These legal cases will determine regulatory power in 2025 and beyond

This year may not bring as many consequential Supreme Court decisions as the last one for financial advisors, but there are several pending lawsuits with big potential industry implications.

Ongoing uncertainty around the reporting of "beneficial ownership information" under the Corporate Transparency Act, a Supreme Court case testing the power of the IRS to collect pre-bankruptcy tax payments and possible new challenges to the agency's rules after the demise last year of the so-called Chevron doctrine could each affect advisors and their clients, according to Leila Carney, a member in the Tax Disputes & Tax Litigation Group at the Washington, D.C., office of Caplin & Drysdale. In addition, the Securities and Exchange Commission and FINRA are facing their own legal confrontations over enforcement capabilities.

"What we've seen is, 2024 cases have chipped away at agency power, lending momentum to private litigants," Carney said in an interview last month shortly after the high court heard arguments in the case involving creditors' ability to claw back tax payments prior to bankruptcy, U.S. v. Miller. "This case will, I think, be a weather balloon to see whether we can expect continued weakening of agencies."

READ MORE: What the Supreme Court's eventful term means for financial advisors

In the wake of one of the Supreme Court rulings last year that gave every SEC defendant the right to a jury trial rather than an administrative law judge, the agency is contending with cases scrutinizing its authority to attach "follow-on" industry bans and FINRA's process for expelling brokerages from its membership. 

The victories by President-elect Donald Trump and his Republican allies in Congress also likely delivered the knockout blow to the Labor Department's new retirement advice rule that was already in a stay blocking its implementation during an industry lawsuit. The Trump administration could drop Labor's appeal of the stay or simply abide by any possible court decisions vacating the new rule.

The path ahead for another new law requiring companies to disclose their ownership to the Treasury Department's Financial Crimes Enforcement Network looks much more murky. Federal judges have halted the Corporate Transparency Act under multiple lawsuits criticizing the law as overly broad under the Constitution, but the Justice Department has asked the Supreme Court to lift the injunction. For the moment, the law has yet to go into effect.

"The Corporate Transparency Act (CTA) plays a vital role in protecting the U.S. and international financial systems, as well as people across the country, from illicit finance threats like terrorist financing, drug trafficking and money laundering. The CTA levels the playing field for tens of millions of law-abiding small businesses across the United States and makes it harder for bad actors to exploit loopholes in order to gain an unfair advantage," according to a website maintained by the agency with the latest updates on the status of the law. 

"The government continues to believe — consistent with the orders issued by the U.S. District Courts for the District of Oregon and the Eastern District of Virginia — that the CTA is constitutional and will continue defending the law as necessary," the agency said.

But the constitutional questions about whether the law extends beyond the federal government's legally mandated oversight of interstate commerce could one day reach the high court, according to Carney.

"Most Americans are hesitant to share information that they would otherwise expect to keep private, just as a matter of good security practices," she said. "The constitutional argument is that, because it's requiring a report of entity formation, it's not within the scope of regulating business because an entity may be formed and may not be doing any business."

READ MORE: Lawsuit contests SEC's ability to slap advisors with industry bans

Another unit of the Treasury, the IRS, is fighting a legal case filed by 3M disputing an agency rule about companies' allocations of corporate income. The U.S. Court of Appeals for the Eighth Circuit heard arguments in the case this past fall. 

It and another case before the Tax Court filed by Abbott Laboratories represent the next struggles over a substitute framework for the Chevron deference taken away from agency rulemaking as part of last year's decision in the Loper Bright Enterprises v. Raimondo case, tax lawyers Lauren Ann Ross and Adam Spiegel of Covington & Burling wrote in Bloomberg Law. Each of the cases are seeking to overturn earlier decisions that revolved around the Chevron deference.

"Two lines of inquiry are likely to emerge: First, does the regulation embody a policy choice or factual determination? If so, courts also are likely to defer to the agency's regulation as long as it reflects reasoned decision-making," Ross and Spiegel wrote. "Otherwise, if the regulation is interpreting the statute, courts may move to a second question: Does the Treasury have discretionary authority to interpret the statute through regulations? If so, the agency's interpretation may still be entitled to deference. If not, the court would interpret the statute without deference to the regulation and could hold the regulation invalid."

In light of Chevron's demise, Congress could "easily fill the gap with legislation" that addresses the possible level of deference for agency rulemaking, Carney said. The incoming Trump administration may single out certain rules for non-enforcement as well, by "targeting regulations that are likely to be challenged" after the Loper Bright case, she said.

READ MORE: FINRA dealt blow by court in its power to expel brokerages

Trump's administration and its allies in Congress are likely to pull back IRS enforcement funding that had previously ramped up the agency's scrutiny of what it described as tax-dodging efforts by the wealthy. However, another area of enforcement called the "economic substance doctrine" that restricts tax benefits for transactions that do not present any legitimate business or economic purpose bears close watching by advisors and tax professionals too, according to Carney. A district court's decision siding with the IRS in a case brought by a company called Liberty Global put tax attorneys on alert about the impact to basic strategies deployed by clients for savings. The case is currently awaiting a ruling in the 10th Circuit Court of Appeals.

"The IRS has been making it a priority to enforce the economic substance doctrine recently," she said. "The litigation climate may make that harder."