Guardian Federal Sav. and Loan Ass'n v. Federal Sav. and Loan Ins. Corp.

• Decision Date: 13 November 1978
• Docket Number: No. 77-1550,77-1550
• Citation: 191 U.S.App.D.C. 135,589 F.2d 658
• Parties: GUARDIAN FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellant, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al. District of Columbia Circuit
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 658

589 F.2d 658

191 U.S.App.D.C. 135

GUARDIAN FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellant, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al.

No. 77-1550.

United States Court of Appeals,District of Columbia Circuit.

Argued May 9, 1978.

Decided Nov. 13, 1978.

William W. Rogal, Washington, D. C., with whom Edward F. Sloane and Charles E. Sloane, Washington, D. C., were on the brief, for appellant.

John E. Gunther, Washington, D. C., a member of the Supreme Court of Virginia by special leave of the Court pro hac vice with whom Harold B. Shore, Associate Gen. Counsel, Washington, D. C., was on the brief, for appellee.

Leonard H. Schwall, New York City, was on the brief, for amicus curiae.

Before LEVENTHAL and MacKINNON, Circuit Judges, and JAMESON, ^* United States Senior District Judge for the District of Montana.

Opinion for the Court filed by LEVENTHAL, Circuit Judge.

LEVENTHAL, Circuit Judge:

This case involves a challenge to the procedural validity of regulations issued without the prior notice and comment procedures of section 553 of the Administrative Procedure Act (the "APA"). ¹

Appellant Guardian Federal Savings and Loan Association ("Guardian") is a federally chartered savings and loan association. Its accounts are insured by appellee Federal Savings and Loan Insurance Corporation ("FSLIC") pursuant to Title IV of the National Housing Act of 1934 (the "NHA"). ² The FSLIC is an agency of the United States as defined by APA subsection 551(1). ³ It operates under the direction of the Federal Home Loan Bank Board (the "Board"), an independent agency of the United States in the Executive Branch. The Board was given plenary authority to charter, regulate and supervise federal savings and loan associations by the Home Owners' Loan Act of 1933. ⁴

The regulations involved in this case are Insurance Regulations 563.17-1 ⁵ and 571.2, ⁶ issued by FSLIC, and Bulletin PA-7a, ⁷ issued by the Board's Office of Examinations and Supervision ("OES"). The procedural validity of Regulation 563.17-1 is uncontested. This regulation largely restates the comprehensive, discretionary authority granted to FSLIC by 12 U.S.C. § 1726(b) (1976). It provides, Inter alia, that each FSLIC-insured institution "shall be audited at least once in each calendar year by auditors and in a manner satisfactory to (FSLIC) in accordance with general policies from time to time established by the Board . . . ."

Challenged Regulation 571.2: (1) requires that insured institutions "must satisfy the audit requirement of § 563.17-1(a) . . . by means of an audit by a public accountant or internal auditor" (12 C.F.R. § 571.2(b)); (2) specifies in considerable detail criteria that must be met before an audit or an auditor will be satisfactory to FSLIC (12 C.F.R. § 571.2(c)); and, (3) delegates the agency's broad authority over such matters to the Chief Examiner of the district in which an insured institution's home office is located (12 C.F.R. § 571.2(d)). In addition, Regulation 571.2 contains a provision allowing an insured institution to seek a waiver from burdensome audit requirements that may be granted in the discretion of the Chief Examiner (12 C.F.R. § 571.2(e)). The regulation also indicates that additional specifications for audits or auditors may be issued from time to time by OES or by the Chief Examiner (12 C.F.R. § 571.2(d)(1)). OES Bulletin PA-7a is one such directive. It details criteria that auditors must meet in order to be satisfactory to FSLIC.

The District Court dismissed Guardian's complaint, ruling that the challenged regulations had been validly promulgated without notice and comment procedures. We affirm. We have concluded that the challenged regulations come within APA subsection 553(b)(A) and thus were exempted from the requirement for public notice and comment.

Section 553 of the APA, set forth in the margin, ⁸ prescribes the procedures that must be satisfied before a "rule" within the APA definition may be promulgated. ⁹ The general policy of section 553 is to provide for public notice and comment procedures before the issuance of a rule. This public participation assures that the agency will have before it the facts and information relevant to a particular administrative problem, as well as suggestions for alternative solutions. Public rulemaking procedures increase the likelihood of administrative responsiveness to the needs and concerns of those affected. And the procedure for public participation tends to promote acquiescence in the result even when objections remain as to substance. Congress has, however, provided for a number of exceptions to notice and comment procedures. These accommodate situations where the policies promoted by public participation in rulemaking are outweighed by the countervailing considerations of effectiveness, efficiency, expedition and reduction in expense.

It is conceded that the challenged regulations are "rules" within the definition of subsection 551(4). ¹⁰ Ordinarily such a concession would trigger the basic procedures governing "rule making" set forth in section 553. ¹¹ The issue here is whether the agency has demonstrated that this case is governed by the exceptions to section 553.

FSLIC investigative powers

FSLIC argues that section 553 procedures are not applicable to rules encompassing audit specifications and auditor qualifications because they are regulations incidental to the exercise of FSLIC's investigative authority. The agency cites the following APA provision in section 555:

(c) Process, requirement of a report, inspection, or other investigative act or demand may not be issued, made, or enforced except as authorized by law. A person compelled to submit data or evidence is entitled to retain or, on payment of lawfully prescribed costs, procure a copy or transcript thereof, except that in a nonpublic investigatory proceeding the witness may for good cause be limited to inspection of the official transcript of his testimony.

We see no relevance in subsection 555(c). Its purpose and effect is to afford certain procedural protections to a person subject to agency investigation, I. e., an assurance of lawfulness in the investigation, and the right to retain, procure, or at least inspect the data or evidence he has been compelled to submit.

A point not argued by FSLIC but more troubling to the court stems from the cases that recognize a distinction between agency action that is subject to the APA, and the exercise of investigative authority that the APA was not intended to regulate. ¹² These decisions in effect imply a classification of investigative acts that is set apart from either adjudication or rulemaking. The distinction is based not on the terms of the APA but, apparently, upon an implication, supported by a single reference in the legislative history, ¹³ and upon what might fairly be described as a sense of manifest and historically recognized need for agencies to be able to issue subpoenas and conduct other investigative activities without constraint of the procedural requirements that the APA established for essentially regulatory actions. Assuming the validity of the distinction, it may prove difficult to differentiate between regulatory actions that are subject to APA procedures and investigative activity that may have only incidental regulatory impact. In this case, however, it is clear that the challenged rules are regulatory in nature and thus within the compass of APA procedures. FSLIC has not required merely the production of a financial report, ¹⁴ but rather has outlined with considerable specificity the actions that it expects the regulated industry to undertake in order to produce an audit report satisfactory to the agency. The APA definition of a rule specifically includes requirements bearing on accounting practices. ¹⁵

Again there may not always be a bright line between accounting rules and reporting requirements. However the regulations before us are fairly within the general category of prescription of accounting practices, ¹⁶ and the applicability of section 553 procedures is not to be gainsaid by a far-reaching expansion of a category of investigative activities that lie wholly outside the APA.

Subsection 553(a)(2): public contracts

We note, but bypass, FSLIC's reliance on 5 U.S.C. § 553(a)(2), which excepts from the section 553 procedures "a matter relating to agency management or personnel or to public property, loans, grants, benefits, or contracts." FSLIC argues first that the agreement between the agency and Guardian, which forms the foundation of the insurer/insured relationship, is a "contract" within this exception, ¹⁷ and then that the exception of subsection 553(a) (2) extends not only to rules establishing the initial terms and conditions of the agreement, but also to all subsequent rules affecting the insured institutions. ¹⁸ We are doubtful whether the term "contract," as it is used in subsection 553(a)(2), reaches beyond the ordinary meaning of a bargained-for, voluntary agreement. To extend the exception to an agreement that is mandatory as this one is (NHA section 403), ¹⁹ would open the door to substantive regulation without public participation. However, we find it unnecessary to enter a formal ruling on the point.

Subsection 553(b)(A): interpretative rules, general statements of policy, and rules of agency procedure

This case turns on subsection 553(b), which provides in part:

Except when notice or hearing is required by statute, this subsection does not apply

(A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice

5 U.S.C. § 553(b) (1976).

1. Although the term "interpretative rule" is not expressly defined by the APA, its essential meaning is readily distinguished from that of a "substantive" or "legislative" rule. A substantive or legislative rule has the force of law; an interpretative rule is merely a clarification or explanation...