July 16, 2019 3:38PM

Reining In Government by Dear Colleague Letter: An Update

For many decades, critics have noted that agencies were using Dear Colleague and guidance letters, memos and so forth — also known variously as subregulatory guidance, stealth regulation and regulatory dark matter — to grab new powers and ban new things in the guise of interpreting existing law, all while bypassing notice‐​and‐​comment and other constraints on actual rulemaking.

That’s a problem we at Cato have been concerned about for at least twenty years — the quote itself is from my 2017 post in this space. In financial regulation, for example, as Charles Calomiris argued in a Cato working paper around the same time, agencies’ overreliance on guidance is a systematic failing that “avoids transparency, accountability and predictability.” We’ve published much more on the topic, in both a lighter and a more serious vein.

Since my update post last year, there have been a number of new developments. Soon after then‐​Attorney General Jeff Sessions’s announcement of the new policy, followed by the revocation of dozens of existing guidance documents, then‐​Associate Attorney General Rachel Brand issued a January 2018 directive telling Department of Justice attorneys not to rely on allegations of noncompliance with agency guidance, in and of themselves, as reason to initiate civil enforcement actions. And this past winter, DOJ updated its Justice Manual to limit the use of guidance as a basis for direct liability in both civil and criminal enforcement. “Guidance is not law. It’s not binding. And it shouldn’t be given the force or effect of law,” said Deputy Assistant Attorney General Charles Cox in a January speech.

It’s important not to overstate what is changing here: the revised Justice Manual is careful to specify that even if they do not create liability directly, guidance documents can still prove relevant to enforcement in many other ways. They can be used to prove states of mind; as evidence of professional or industry standards, practices, and customs, or that scientific or technical assertions are generally accepted in a particular field; in cases where a regulated party falsely represented itself as having followed guidance; and in various other circumstances.

On April 11, the White House Office of Management and Budget tightened another means of control when it issued guidance (irony alert) about the duty of agencies, including traditionally independent agencies, to notify OMB’s Office of Information and Regulatory Affairs well in advance of publishing new rules to ensure compliance with the Congressional Review Act. The guidance makes clear that “rule” can sometimes include “guidance documents, general statements of policy, and interpretive rules” that do not go through a conventional rulemaking process.

Meanwhile, on a separate track, the unglamorous but often influential federal agency known as the Administrative Conference of the United States commissioned Yale law professor Nicholas Parrillo to write a lengthy study on the guidance issue. (Spinoffs: summary by Parrillo and Lee Liberman Otis, Yale Journal on Regulation and related symposiumFederalist Society panel.) Parrillo agrees that the problems with guidance are real, but argues that most of them arise from structural difficulties within administrative and legal bureaucracy, rather than from a purposeful intent to circumvent process protections. He also finds that they come up unevenly: regulated parties are most likely to feel that they have no real choice but to obey guidance 1) when they need to obtain preapproval before doing business, 2) when repeat interactions with regulators are inevitable and full compliance all the time is unlikely no matter how hard they try; 3) when the consequences of agency enforcement, or even the opening of an enforcement action, are severe; and 4) when the regulated party employs a large dedicated compliance staff.

These might serve as interesting guideposts in looking for ways to revamp regulatory schemes in such a way that agencies’ whims will no longer be received as law.