Business Roundtable v. S.E.C.

• Decision Date: 12 June 1990
• Docket Number: No. 88-1651,88-1651
• Citation: 905 F.2d 406
• Parties: , 59 USLW 2007, Fed. Sec. L. Rep. P 95,291 THE BUSINESS ROUNDTABLE, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 406

905 F.2d 406

284 U.S.App.D.C. 301, 59 USLW 2007, Fed.

Sec. L. Rep. P 95,291

THE BUSINESS ROUNDTABLE, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 88-1651.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 21, 1989.

Decided June 12, 1990.

Petition for Review of an Order of the Securities and Exchange Commission.

Robert D. Rosenbaum, with whom Daniel A. Rezneck and Rebecca E. Swenson, Washington, D.C., were on the brief, for petitioner.

Jacob H. Stillman, Associate Gen. Counsel, S.E.C., with whom Daniel L. Goelzer, Gen. Counsel, Anne E. Chafer and Thomas L. Riesenberg, Asst. Gen. Counsels, and Paul Gonson, Sol., S.E.C., Washington, D.C., were on the brief, for respondent. Richard K. Kirby, Washington, D.C., also entered an appearance, for respondent.

Cordelia A. Glenn, Columbus, Ohio, with whom Daniel A. Malkoff, Youngstown, Ohio, was on the brief, for amici curiae, State of Ohio, et al., urging that Rule 19c-4 be declared invalid.

James Edward Maloney and Karen K. Hachler, were on the brief, for amicus curiae United Shareholders Ass'n, urging that Rule 19c-4 be affirmed.

Before EDWARDS, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

In 1984 General Motors announced a plan to issue a second class of common stock with one-half vote per share. The proposal collided with a longstanding rule of the New York Stock Exchange that required listed companies to provide one vote per share of common stock. The NYSE balked at enforcement, and after two years filed a proposal with the Securities and Exchange Commission to relax its own rule. The SEC did not approve the rule change but responded with one of its own. On July 7, 1988, it adopted Rule 19c-4, barring national securities exchanges and national securities associations, together known as self-regulatory organizations (SROs), from listing stock of a corporation that takes any corporate action "with the effect of nullifying, restricting or disparately reducing the per share voting rights of [existing common stockholders]." Voting Rights Listing Standards; Disenfranchisement Rule, 53 Fed.Reg. 26,376, 26,394 (1988) ("Final Rule"), codified at 17 CFR Sec. 240.19c-4 (1990). The rule prohibits such "disenfranchisement" even where approved by a shareholder vote conducted on one share/one vote principles. Because the rule directly controls the substantive allocation of powers among classes of shareholders, we find it in excess of the Commission's authority under Sec. 19 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 15 U.S.C. Sec. 78s (1988). Neither the wisdom of the requirement, nor of its being imposed at the federal level, is here in question. ¹

In conducting our review, we assume that we owe the Commission deference under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), even though the case might be characterized as involving a limit on the SEC's jurisdiction. Cf. Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 108 S.Ct. 2428, 2444, 101 L.Ed.2d 322 (1988) (Scalia, J., concurring in the judgment) (questioning intelligibility of distinction between "an agency's exceeding its authority and an agency's exceeding authorized application of its authority"). This circuit has suggested that deference to an agency may be "inappropriate" in interpreting statutory provisions "delimiting its jurisdiction." New York Shipping Ass'n v. Federal Maritime Comm'n, 854 F.2d 1338, 1363 (D.C.Cir.1988) (alternative holding); see also National Wildlife Fed'n v. ICC, 850 F.2d 694, 699 n. 6 (D.C.Cir.1988). The Supreme Court cannot be said to have resolved the issue definitively. Compare Mississippi Power & Light Co., 108 S.Ct. at 2444 ("it is plain that giving deference to an administrative interpretation of its statutory jurisdiction or authority is both necessary and appropriate") (Scalia, J., concurring in the judgment), and Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 845, 106 S.Ct. 3245, 3253-54, 92 L.Ed.2d 675 (1986) (agency's expertise is due substantial deference even when deciding issues that impinge on its jurisdiction), with Mississippi Power & Light Co., 108 S.Ct. at 2446-47 (Brennan, J., dissenting) (deference is not appropriate for jurisdictional issues). See also Cass R. Sunstein, Constitutionalism After the New Deal, 101 Harv.L.Rev. 421, 467 (1987) (deference to administrators' decisions on scope of their own authority violates separation of powers principles dating back to Marbury v. Madison, 5 U.S. 137, 2 L.Ed. 60 (1803)); Note, Coring the Seedless Grape: A Reinterpretation of Chevron U.S.A. Inc. v. NRDC, 87 Col.L.Rev. 986, 1005-06 (1987) (courts should not defer to agency where potential for "agency aggrandizement" exists); Schwabacher v. United States, 334 U.S. 182, 204, 68 S.Ct. 958, 969-70, 92 L.Ed. 1305 (1948) (Frankfurter, J., dissenting). Here we need not reach the issue as Chevron deference does not allow an agency "to alter the clearly expressed intent of Congress." Board of Governors of the Federal Reserve System v. Dimension Financial Corp., 474 U.S. 361, 368, 106 S.Ct. 681, 685-86, 88 L.Ed.2d 691 (1986). See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214, 96 S.Ct. 1375, 1391, 47 L.Ed.2d 668 (1976). As we shall develop below, we find that the Exchange Act cannot be understood to include regulation of an issue that is so far beyond matters of disclosure (such as are regulated under Sec. 14 of the Act), and of the management and practices of self-regulatory organizations, and that is concededly a part of corporate governance traditionally left to the states.

Two components of Sec. 19 give the Commission authority over the rules of self-regulatory organizations. First, Sec. 19(b) requires them to file with the Commission any proposed change in their rules. The Commission is to approve the change if it finds it "consistent with the requirements of [the Exchange Act] and the rules and regulations thereunder applicable" to the self-regulatory organization. Sec. 19(b)(2), 15 U.S.C. Sec. 78s(b)(2). This provision is not directly at issue here, but, as we shall see, both the procedure and the terms guiding Commission approval are important in understanding the scope of the authority the Commission has sought to exercise. That is found in Sec. 19(c), which allows the Commission on its own initiative to amend the rules of a self-regulatory organization as it

deems necessary or appropriate to insure the fair administration of the self-regulatory organization, to conform its rules to requirements of [the Exchange Act] and the rules and regulations thereunder applicable to such organization, or otherwise in furtherance of the purposes of [the Exchange Act].

Sec. 19(c), 15 U.S.C. Sec. 78s(c) (emphasis and enumeration added). As no one suggests that either of the first two purposes justifies Rule 19c-4, the issue before us is the scope of the third, catch-all provision.

First it seems indisputable that the NYSE's proposed rule modifying its one share/one vote listing standard is a "rule" covered by Sec. 19(b) and, correspondingly, that Rule 19c-4 does not fall outside of Sec. 19(c)'s ambit for any want of being a "rule of a self-regulatory organization." As enacted in 1934, Sec. 19 of the Exchange Act gave the Commission power to amend the rules of an exchange "in respect of" 12 explicitly enumerated "matters," including "the listing or striking from listing of any security," and "similar matters." Securities Exchange Act of 1934, ch. 404, Sec. 19(b), 48 Stat. 881, 898-99. The 1975 amendments to the Exchange Act, far from narrowing that authority, removed the enumeration and replaced it with a general power under new Secs. 19(b) & (c) both to review and to amend all self-regulatory organization rules. ² See Senate Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, Securities Industry Study, 93 Cong., 1st Sess. 163 (Comm. Print 1973) ("Securities Industry Study ") (object of amendments was to "giv[e] the Commission clear and effective jurisdiction over all self-regulatory rules"). ³ See also S.Rep. No. 75, 94th Cong., 1st Sess. 131 (1975) ("1975 Senate Report"), U.S.Code Cong. & Admin.News 1975, 179 (similar).

The practice of the securities industry confirms the broad sweep of Sec. 19(b)'s review mechanism. For the past fifteen years, the exchanges have routinely submitted changes in listing standards for approval and the Commission has reviewed them without any commenting party expressing doubt of its jurisdiction. ⁴ Indeed, exchanges followed this practice with the proposals that led directly to the regulations challenged here. See Proposed Rule Change by New York Stock Exchange, 51 Fed.Reg. 37,529 (1986) (proposal to eliminate one share/one vote policy); Proposed Rule Change by American Stock Exchange, 52 Fed.Reg. 1,574 (1987) (similar); Proposed Rule Change by the Pacific Stock Exchange, 52 Fed.Reg. 1,686 (1987) (similar). Many of the past proposals dealt with matters of internal corporate governance, but in no such case did the SEC seek to exercise its veto. ⁵ Accordingly, while the practice confirms that the "rules of a self-regulatory organization" required to be vetted by the Commission under Sec. 19(b) are all-encompassing, it tells us nothing about the criteria of judgment the Commission may apply under subsection (b) or (c).

As mentioned above, the Commission does not suggest that it might support Rule 19c-4 by reference to the first two of the possible heads of jurisdiction in Sec. 19(c)--assurance of fair administration of the self-regulatory organization itself and conformity to the requirements of the Exchange Act or rules thereunder applicable to the organization. Thus it is driven to the third--"otherwise in furtherance of the purposes" of the Exchange Act.

What then are the "purpose...