to administrators of federally funded schools. Similarly, the Obama administration tried to make immigration policy via an executive action to defer deportation of longtime, law-abiding undocumented residents who are the parents of U.S. citizens. The U.S. Supreme Court let stand an injunction barring enforcement of the proposed rule, but if it had been implemented (and had been deemed a policy announcement rather than a substantive rule), Trump could have overturned it with a policy announcement of his own.

“Issuing informal guidance can be easy, so it can be easy to undo informal guidance,” BYU prof Nielson said in an email.

But undoing federal rules adopted through the formal notice-and-comment process laid out in the Administrative Procedure Act requires a new administration to retrace that long and winding path. “A good rule of thumb,” said Nielson, “is this: The harder it was for the agency to act in the first place, the harder it is to undo what the agency did.”

Formal rulemaking requires federal agencies to publish a proposal and solicit comments on it. The agency’s final rule is supposed to respond to comments and justify bureaucratic decision-making. If final rules are challenged in court, the agency has to establish that it jumped through all of the prescribed procedural hoops and acted reasonably.

The Securities and Exchange Commission adopted a slew of new rules after Congress passed Dodd-Frank financial reforms. Those SEC regulations underwent the formal notice and comment process, including, in many cases, judicial review. Without new law from Congress, to substantively change the surviving Dodd-Frank regulations – some of which are presumably responsible for Icahn’s perception of regulatory overkill - the Trump administration would have to propose new rules, seek comment and respond in what law prof Levin called a “judicially defensible” way.

“Icahn has been recruited to bring about change from a business point of view,” Levin said. “But that has to be translated through the legal process.”

Courts do not have to pay deference to agency attempts to override judicially approved regulations. Iowa professor Grewal pointed me toward the Supreme Court’s 1983 decision in Motor Vehicle Manufacturers Association v. State Farm, which addressed President Ronald Reagan’s attempt to undo a National Highway Traffic Safety Administration mandate requiring car makers to include passive seat belt restraints. The Reagan administration regarded the rule, which was adopted during the Jimmy Carter presidency under 1974 amendments to the Motor Vehicle Safety Act, as ineffective because the automatic belts were expensive to install and passengers could easily disable them.

The Supreme Court said, however, that President Reagan’s Transportation Department was arbitrary and capricious in ditching the regulation. “An agency changing its course by rescinding a rule is obligated to supply a reasoned analysis for the change beyond that which may be required when an agency does not act in the first instance,” the Supreme Court held. “The forces of change do not always or necessarily point in the direction of deregulation. In the abstract, there is no more reason to presume that changing circumstances require the rescission of prior action.” If anything, the justices said, the presumption in judicial review should be against policy changes “that are not justified by the rulemaking record.”

“It is impossible for any one person to reshape the administrative state,” Grewal said. “The power of bureaucracy in Washington is pretty strong.”

But if Icahn and the Trump administration can’t change actual rules overnight, they may be able to achieve the same result by instructing federal agencies not to enforce regulations. Rutgers prof Bell told me that traditionally, federal agencies have broad discretion over their enforcement decisions. Even the Supreme Court has generally shied away from second-guessing agency enforcement, although Bell said dicta in the court’s 1985 ruling in Heckler v. Chaney – a challenge by death row inmates to the Food and Drug Administration’s refusal to bar lethal injections – suggests that the justices believe they have the authority to review some non-enforcement policies.

A Trump SEC wouldn’t have to worry about judicial review if it curtailed the agency’s expanded use of administrative proceedings, for instance. Were the SEC to ease up on enforcing disclosure and anti-fraud regulations, Bell said, it might take heat from public interest groups and Democratic lawmakers. And, of course, if slack in SEC enforcement contributes to another financial scandal, the agency will be roundly criticized.

That may be a risk Icahn and Trump are willing to take.

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