Drawing from the Court’s earlier discussions of the limitations of Auer deference, Kisor sets forth a multifactor test that an agency’s interpretation must pass in order to receive such deference.
- Is the regulation “genuinely ambiguous”? Under Kisor, a court should not apply Auer deference unless a regulation is “genuinely ambiguous.” Although ambiguity has always been a requirement for deference, Kisor provides that a court may make this determination only after exhausting “all the traditional tools of construction,” including the “text, structure, history and purpose of the regulation.” The Court noted that “hard interpretive conundrums, even those related to complex rules, can often be solved” and that a court’s independent, careful consideration of the issue will make Auer deference inappropriate for “many seeming ambiguities.”
- Is the agency’s interpretation reasonable? The interpretation offered by the agency also must fall within the “zone of ambiguity” the court has identified in considering whether the regulation was genuinely ambiguous. In other words, the court’s analysis in the step above not only determines whether a regulation is ambiguous, but also determines the range of reasonable interpretations. Kisor adjures that there should “be no mistake: That is a requirement an agency can fail.”
- Does the “character and context” of the interpretation entitle it to deference? In order to grant Auer deference, the court must also determine that the “character and context” of the interpretation warrants deference. In other words, the court must decide whether is it appropriate to presume that Congress would have wanted the agency to resolve the particular interpretive issue presented. The Court gave “some especially important markers” under this inquiry and noted other considerations could be relevant.
- Was the interpretation actually made by the agency? Kisor explains that the interpretation must be the agency’s “authoritative or official position” in order to receive deference. Although this standard encompasses more than just interpretations directly approved by the head of the agency (g., official staff memoranda published in the Federal Register), it does not include every memorandum, speech, or other pronouncement from agency staff. The interpretation “must at the least emanate from those actors, using those vehicles, understood to make authoritative policy.”
- Does the interpretation implicate the agency’s substantive expertise? The Court explained that, generally, agencies have a nuanced understanding of the regulations they administer, such as when a regulation is technical or implicates policy expertise. However, deference may not be warranted where an interpretive issue “falls more naturally into the judge’s bailiwick,” such as a common law property term or the award of attorney’s fees.
- Does the interpretation reflect the “fair and considered judgment” of the agency? Deference also may not be warranted where the agency interpretation creates “unfair surprise,” such as when the interpretation conflicts with its prior interpretation or imposes retroactive liability for long-standing conduct that the agency had never before addressed. Similarly, agency interpretations that are “post hoc rationalizatio[ns] advanced to defend past agency action” should not be afforded deference.
Kisor’s Potential Implications
Kisor’s effect on banking agencies and banking organizations remains to be seen as few cases have yet applied Kisor’s test to an agency interpretation. It is also unclear whether and to what extent Kisor will affect how agencies interpret their own regulations. On the one hand, the potential additional scrutiny of a court may not deter an agency (or its staff) from making questionable interpretations of regulations simply because of the historically low likelihood of banking organizations challenging these agencies in court. On the other hand, Kisor has the potential to affect the agencies and their interactions with banking organizations in a number of significant ways.
Improve Quality of Agency Interpretations and Regulations
Kisor could improve the quality of agency interpretations of regulations (as well as the regulations themselves) for a number of reasons. First, agencies may be more likely to issue interpretations through the head(s) of the agency or other authoritative or official processes, thereby subjecting them to additional review, so that the interpretation can clearly meet the “authoritative or official position” aspect of the Kisor test. Second, the additional rigor of other aspects of the Kisor test may encourage agencies to more carefully consider their interpretations of regulations. Third, agencies may be more willing to consider banking organizations’ views of the meaning of regulations and their underlying rationale prior to issuing official interpretations (through requests for interpretations or otherwise). Kisor should be seen as giving those outside the agencies a greater role in analyzing interpretive questions; the opinion makes clear that an agency’s views regarding the text, structure, history, and policy of the regulation are not the only ones that matter. Rather, these issues are considered independently—as if there were “no agency to fall back on.” Fourth, an agency may be more reluctant to offer interpretations that are likely to fail the Kisor test, such as those that would “unfair[ly] surprise” banking organizations or for which the agency has no particular expertise. Finally, Kisor also appears to decrease any agency’s incentive to issue open-ended or otherwise ambiguous regulations, as it now should be less likely that the agency would receive Auer deference for its interpretation of such a regulation.
Encouraging Notice and Comment Rulemakings
Kisor also could be seen as further cabining an agency’s ability to create binding requirements outside of the Administrative Procedure Act’s rulemaking process. The banking agencies recently have acknowledged that, although law and regulations have the force and effect of law, “supervisory guidance” does not. In other words, supervisory guidance may not be phrased in terms of binding requirements, and an agency may not treat the guidance as if it were binding. However, agency interpretations, like the regulations they interpret, may be phrased as binding requirements and treated as binding.
Of course, agencies are aware of this distinction and may use it to impose binding requirements on banking organizations, sometimes by characterizing statements that appear to be supervisory guidance as interpretations. For example, in a bank’s appeal of a cease-and-desist order issued by the FDIC, the 9th Circuit disagreed with the bank’s argument that the FFIEC’s BSA/AML Examination Manual could not impose legal obligations on the bank, and found that the manual was an interpretation of the FDIC’s regulations entitled to Auer deference. The Kisor test may have led the 9th Circuit to reach a different outcome because the test would have required the court to engage in a much more careful analysis of this question than the two paragraphs the 9th Circuit afforded it. In other words, Kisor’s additional constraints on deference should make it more difficult for agencies to successfully impose binding requirements by issuing interpretations of regulations or characterizing supervisory guidance as an interpretation of a regulation.
The impact of a new Supreme Court case can be easy to overstate, and Kisor may be no exception to this general rule. However, the Kisor test and the Court’s underlying rationale do at least appear to provide new methods to encourage the banking agencies to engage in more open, transparent, and rigorous consideration of interpretive questions.