It’s no secret that agencies communicate with the public. Nor is it a secret that the public often listens. It is worth thinking about, however, why the public listens.

Sometimes, of course, it is a not a mystery why what an agency says is important. Imagine, for instance, that an agency has authority to waive regulatory requirements. Imagine further that a regulated party would like a waiver. If, perchance, a high-level official from the agency were to give a speech about what the agency would like to see in waiver applications, it is obvious why the regulated party would pay attention.* Similarly, it is easy to understand why regulated parties scour the text of regulatory prohibitions. Who wants to violate to law?

There are other times, however, where it is much less obvious why what an agency says is so important.

Consider a situation in which an agency has authority under a vague statute (e.g., to regulate “in the public interest”) but has not promulgated any regulations. Now the agency issues a guidance document. Why should anyone care about that guidance? One can imagine a world in which regulated parties would have no reason to care because unless an agency has promulgated a regulation that clearly puts everyone on notice of what is and is not unlawful, the agency has no power to act. That is not the world that we live in. In the second SEC v. Chenery case, the Supreme Court held that agencies (generally) need not prospectively promulgate regulations but instead can make policy retroactively through adjudication. It thus makes a lot of sense that regulated parties look for hints into how the agency will act. As I explained in a recent article:

At least in part, the reason regulated parties care about guidance documents where the agency has not promulgated a rule is because Chenery II looms in the background. If an agency could not punish regulated parties directly under the statute, but instead could only promulgate rules, regulated parties would have less reason to worry about a guidance document when the agency has not promulgated a rule. As it is now, however, agencies can bring an enforcement action under the statute itself, thus forcing regulated parties to pay attention to the agency’s guidance. To be sure, in adjudication, the agency could not simply say “the party has violated the guidance document” because the guidance document itself would not itself have legal effect. But the agency could say “this is how we read the statute itself,” and if the reading of the statute was reasonable, the agency would be entitled to prevail under Chenery II. Hence, Chenery II is the anchor that gives many guidance documents their weight.

Although there are times where it makes sense to let agencies act through adjudication under the statute without first promulgating a rule, this dynamic strikes me as potentially dangerous, hence, the Supreme Court should ensure that the fair notice doctrine is, well, fair. (Similarly, if the agency has promulgated an ambiguous regulation, regulated parties care because of Seminole Rock deference; they know that the agency can retroactively “clarify” that regulation.)

Another situation in which it is not obvious why anyone cares what an agency says involves incentives. Agencies often try to create incentives to encourage private parties to do what the agency would prefer. But why does anyone listen, especially if doing what the agency wants requires a massive capital expenditure that will only recouped, if at all, after many years?   After all, what stops the agency from changing its mind and eliminating the flow of incentives once sunk costs have already spent? Because the agency has the power to shift gears, why listen when it makes promises about what the regulatory scheme will be in the future?

Regulated parties care about agency incentives in large part because of ossification—yes, the same ossification that regulatory scholars often bemoan. Because procedural requirements make it hard for regulated parties to change policy, regulated parties have more reason to listen when an agency creates incentives. As I have argued elsewhere:

Without ossification, it would be more difficult for agencies to accomplish certain long-term objectives. Ossification enables agencies to more credibly commit to regulatory programs because regulated parties know that even if the agency wanted to change the scheme in the future, it would be difficult to do so—the same procedures that make it hard to create policy also make it hard to rescind policy. Ossification thus acts as a commitment mechanism. Absent this mechanism, basic economics suggests that regulated parties would be less likely to participate in the market, or at least to participate as much as the agency would like them to do so, because the investment would be riskier.

These are just a couple of examples, but hopefully they illustrate my point. It is worth thinking about how agencies communicate and I appreciate the opportunity to participate in this symposium. But it is also important to understand why we care what they have to say.

*For what it is worth, agencies should try to make sure that this sort of information is publicly available in a place and format that everyone, including new market entrants, can easily find and understand.

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This post is part of a symposium entitled How Agencies Communicate. You can read all the posts here.