Sacks v. Sec.

• Decision Date: 08 August 2011
• Docket Number: No. 07–74647.,07–74647.
• Citation: 648 F.3d 945,11 Cal. Daily Op. Serv. 9987,2011 Daily Journal D.A.R. 11910
• Parties: Richard L. SACKS, Petitioner,v.SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

648 F.3d 945

11 Cal. Daily Op. Serv. 9987

2011 Daily Journal D.A.R. 11,910

Richard L. SACKS, Petitioner,

v.SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 07–74647.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 30, 2010.Filed Feb. 22, 2011.Amended Aug. 8, 2011.

OPINION TEXT STARTS HEREWest CodenotesHeld Invalid17 C.F.R. § 201.430(c) Timothy A. Canning, Arcata, California, for the petitioner.Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, Mark Pennington, Assistant General Counsel, Washington, D.C., for the respondent.On Petition for Review of an Order of the Securities & Exchange Commission. SEC No. 34–56540.

Before: MARY M. SCHROEDER, SIDNEY R. THOMAS, and RONALD M. GOULD, Circuit Judges.

ORDER

The opinion is amended as follows:

1. Page 2745

[635 F.3d at 1123]

, line 30, to Page 2746

[635 F.3d at 1123–24]

, line 16. Delete:

Where Congress has enacted a special statutory review process for administrative action, that process applies to the exclusion of the Administrative Procedure Act (“APA”) or other general exhaustion principles. See 5 U.S.C. § 703; Bowen v. Massachusetts, 487 U.S. 879, 903, 108 S.Ct. 2722, 101 L.Ed.2d 749 (1988); Steadman v. SEC, 450 U.S. 91, 105, 101 S.Ct. 999, 67 L.Ed.2d 69 (1981) (“[T]he general provisions of the APA are applicable only when Congress has not intended that a different standard be used in the administration of a specific statute.” (Powell, J., concurring)); W. Watersheds Project v. Kraayenbrink, 632 F.3d 472, 495–96 (9th Cir.2011) (citing Bennett v. Spear, 520 U.S. 154, 164, 117 S.Ct. 1154, 137 L.Ed.2d 281 (1997)); Turtle Island Restoration Network v. U.S. Dep't of Commerce, 438 F.3d 937, 947 (9th Cir.2006). With respect to exhaustion, specifically, the United States Supreme Court has held:

“[A]ppropriate deference to Congress' power to prescribe the basic procedural scheme under which a claim may be heard in a federal court requires fashioning of exhaustion principles in a manner consistent with congressional intent and any applicable statutory scheme.”

Darby v. Cisneros, 509 U.S. 137, 153, 113 S.Ct. 2539, 125 L.Ed.2d 113 (1993) (quoting McCarthy v. Madigan, 503 U.S. 140, 144, 112 S.Ct. 1081, 117 L.Ed.2d 291 (1992)).

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[635 F.3d at 1124–25]

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However, the regulation does not apply here because 15 U.S.C. § 78y sets out the exclusive procedure for judicial review of rules that are proposed by self-regulating organizations and adopted by the SEC under § 78s. See Bowen, 487 U.S. at 903, 108 S.Ct. 2722; Steadman, 450 U.S. at 105, 101 S.Ct. 999; W. Watersheds Project, 632 F.3d at 495–96. As a result, neither the APA nor a regulation of general applicability promulgated under the APA—such as 17 C.F.R. § 201.430(c)—applies here.⁴

* * *

On April 13, 2007, FINRA proposed a rule prohibiting non-attorneys who have been banned from the securities industry from representing parties in securities-related arbitration. 72 Fed.Reg. 18703 (Apr. 13, 2007). Richard Sacks submitted a comment letter to FINRA on May 3, 2007, challenging the proposed rule. Sacks, who is not an attorney, was banned from the securities industry by FINRA in 1991. However, he was not barred from representing parties in securities-related arbitration. Sacks claims that, since 1991, he has represented parties in over 1,300 arbitration claims, tried 300 or so cases to a decision, and mediated another 250 or so claims to a settlement. The rule, though, would prevent him from continuing to represent parties in securities-related arbitration.

Among other things, Sacks claimed in his comment letter that the rule was impermissibly retroactive and constituted an additional sanction for conduct that occurred more than 16 years ago. The SEC's Division of Market Regulation rejected Sacks' protest. It adopted the rule on October 3, 2007, and commented:

[FINRA's] rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission believes that the proposed rule change meets this standard by balancing the needs of investors to have access to representation, particularly in small cases, with [FINRA's] responsibility to protect investors, the integrity of its forum, and the public interest.

72 Fed.Reg. 56410, 56411 (Oct. 3, 2007). Sacks filed a petition for review with us on November 13, 2007, without first petitioning the SEC.

II

We have jurisdiction over Sacks' petition, even though he did not first seek relief from the SEC after it adopted the rule.

Our jurisdiction arises under the special statutory review process set out in 15 U.S.C. § 78y, which governs our review of rules proposed by self-regulating organizations, such as FINRA, and adopted by the SEC under § 78s. ² Section 78y(b)(1) provides:

A person adversely affected by a rule of the Commission promulgated pursuant to section ... 78s of this title may obtain review of this rule in the United States Court of Appeals for the circuit in which he resides or has his principal place of business or for the District of Columbia Circuit, by filing in such court, within sixty days after the promulgation of the rule, a written petition requesting that the rule be set aside.15 U.S.C. § 78y(b)(1). There is no dispute here that Sacks was adversely affected by the rule, that he filed his petition with the appropriate circuit court, and that he filed his petition within 60 days after the SEC issued the order adopting the rule.

Section 78y(c)(1) sets out the exhaustion requirement for this special statutory review process:

No objection to an order or rule of the Commission, for which review is sought under this section, may be considered by the court unless it was urged before the Commission or there was reasonable ground for failure to do so.

15 U.S.C. § 78y(c)(1). We agree with the D.C. Circuit that a party has sufficiently “urged” his objection to the SEC by raising his objection to the rule during the rule-making process. See Blount v. SEC, 61 F.3d 938, 940 (D.C.Cir.1995). In other words, a petitioner need not have filed a petition for review with the SEC after it has adopted a rule in order to have sufficiently “urged” his objection. As the D.C. Circuit reasoned, this exhaustion requirement “is presumably aimed only at assuring that the Commission have had a chance to address claims before being challenged on them in court.” Id. at 940.

Here, Sacks met the exhaustion requirement in § 78y(c)(1). Sacks raised his objection to the rule in his comment letter to the SEC, and the SEC responded to his objection in its approval order. The SEC acknowledged that Sacks and three others commented:

The proposed rule change would penalize retroactively those persons who are currently suspended or barred from the securities industry by prohibiting them from representing a party in an arbitration or mediation proceeding. In their view, it would impose a new penalty on those who have had their misconduct adjudicated and sanctions imposed.

72 Fed.Reg. at 56411. This is the same claim that Sacks raises in his petition before us. And the SEC responded to Sacks's claim:

[FINRA] indicated that the rule is “designed to protect investors” and that at a minimum a non-attorney representative should not be “a person whom a regulatory body has suspended or barred from representing clients or conducting securities business with the public.”

Id. Sacks provided the SEC “a chance to address [his] claims before being challenged on them in court[,]” see Blount, 61 F.3d at 940, and it rejected them. Therefore, he sufficiently “urged” his objection before the SEC. 15 U.S.C. § 78y(c)(1).

We have jurisdiction over Sacks' petition because he has met all of the jurisdictional requirements under the special statutory review process set out in 15 U.S.C. § 78y, including its exhaustion requirement.

The SEC argues we lack jurisdiction under 17 C.F.R. § 201.430(c). That regulation states:

Prerequisite to judicial review. Pursuant to Section 704 of the Administrative Procedure Act, 5 U.S.C. 704, a petition to the Commission for review of an action made by authority delegated in §§ 200.30–1 through 200.30–18 of this chapter is a prerequisite to the seeking of judicial review of a final order entered pursuant to such an action....

17 C.F.R. § 201.430(c). Under § 201.430(b)(1), the party must either:

fil[e] a written notice of intention to petition for review within five days after actual notice of the action to that party or aggrieved person, or 15 days after publication of the notice of action in the Federal Register, or five days after service of notice of the action on that party or aggrieved person pursuant to § 201.141(b), whichever is the earliest.

17 C.F.R. § 201.430(b)(1).

The SEC argues that it approved the rule through delegated authority under 17 C.F.R. § 200.30–3(a)(12) ³ and that Sacks did not timely file a petition with the SEC. However, as we have explained, 15 U.S.C. § 78y(c)(1) requires only that a petitioner raise his objection during the rule-making process. Because the additional requirement in 17 C.F.R. § 201.430(c) conflicts with the more lenient requirement in § 78y(c)(1), the regulation does not apply. See United States v. Doe, 701 F.2d 819, 823 (9th Cir.1983) (“Where an administrative regulation conflicts with a statute, the statute controls.”).

Because our jurisdiction over Sacks' petition is governed by 15 U.S.C. § 78y and 17 C.F.R. § 201.430(c) does not apply, we have jurisdiction to address the merits of the petition.

III

Sacks argues the rule at issue here is impermissibly retroactive. We agree and hold that it cannot be applied retroactively.

Our standard of review is governed by Section 78y:

[We] shall affirm and enforce the rule unless the Commission's action in promulgating the rule is found to be...