Financial Planning Ass'n v. Securities & Exchange CommissionFinancial Planning Ass'n v. Securities & Exchange Commission
Lead Opinion
Dissenting opinion filed by Circuit Judge GARLAND.
Brоkers and dealers are not subject to the requirements of the Investment Advisers Act (“IAA”) where their investment advice is (1) “solely incidental to the conduct of [their] business as a broker or dealer,” and (2) the broker or dealer “receives no special compensation therefor.” 15 U.S.C. § 80b-2(a)(ll)(C) (2000). The Securities and Exchange Commission, acting pursuant to § 202(a)(ll)(F) and § 211(a) of the IAA, 15 U.S.C. §§ 80b-2(a)(ll)(F)
I.
The IAA was enacted by Congress as one title of a bill “to provide for the registration and regulation of investment companies and investment advisers.” Pub.L. No. 76-768, tit. II, 54 Stat. 847 (1940). The other title was the Investment Company Act (“ICA”). Pub.L. No. 76-768, tit. 1, 54 Stat. 789 (1940). These were the last in a series of congressional enactments designed to eliminate certain abuses in the securities industry that contributed to the stock market crash of 1929 and the depression of the 1930s. Cоngress had previously enacted the Securities Act of 1933, the Securities Exchange Act of 1934 (hereinafter “the Exchange Act”), the Public Utility Holding Company Act of 1935, and the Trust Indenture Act of 1939.
“A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.” SEC v. Capital Gains Research Bureau, Inc.,
“Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervisеd.... Individuals assuming to act as investment advisers at present can enter profit-sharing contracts which are nothing more than ‘heads I win, tails you lose’ arrangements. Contracts with investment advisers which are of a personal nature may be assigned and the control of funds of investors may be transferred to others without the knowledge or consent of the client.”
S.Rep. No. 76-1775, at 21-22 (1940).
Under the IAA, investment advisers are required, among other things, to register and to maintain records, 15 U.S.C. § 80b-3(c) & (e); to limit the type of contracts they enter, id. § 80b-5; and not to engage in certain types of deceptive and fraudulent transactions, id. § 80b-6. Congress has amended the IAA on several occasions,
In § 202(a)(ll) of the IAA, Congress broadly defined “investment adviser” as
“any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities
15 U.S.C. § 80b-2(a)(ll). Carving out six exemptions from this broad definition, Congress determined that an “investment adviser” did not include:
(A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956 which is not an investment company, except that the term “investment adviser” includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser;
(B) any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession;
(C) any broker or dealer [1] whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and [2] who receives no special compensation therefor;
(D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation;
(E) any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant tosection 3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act; or
(F) such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
15 U.S.C. § 80b-2(a)(ll) (emphasis added). Subsections (C) and (F) are at issue in this appeal.
Before enactment of the IAA, broker-dealers and others who offered investment advice received two general forms of compensation. Some charged only traditional commissions (earning a certain amount for each securities transaction completed). Others charged a separate advice fee (often a certain percentage of the customer’s assets under advisement or supervision). See 11 Fed.Reg. 10,996 (Sept. 27, 1946). The Committee Reports recognized that the statutory exemption for broker-dealers reflected this distinction; the Reports explained that the term “investment adviser” was “so defined as specifically to exclude ... brokers (insofar as them advice is merely incidental to brokerage transactions for which they receive only brokerage commissions).” S.Rep. No. 76-1775, at 22 [HA 164]; H.R.Rep. No. 76-2639, at 28 [HA 168],
The final rule took a different approach. After determining in 1999 that certain new forms of fee-contracting adopted by broker-dealers were “not ... fundamentally different from traditional brokerage programs,” the SEC proposed a rule very similar to the final rule, see Notice of Proposed Rulemaking, 64 Fed.Reg. 61,228 (Nov. 10, 1999) (“1999 NOPR”), stating it would act as if it had already issued the rule, id. at 61,227. In adopting the temporary rule, pursuant to subsection (F) and its general rulemaking authority under IAA § 211(a), the SEC exempted a new group of broker-dealers from the IAA. 64 Fed.Reg. 61,226 (Nov. 10, 1999). After re-proposing the rule in January 2005, again pursuant to its authority under subsection (F) and § 211(a), the SEC adopted a slightly modified final rule on April 12, 2005, codified at 17 C.F.R. § 275.202(a)(ll)-l. 70 Fed.Reg. 20,424, 453-54.
The final rule provides, generally, in Paragraph (a)(1), on “fee-based programs,”- that a broker-dealer who (1) receives special compensation will not be deemed an investment adviser if (2) any advice provided is solely incidental to brokerage services provided on a customer’s account and (3) specific disclosure is made to the customer.
The FPA petitions for review, challenging the SEC’s authority to promulgate the final rule.
II.
Article III standing is a fundamental prerequisite to any exercise of the court’s jurisdiction, see Lujan v. Defenders of Wildlife,
The standard for representational standing is well-established:
[A]n association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.
United Food & Commercial Workers Union Local 751 v. Brown Group, Inc.,
The court has “repeatedly recognized that parties ‘suffer constitutional injury in fact when agencies ... allow increased competition’ аgainst them.” U.S. Telecom Ass’n v. FCC,
Additionally, contrary to the SEC’s view, the FPA also has prudential standing. Its members are within the IAA’s zone of interest, see Clarke v. Sec. Indus. Ass’n,
Accordingly, we hold that the FPA has standing to bring its petition.
III.
The FPA contends that when Congress enacted the IAA, Congress identified in subsection (C) the group of broker-dealers it intended to exempt, and that subsection (F) was only intended to allow the SEC to exempt new groups from the IAA, not to expand the groups that Congress specifically addressed. The resolution of the FPA’s challenge thus turns on whether the SEC is authorized under § 202(a)(ll)(F) or § 211(a) to except from IAA coverage an additional group of broker-dealers beyond the broker-dealers exempted by Congress in subsection (C), 15 U.S.C. § 80b-2(a)(ll)(C). Subsection (F) of § 202(a)(ll) authorizes the SEC to except from the IAA “such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.” 15 U.S.C. § 80b-2(a)(ll)(F). As such, we review the SEC’s exercise of its authority pursuant to subsection (F) under the familiar two-step analysis of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
Applying the “traditional tools of statutory construction,” see Chevron,
Section 202(a)(ll) lists exemptions (A)(E) from the broad definition of “investment adviser” for several classes of persons — including, for example, lawyers, accountants, and others whose advice is “solely incidental” to their regular business; and publishers of newsletters that circulate widely and do not give individually-tailored financial advice. Among the IAA exemptions is subsection (C)’s exemption for “any broker or dealer whose performance of such [investment advisory] services is solely incidental to the conduct of his business as a broker or dealer and
In the final rule, the SEC purports to use its authority under subsection (F) to broaden the exemption for broker-dealers provided under subsection (C). The rule is inconsistent with the IAA, however, because it fails to meet either of the two requirements for an exemption under subsection (F). First, the legislative “intent” does not support an exemption for broker-dealers broader than the exemption set forth in the text of subsection (C); therefore, the final rule does not meet the statutory requirement that exemptions under subsection (F) be consistent with the “intent” of paragraph 11 of section 202(a). Second, because broker-dealers are already expressly addressed in subsection (C), they are not “other persons” under subsection (F); therefore the SEC cannot use its authority under subsection (F) to establish new, broader exemptions for broker-dealers.
The final rule’s exemption for broker-dealers is broader than the statutory exemption for broker-dealers under subsection (C). Although the SEC maintains that the intent of paragraph 11 is to exempt broker-dealers who receive special compensation for investment advice [Red Br. 28; Oral Arg. Tape at 31:50], the plain text of subsection (C) exempts only broker-dealers who do not receive special compensation for investment advice. The word “any” is usually understood to be all inclusive. See New York v. EPA,
No other indicators of congressional intent support the SEC’s interpretation of its authority under subsection (F). The relevant language in the committee reports suggests that Congress deliberately drafted the exemption in subsection (C) to apply as written. Those reports stated that the “term ‘investment adviser’ is so defined as specifically to exclude ... brokers (insofar as them advice is merely incidental to brokerage transactions for which they receive only brokerage commissions).” S.Rep. No. 76-1775, at 22 (emphasis added) [HA 164]; see also H.R.Rep. No. 76-2639, at 28 [HA 168]. By seeking to exempt broker-dealers beyond those who receive only brokerage commissions for investment advice, the SEC has promulgated a final rule that is in direct conflict with both the statutory text and the Committee Reports.
The text of subsection (F) confirms this conclusion by the limiting the SEC’s exemption authorization to “other persons.” We agree with the FPA that when Congress enacted the IAA, Congress identified the specific classes of persons it intended to exempt. As to broker-dealers, subsection (C) applied to “any broker or dealer.” Congress, through the use of contrasting
As the FPA points out, the word “other” connotes “existing besides, or distinct from, that already mentioned or implied.” II The Shorter Oxford English Dictionary 1391 (2d ed.1936, republished 1939). See Key v. Allstate Ins. Co.,
A universal clause preceding every definition in the statute, which states only “unless the context otherwise requires,” cannot provide the authority for one of the agencies whose jurisdictional boundaries are defined in the statute to alter by administrative regulation those very jurisdictional boundaries. To suggest otherwise is to sanction administrative autonomy beyond the control of either Congress or the courts.
Just as the text and structure of paragraph of 202(a)(ll) make it evident that Congress intended to define “investment adviser” broadly and create only a precise exemption for .broker-dealers, so does a consideration of the problems Congress sought to address in enacting the IAA. A comprehensive study conducted by the SEC pursuant to the Public Utility Holding Company Act of 1935 indicated that “many investment counsel have ‘strayed a great distance from that professed function’ of furnishing disinterested, personalized, continuous supervision of investments.” Securities and Exchange Commission, Investment Counsel, Investment Management, Investment Supervisory and Investment Advisory Services, at 25 (1939) (quoting testimony of brokerage executive James N. White, of Scudder, Stevens & Clark). Floor debate on the IAA called attention to the fact that while this study was being conducted investment trusts and investment companies had perpetrated “some qf the most flagrant abuses and grossest violations of fiduciary duty to investors.” 86 Cong. Rec. 2844 (daily ed. Mar. 14, 1940)
The overall statutory scheme of the IAA addresses the problems identified to Congress in two principal ways: First, by establishing a federal fiduciary standard to govern the conduct of investment advisers, broadly defined, see Transamerica Mortgage Advisors v. Lewis,
[T]he Committee Reports indicate a desire to ... eliminate conflicts of interest between the investment adviser and the clients as safeguards both to ‘unsophisticated investors’ and to ‘bona fide investment counsel.’ The [IAA] thus reflects a ... congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser — consciously or unconsciously — to render advice which was not disinterested.
Id. at 191-92,
In an attempt to overcome the plain language of the statute, the SEC asserts that Congress was also concerned about the regulation of broker-dealers under both the IAA and Exchange Act, and that such concern was reflected in the “intent” of the paragraph. See 70 Fed.Reg. 20,430; see also 64 Fed.Reg. 61,228. The SEC points to no convincing evidence that supports these assertions. At the time Congress enacted the IAA in 1940, broker-dealers were already regulated under the Exchange Act. In the IAA, Congress expressly acknowledged that the broker-dealers it covered could also be subject to other regulation. IAA § 208(b), 15 U.S.C. § 80b-8(b). The IAA’s essential purpose was to “protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful.” H.R.Rep. No. 76-2639 at 28; see also id. at 21. As the FPA emphasizes, there is nothing in the committee reports to suggest that Congress was particularly concerned about the regulatory burdens on broker-dealers.
While the SEC’s failure to respect the unambiguous textual limitations marked by the phrase “intent of this paragrаph” and “other persons” is fatal to the final rule, an additional weakness exists in the SEC’s interpretation: It flouts six decades of consistent SEC understanding of its authority under subsection (F). Cf. Commodity Futures Trading Comm’n v. Schor,
The SEC unconvincingly attempts to defend its expansive interpretation of subsection (F) by likening it to section 6(c) of the ICA, 15 U.S.C. § 80a-6(c). Section 6(c) of the ICA empowers the SEC to grant exemptions from the ICA, or any rule or regulation adopted under it, “if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions” of the ICA. This court has noted that the SEC “has exercised this authority to exempt persons not within the intent of the [ICA] and generally to adjust its provisions to take account of special situations not foreseen when the [ICA] was drafted.” NASD v. SEC, 420
In light of the'context in which Congress drafted subsections (C) and (F), we conclude that, as indicated by the structure of § 202(a)(ll) and the problems that Congress addressed .in the IAA, as well as the other indicators of Congress’s intent, under Chevron step one the text of subsections (C) and (F) is unambiguous, and that, therefore, the SEC has exceeded its authority in promulgating the final rule. Our dissenting colleague’s analysis fails to confront two realities of statutory construction. First, “[a]mbiguity is a creature not of definitional possibilities but of statutory context.” Brown v. Gardner,
Accordingly, we grant the petition and vacate the final rule. See North Carolina v. Fed. Energy Regulatory Comm’n,
Notes
. In the wake of the Enron and WorldCom collapses, Congress enacted the Credit Rating Agency Reform Act of 2006 (‘'CRARA”), Pub.L. No. 109-291, 120 Stat. 1327, 1337 (2006), which included an amendment to the IAA to add a new exception to the definition of "investment adviser" in § 202(a)(ll) for statistical rating organizations. CRARA § 4(b)(3), Pub.L. No. 109-291. Hence, subsection (F) is now found in 15 U.S.C. § 80b-2(a)(l 1)(G). References in this opinion are to the IAA prior to this 2006 amendment.
. We refer to brokers and dealers as "broker-dealers” because their different roles are irrelevant for purposes of this appeal. See IAA, 15 U.S.C. §§ 80b-2(a)(3), (a)(7); Securities Exchange Act, 15 U.S.C. §§ 78c(a)(4) (broker), (a)(5) (dealer).
. See, e.g., Pub.L. No. 86-507, 74 Stat. 201 (1960); Pub.L. No. 86-624, 74 Stat. 412 (I960); Pub.L. No. 86-750, 74 Stat. 885 (I960); Pub.L. No. 91-547, 84 Stat. 1430, 1433 (1970) (adding § 206A); Pub.L. No. 94-29, 89 Stat. 163 (1975).
. The required disclosure consists of the following statement:
Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations ta disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.
Section (a)(l)(ii), 70 Fed.Reg. 20,454.
. The FPA initially filed a petition in 2004 for review of the 1999 temporary rule. See 69 Fed.Reg. 51,620 n. 4 (Aug. 20, 2004). After the SEC promulgated the final rule on April 12, 2005, FPA again petitioned for review. The court consolidated the petitions by Order of May 11, 2005.
. See, e.g., 86 Cong. Rec. S2844-45, 2847 (daily ed. Mar. 14, 1940); 86 Cong Rec. S8843 (daily ed. June 21, 1940); 86 Cong. Rec. H9807, 9809, 9815-16 (daily ed. Aug. 1, 1940); 86 Cong. Rec. S10077 (daily ed. Aug. 8, 1940).
. Very shortly after enactment of the IAA, the SEC advised that any charges directly related to the giving of investment advice would be special compensation. On October 28, 1940, the SEC General Counsel issued an opinion stating:
Clause (C) of section 202(a)(ll) amounts to a recognition that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular business, and that it would be inappropriate to bring them within the scope of the Investment Advisers Act merely because of this aspect of their business. On the other hand, that portion of clause (C) which refers to "special compensation" amounts to an equally clear recognition that a broker or dealer who is specially compensated for the rendition of advice should be considered an investment adviser and not be excluded from the purview of the Act merely because he is also engaged in effecting market transactions in securities.
11 Fed.Reg. 10,996 (Sept. 27, 1946) (reprinting SEC General Counsel opinion letter of October 28, 1940). Thus, any charges "directly related to the giving of advice” would be special compensation. Id.
This contemporary interpretation was reflected as well when the SEC addressed two-tiered pricing arrangements (including a discounted fee arrangement) in 1978:
[I]f a broker-dealer has in effect, either formally or informally, two general schedules of fees available to a customer, the lower without investment advice and the higher with investment advice[,] and the difference is primarily attributable to this factor ... the [SEC] would regard the extra charge as “special compensation” for investment advice.
43 Fed.Reg. 19,224, 19,226 (May 4, 1978). The SEC made clear at the time that "[t]his would be the case even in a situation, currently nonexistent, in which a current ‘full service’ firm implements a 'discount' or ‘execution-only’ service.” Id.; see also Townsend & Assocs., Inc., SEC No-Action Letter, 1994 SEC No-Act. LEXIS 739 (Sept. 21, 1994); Am. Capital Fin. Servs., Inc., SEC No-Action Letter, 1985 SEC No-Act. LEXIS 2209 (Apr. 29, 1985).
. Section 211 (a) provides:
The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the functions and powers conferred upon the Commission elsewhere in this subchapter. For the purposes of its rules or regulations the Commission may
classify persons and matters within its jurisdiction and prescribe different requirements for different classes of persons or matters.
15 U.S.C. § 80b-l 1(a).
Dissenting Opinion
dissenting.
The Investment Advisers Act contains five specific exceptions, and further authorizes the SEC to exempt “such other persons not within the intent of this paragraph, as the Commission may designate by rules.” 15 U.S.C. § 80b-2(a)(ll). ' Unlike my colleagues, I cannot derive an unambiguous meaning from the terms “such other persons” and “within the intent of this paragraph.” As required by Chevron, I would therefore defer to the SEC’s reasonable interpretation of the statute it administers and uphold the Commission’s fee-based brokerage rule.
I
The Investment Advisers Act (IAA) imposes a series of requirements on “investment advisers.” See 15 U.S.C. §§ 80b-3 to -6. Paragraph 11 of section 202(a) of the Act defines an “investment adviser” as “any person who, for compensation, engages in the business of advising others ... as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” unless that person comes within one of six exceptions. Id. §'80b-2(a)(ll).
any broker or dealer whose performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.
Id. § 80b-2(a)(ll)(C). The SEC has construed “special compensation” to mean any compensation other than brokerage commissions (or dealers’ “mark-ups” or “markdowns”). See Certain Broker-Dealers Deemed Not To Be Investment Advisers, 70 Fed.Reg. 20,424, 20,425 & n. 10 (Apr. 19, 2005) [hereinafter Certain Broker-Dealers]. Hence, a broker-dealer who receives any kind of compensation other than commissions does not come within the subsection (C) exception, even if he, too, provides advice solely as an incident to his business as a broker-dealer. See id. at 20,425.
In addition to the five specific exceptions, the IAA’s definition of covered investment advisers includes a sixth exception — subsection (F) — which reads as follows:
such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
15 U.S.C. § 80b-2(a)(ll)(F). That exception is the crux of this case. In the final rule currently under attack, the SEC exercised its authority under subsection (F) to create an exception for broker-dealers whose provision of advice is also solely incidental to their brokerage services, but who receive a particular kind of non-commission compensation. These broker-dealers — a group that did not exist when the IAA was passed in 1940 — charge either a fixed fee or a fee based on the amount of assets in the customer’s account. In return, they provide the customer with a traditional package of brokerage services that includes investment advice, execution, arranging for delivery and payment, and custodial and recordkeeping services. Certain Broker-Dealers, 70 Fed.Reg. at 20,425. Because these broker-dealers receive fee-based compensation rather than commissions, they receive “special compensation” within the meaning of subsection (C) and hence are not covered by that exception. See id.
As the court states, the question before us is whether subsection (F) gives the SEC the authority to “except from IAA coverage an additional group of broker-dealers bеyond the broker-dealers exempted by Congress in subsection (C).” Court Op. at 487. The SEC believes that it does. In the Commission’s view, although these broker-dealers receive “special compensation” in a technical sense, they provide investment advice in the same manner as those who are exempt under subsection (C), and exempting them would thus serve the same purpose. See infra Part III.
Under the first step of Chevron analysis, if the terms of subsection (F) unambiguously preclude the SEC’s interpretation, we must reject it. See Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc.,
II
The court begins and ends its analysis at Chevron step one, concluding that the SEC unambiguously lacks authority under subsection (F) to exempt any broker-dealers beyond those specified in subsection (C). Court Op. at 492. The court reaches this conclusion based on its examination of the
A
Like my colleagues, I begin with the term “within the intent of this paragraph.” Under Chevron, a statutory term is unambiguous only if Congress has “directly spoken to the precise question at issue.”
The court cannot point to any words in paragraph 11, or in any other paragraph of the Act, that suggest a negative answer to that question — or that explain what Congress intended with resрect to that question at all. Instead, the court appears to rely on a version of the expressio unius canon — the principle that the mention of one thing implies the exclusion of another — by reasoning that the exception for some broker-dealers in subsection (C) means that coverage of all other broker-dealers must be “within the intent of’ paragraph 11. But this court has repeatedly held that expressio unius is “an especially feeble helper in an administrative setting, where Congress is presumed to have left to reasonable agency discretion questions that it has not directly resolved.” Martini v. Fed. Nat’l Mortgage Ass’n,
Turning from the statutory text to the legislative history, the court quotes a committee report stating that the “ ‘term “investment adviser” is so defined as specifically to exclude ... brokers (insofar as them advice is merely incidental to brokerage transactions for which they receive only brokerage commissions).’ ” Court Op. at 488 (quoting S. Rep. NO. 76-1775, at 22 (1940)) (emphasis added by the court); see also H.R. Rep. NO. 76-2639, at 28 (1940). This quotation, however, has the same problem identified above. The committee was referring only to the specific exclusion provided by subsection (C), and not to the further exclusions permitted by subsection (F). That is made clear by the sentence that follows the one quoted by the court: “In addition, the Commission is authorized by rules and regulations or order, to make certain further exceptions
B
The court also perceives clarity in the subsection (F) term “such other persons.” According to the court, “other persons” excludes any person who is a member of one of the broad categories referenced in paragraph ll’s five specific exceptions. Because some broker-dealers are referenced in subsection (C), the court concludes that the- subset of broker-dealers covered by the fee-based brokerage rule cannot constitute “other persons” within the meaning of subsection (F). See Cоurt Op. at 488-89. The SEC, by contrast, contends that “other persons” excludes only, those persons who actually come within one of the five preceding exceptions. On the SEC’s reading, the fee-based brokerage rule is a permissible exercise of the Commission’s delegated authority because it exempts broker-dealers other than those exempted by subsection (C).
Because the IAA does not define “other persons,” the court turns to the dictionary to find its meaning. There, the court learns that “the word ‘other’ connotes ‘existing besides, or distinct from, that already mentioned or implied.’ ” Id. at 489 (quoting 2 The Shorter Oxford English Dictionary 1391 (2d ed.1936, republished 1939)). But like the text and the legislative history, the dictionary fails to resolve the precise question at issue. It cannot tell us whether the persons “already mentioned” in subsection (C) are “any broker or dealer,” as one might reasonably conclude if one looked only at the first four words of the subsection, or instead are “any broker or dealer whose performance of such services is solely incidental to the conduct of his business ... and who receives no special compensation therefor,” as one might reasonably conclude if оne looked at all the words of the subsection. The SEC takes the latter approach, and neither the plain text nor the dictionary bars that construction. This should end the Chevron step one inquiry.
Turning away from the IAA altogether, the court next looks to judicial precedents construing two different provisions — Federal Rule of Civil Procedure 60(b) and the Securities Exchange Act of 1934. These cases, however, shed no light on the IAA.
In Liljeberg v. Health Services Acquisition Corp.,
This circuit’s interpretation of the Securities Exchange Act in American Bankers Association v. SEC,
In short, these cases do not illustrate an “underlying principle” that resolves thе interpretive question in this case. Court Op. at 489. To the contrary, they merely tell us how courts have construed dissimilar language in dissimilar circumstances — that is, in situations where, unlike here, Chevron deference is inappropriate. There is, therefore, nothing in the text or structure, of paragraph 11 — or in any judicial precedent — that compels the statutory construction that the court has adopted.
C
Finally, the court seeks to buttress its arguments from text and structure with three more general considerations. First, it examines “the problems Congress sought to address in enacting the IAA.” Id. at 489. That the first item the court turns to in that examination is a 1939 “comprehensive study conducted by the SEC,” id., should cast some doubt on whether the court is better equipped to interpret the study’s import than the authoring agency. In any event, my colleagues learn little from this or any other aspect of the historical context beyond the fact that “[t]he IAA’s essential purpose was to ‘protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts.’ ” Id. at 490 (quoting H.R. Rep. No. 76-2639, at 28). There is no doubt that this accurately identifies the intent of Congress at a
My colleagues contend that “an additional weakness exists in the SEC’s interpretation” because it “flouts six decades of consistent SEC understanding of its authority under subsection (F).” Id. at 490. The only SEC opinions quoted for that proposition are two releases that refer only to subsection (C). Neither mentions subsection (F) at all, and neither considers whether an exception for fee-based brokerage would be appropriate under that (or any other) subsection. See id. at 490-91 n. 7 (citing 43 Fed.Reg. 19,224, 19,226 (May 4, 1978), and 11 Fed.Reg. 10,996 (Sept. 27, 1946) (republishing SEC General Counsel opinion letter of Oct. 28,1940)).
But even if the SEC had changed its construction of subsection (F), “ 'change is not invalidating, since the whole point of Chevron is to leave the discretion provided by the ambiguities of a statute with the implementing agency.’” Brand X,
Last, my colleagues state that “the broader language found in § 206A [of the IAA] supports the conclusion that subsection (F) must be read more narrowly.” Court Op. at 492. Whether the exempting power delegated to the SEC under § 206A is in fact broader than that delegated by subsection (F) is unclear. Compare 15 U.S.C. § 80b-6a, with id. § 80b-2(a)(ll)(F). But even if it were, the court does not explain how § 206A, which was not added to the IAA until 1970, can provide insights into the intent of the Congress that enacted subsection (F) in 1940.
Because I fail to perceive the clarity required to vacate the SEC’s fee-based brokerage rule under the first step of Chevron analysis, I proceed to the second step.
Ill
Under Chevron step two, “if the implementing agency’s construction is reasonable,” a court must “accept the agency’s construction of the statute, even if the agency’s reading differs from what the court believes is the best statutory interprеtation.” Brand X,
For the same reasons that I find subsection (F)’s use of the term “such other persons” ambiguous, see supra Part II.B, I conclude that the SEC’s construction of that term is reasonable. There is nothing implausible about interpreting those words to encompass anyone not actually exempt under one of the five preceding exceptions.
The reasonableness of the SEC’s interpretation of “such other persons” does not end the analysis, of course. Any regulatory exception must also be consistent with “the intent of’ paragraph 11. The remaining question, then, is whether an exception for broker-dealers who provide investment advice solely incidental to their business as broker-dealers, but who are paid fee-based rather than commission-based compensation, is consistent with that intent.
The SEC has presented a reasonable case for concluding that it is. The Commission explained that, at the time of the IAA’s passage in 1940, broker-dealers were providing investment advice and receiving compensation in only two ways: “as an аuxiliary part of the traditional brokerage services for which their brokerage customers paid fixed commissions and, alternatively, as a distinct advisory service for which their advisory clients separately contracted and paid a fee.” Certain Broker-Dealers, 70 Fed.Reg. at 20,428. Congress was concerned about the potential for fraud and misrepresentation when advice was provided in the latter form— whether it was provided by broker-dealers charging separately for such advice or by others whose only business was to provide advice for a fee. See id. at 20,429-80 & n. 60. In enacting the IAA, however, Congress did not express the same concern about investment advice included within a larger package of brokerage services — as evidenced by the exception contained in subsection (C).
As the SEC interprets the legislative history, subsection (C) was intended to exempt broker-dealers when they gave investment advice as part of a package of traditional brokerage services, but not when they sold advice as a distinct service for a separate fee. See id. at 20,430. The 1940 SEC release quoted by the court, Court Op. at 490-91 n. 7, is to precisely that effect:
Clause (C) ... amounts to a recognition that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular business, and that it would be inappropriate to bring them within the scope of the [IAA] merely because of this aspect of their business. On the other hand, that portion of clause (C) which refers to “special compensation” amounts to an equally clear recognition that a broker or dealer who is specially compensated for the rendition of advice should be considered an investment adviser and not be excluded from the purview of the Act ....
11 Fed.Reg. 10,996 (Sept. 27, 1946) (emphasis added) (republishing SEC General Counsel opinion letter of Oct. 28, 1940). Since, at the time, the only kind of compensation that exchange rules permitted a broker-dealer to charge for a traditional package of services was the fixed brokerage commission, subsection (C)’s exception for broker-dealers receiving such compensation effectively exempted all broker-dealers who provided advice as part of such a package. See Certain Broker-Dealers, 70 Fed.Reg. at 20,431 & n. 75.
For several decades after the IAA was passed, subsection (C)’s “no special compensаtion” rule — understood to mean “no compensation other than brokerage commissions” — continued to exempt the only group of broker-dealers who gave advice as part of a traditional package of brokerage services. See id. at 20,431. In 1975, however, the SEC eliminated the requirement that broker-dealers charge only fixed commissions for brokerage services. See id. at 20,431 n. 74. In the 1990s, broker-dealers began to take advantage of the
In 1999, in response to these developments, the SEC first proposed what would become the final rule now before us. The Commission concluded that “these new fee-based brokerage programs ... were not fundamentally different from traditional brokerage programs” and that broker-dealers had simply “re-priced traditional brokerage programs rather than ... created advisory programs.” Id. at 20,426. Although fee-based brokers receive “special compensation” in the technical sense that they are paid in a form other than brokerage commissions, such brokers provide investment advice only as a part of a traditional package of brokerage sendees, just like the brokers who have always been exempt from the IAA. And unlike the broker-dealers who Congress intended to include within the Act’s coverage via subsection (C)’s bar on “special compensation,” the subset of broker-dealers exempted by the final rule do not charge a separate fee or separately contract for investment advice. (The final rule expressly excludes such broker-dealers from the exception. See 17 C.F.R. § 275.202(a)(ll)-l(b)(l).) Because the SEC reasonably believed that an exception for the broker-dealers covered by the final rule — a group that did not exist in 1940 — would serve the same purpose as the exception that Congress created when it passed the IAA, the Commission reasonably concluded that its final rule was consistent with the intent of paragraph 11. As the Commission explained:
There is no evidence that the “special compensation” requirement was included in section 202(a)(ll)(C) for any purpose beyond providing an easy way of accomplishing the underlying goal of excepting only advice that was provided as part of the package of traditional brokerage services. In particular, neither the legislative history of section 202(a)(ll)(G) nor the broader legislative history of the Advisers Act as a whole suggests that, in 1940, Congress viewed the form of compensation for the services at issue — commission versus fee-based compensation — as having any independent relevance in terms of the advisory services the Act was intended to reach.
Certain Broker-Dealers, 70 Fed.Reg. at 20,431 (footnote omitted).
The SEC also reasonably explained why its new exception was consistent with the IAA’s more general purpose of preventing fraud and misrepresentation. As the Commission points out, broker-dealers who are exempt from the IAA are not free from oversight, but instead are regulated under the Securities Exchange Act of 1934 and by self-regulatory organizations such as the New York Stock Exchange. Id. at 20,424. That regulation, the SEC explained, “provide[s] substantial рrotections for broker-dealer customers.” Id. at 20,-433. To supplement that regulation, the final rule further provides that broker-dealers cannot qualify for the exception unless they make specified disclosures about potential conflicts of interest to their customers. 17 C.F.R. § 275.202(a)(ll)-1(a)(1).
Moreover, a major impetus to promulgation of the rule was the SEC’s concern that commission-based compensation has conflict-of-interest and fraud potential of its own. Charging a commission for each transaction, the SEC said, gives brokers an incentive “to churn accounts, recommend unsuitable securities, and engage in aggressive marketing of brokerage services.”
The Financial Planning Association and its amici advance a host of reasons to question the SEC’s judgment that the fee-based brokerage exception will not undermine investor protection. Whatever the validity of those concerns, they reflect policy disputes of the type that Chevron counsels us to leave to agency resolution. As the Supreme Court emphasized:
When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency’s policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges — who have no constituency— have a duty to respect legitimate policy choices made by those who do.
Chevron,
IV
The SEC’s interpretation of the Investment Advisers Act is “a reasonable interpretation of an ambiguous statute.” Christensen v. Harris County,
Congress added a seventh exception in 2006. My citations, like the court's, are to the preamendment statute.