FINANCIAL PLANNING ASSOCIATION, PETITIONER v. SECURITIES AND EXCHANGE COMMISSION, RESPONDENT
No. 04-1242
Unitеd States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 5, 2006 Decided March 30, 2007
Consolidated with No. 05-1145
Merril Hirsh argued the cause for petitioner. With him on the briefs was Jonathan A. Cohen.
Rachel M. Weintraub and Mercer E. Bullard were on the brief for amici curiae Consumer Federal of America and Fund Democracy, Inc. in support of petitioner.
Debra G. Speyer was on the brief for amicus curiae Public Investors Arbitration Bar Association in support of petitioner.
Rada L. Potts, Senior Litigation Counsel, Securities & Exchange Commission, argued the cause for respondent. With her on the brief were Brian G. Cartwright, General Counsel, Jacob H. Stillman, Solicitor, Michael A. Conley, Special Counsel, and Jeffrey T. Tao, Senior Counsel.
Before: ROGERS, GARLAND and KAVANAUGH, Circuit Judges.
Opinion for the Court filed by Circuit Judge ROGERS.
Dissenting opinion filed by Circuit Judge GARLAND.
ROGERS, Circuit Judge: Brokers 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.”
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. I, 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. Congress 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., 375 U.S. 180, 186 (1963). The IAA arose from a consensus between industry and the SEC “that
Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervised.... 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,
In § 202(a)(11) 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 ....
(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 tо 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 to section 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.
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)(11)-1. 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
II.
Article III standing is a fundamental prerequisite to any exercise of the court‘s jurisdiction, see Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992), and requires, at the “irreducible constitutional minimum,” id., a showing that the litigant has suffered a concrete and particularized injury that is actual or imminent, traceable to the challenged act, and redressable by the court. See Allen v. Wright, 468 U.S. 737, 751 (1984); Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 37-38, 41-42 (1976). A petitioner must support each element of its claim to standing “by affidavit or other evidence.” Defenders of Wildlife, 504 U.S. at 561; see Sierra Club v. EPA, 292 F.3d 895, 899 (D.C. Cir. 2002). The SEC maintains that the FPA fails to show injury-in-fact because FPA‘s assertions of injury from the final rule‘s dual standard are conclusory.
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., 517 U.S. 544, 553 (1996) (quoting Hunt v. Wash. State Apple Adver. Comm‘n, 432 U.S. 333, 343 (1977)). The FPA meets this test.
The court has “repeatedly recognized that parties ‘suffer constitutional injury in fact when agencies ... allow increased competition’ against them.” U.S. Telecom Ass‘n v. FCC, 295 F.3d 1326, 1331 (D.C. Cir. 2002) (citation omitted). The FPA is a non-profit organization with over 27,000 members that exists to advance the financial planning profession. See Decl. of Daniel Moisand, President of the FPA, ¶¶ 1, 2, Petitioner‘s Br. App. 1. The final rule creates a dual standard for the provision of investment advice. First, there are investment advisers who are covered by the IAA; many FPA members are investment advisers, and must comply with the IAA. See FPA Comment Letter of Feb. 7, 2005 n.1. Second, there is a new group of broker-dealers who are exempted from the IAA even though their activities do not conform to the two-pronged requirements of subsection (C). The two groups compete for customers, and under the final rule one of them (including FPA members) must continue to comply with the IAA, while the other one (the broker-dealers in the new, exempt category) need not.
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, 479 U.S. 388, 399 (1987), because one of Congress‘s purposes in enacting the IAA was to protect the ability of “bona fide” investment advisers to compete on a level regulatory playing field with those advisers who did not fully disclose their conflicts of interest, see Capital
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
Applying the “traditional tools of statutory construction,” see Chevron, 467 U.S. at 843 n.9, the court looks to the text, structure, and the overall statutory scheme, as well as the problem Congress sought to solve. See PDK Labs. Inc. v. DEA, 362 F.3d 786, 796 (D.C. Cir. 2004); Sierra Club v. EPA, 294 F.3d 155, 161 (D.C. Cir. 2002). All four elements demonstrate that the SEC has exceeded its authority in promulgating the rule under
Section 202(a)(11) 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 who receives no special compensation therefor.” (Emphasis added). Beyond the listed exemptions, subsection (F) authorizes the SEC to exempt from the IAA “such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.” (Emphasis added).
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-
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, 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, 443 F.3d 880, 885 (D.C. Cir. 2006). As “[t]he plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters,‘” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)), the terms of the IAA establish the precise conditions under which broker-dealers are exempt from the IAA. “To read out of a statutory provision a clause setting forth a specific condition or trigger to the provision‘s applicability is ... an entirely unacceptable method of construing statutes.” Natural Res. Def. Council v. EPA, 822 F.2d 104, 113 (D.C. Cir. 1987).
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
The text of subsection (F) confirms this conclusion by 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 text in subsection (F), signaled that it only authorizеd the SEC to exempt “other persons” when consistent with the intent of the paragraph, and thus only when doing so would not override Congress‘s determination of the appropriate persons to be exempted from the IAA‘s requirements.
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., 90 F.3d 1546, 1550 (11th Cir. 1996) (citing The American Heritage Dictionary 931 (1981)). There is nothing to suggest that Congress did not intend the words “any” or “other” to have their “ordinary or natural meaning.” Smith v. United States, 508 U.S. 223, 228 (1993). So understood, courts have hesitated to allow parties to use language structurally similar to the “other persons” clause in subsection (F) to redefine or otherwise avoid specific requirements in existing statutory exceptions. In Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 864 n.11 (1988),
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 jurisdiсtional 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.
804 F.2d 739, 754 (D.C. Cir. 1986). Our dissenting colleague attempts to distinguish these two cases as limited to situations in which one agency seeks to redraw the jurisdictional boundaries of another agency. See Dissenting Op. at 7-9. That interpretation, however, ignores the underlying principle in each case: where the statutory text is clear, an agency may not use general clauses to redefine the jurisdictional boundaries set by the statute.
Just as the text and structure of paragraph of 202(a)(11) 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
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, 444 U.S. 11, 17 (1979), and second, by requiring full disclosure of all conflicts of interest. As the Supreme Court noted, Congress‘s “broad proscription against ‘any ... practice ... which operates ... as a fraud or deceit upon any client or prospective client’ remained in the bill from beginning to end.” Capital Gains, 375 U.S. at 191.
[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. This statutory scheme is inconsistent with a construction of the SEC‘s authority under subsection (F) that would enable persons Congress determined should be subject to the IAA to escape its restrictions.
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),
While the SEC‘s failure to respect the unambiguous textual
This cоntemporary 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).
The SEC unconvincingly attempts to defend its expansive interpretation of subsection (F) by likening it to section 6(c) of the ICA,
In light of the context in which Congress drafted subsections (C) and (F), we conclude that, as indicated by the structure of
The SEC‘s invocation of its general rulemaking authority under
Accordingly, we grant the petition and vacate the final rule. See North Carolina v. Fed. Energy Regulatory Comm‘n, 730 F.2d 790, 795-96 (D.C. Cir. 1984); cf. K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 294 (1988). The final rule does not contain a severability clause; nor does the SEC suggest it is severable. Paragraph (b) is expressly tied to paragraph (a). Although, absent (a) or (b), paragraph (c) merely states the current law, the SEC identifies paragraph (c) as one of “three separate, yet related, parts” of the final rule. Respondent‘s Br. at 11, 13. Paragraph (d) defines a term used in paragraphs (a) and (b). The SEC release to the final rule states that paragraph (d) institutes a policy change based on its interpretation of subsection (F), see 70 Fed. Reg. 20,439-440, but otherwise identifies paragraph (d) in the release as part and parcel of the final rule, see, e.g., id. at 20,424.
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.”
I
The Investment Advisers Act (IAA) imposes a series of requirements on “investment advisers.” See
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.
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.
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 beyond the broker-dealers exempted by Congress in subsection (C).” Court Op. at 11. 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 rejеct it. See Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-44 (1984). If the terms are ambiguous, however, we must proceed to Chevron‘s second step and defer to the SEC‘s interpretation if it is reasonable. See id.; Nat‘l Cable & Telecomms. Ass‘n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005).
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 21. The court reaches this conclusion based on its examination of the subsection (F) terms “such other persons” and “within the intent of this paragraph.” I fail to appreciate the clarity of either term. Indeed, apart from the inherent ambiguity of the words themselves, clarity is particularly elusive because subsection (F)‘s final clause -- “as the Commission may designate by rules” --
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.” 467 U.S. at 842-43. The court is obviously correct in stating that “the plain text of subsection (C) exempts only broker-dealers who do not receive special compensation for investment advice” -- that is, broker-dealers who do not receive compensation other than commissions. Court Op. at 13 (emphasis added). But that is not the precise question before us. That question is whether Congress intended subsection (F) to permit the SEC to exempt broker-dealers beyond those already exempt under subsection (C).
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 respect 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
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 their advice is merely incidental to brokerage transactions for which they receive only brokerage commissions).” Court Op. at 14 (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 according to prescribed statutory standards.” S. REP. NO. 76-1775, at 22 (emphasis added); see also H.R. REP. NO. 76-2639, at 28. There is nothing in the committee report that explains Congress’ intentions with respect to those “further exceptions.”
B
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 14 (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 one 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.
In Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847 (1988), the Supreme Court interpreted
This circuit‘s interpretation of the Securities Exchange Act in American Bankers Association v. SEC, 804 F.2d 739 (D.C. Cir. 1986), is likewise inapposite. There, the court declined to accord Chevron deference to an SEC interpretation because it concerned the allocation of jurisdiction between the SEC and other agencies. The Exchange Act expressly excludes “banks,” which are regulated by the federal banking agencies, from the definitions of “brokers” and “dealers,” which are regulated by the SEC. See id. at 743 (citing
In short, these cases do not illustrate an “underlying principle” that resolves the interpretive question in this case.
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 16. 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 17 (quoting H.R. REP. NO. 76-2639, at 28). There is no doubt that this accurately identifies the intent of Congress at a high level of generality. But it, too, fails to address the precise question at issue here -- the meaning of subsection (F). Nor should it come as any surprise that -- as discussed in Part III below -- the SEC neither disputes that the IAA‘s essential purpose was to protect the public from fraud and misrepresentation, nor believes that its fee-based brokerage rule would be a boon to unscrupulous tipsters and touts.
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 18. The only SEC opinions quoted for that proposition are two releases that refer only to subsection (C).
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, 545 U.S. at 981 (quoting Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 742 (1996)). It is well-settled that “[a]n agency‘s interpretation of a statute is entitled to no less deference simply because it has changed over time.” Nat‘l Home Equity Mortgage Ass‘n v. Office of Thrift Supervision, 373 F.3d 1355, 1360 (D.C. Cir. 2004). Indeed, Chevron itself deferred to a changed agency interpretation. See Chevron, 467 U.S. at 863-64. As the Court said in Brand X, “[u]nexplained inconsistency is, at most, a reason for holding an interpretation to be an arbitrary and capricious change from agency practice under the Administrative Procedure Act” -- an issue my colleagues do not address. 545 U.S. at 981. In any event, the SEC‘s construction is neither inconsistent nor, as discussed in Part III, unexplained.
Last, my colleagues state that “the broader language found in
III
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 interpretation.” Brand X, 545 U.S. at 980 (citing Chevron, 467 U.S. at 843-44 & n.11).
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. In so doing, the SEC does not “rewrite the statute.” Court Op. at 19. Rather, it gives effect to one of two plausible interpretations of the statutory language.
The reasonableness of the SEC‘s interpretation of “such other persons” doеs 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
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 18 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 . . . .
For several decades after the IAA was passed, subsection (C)‘s “no special compensation” 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 change by offering their customers fee-based brokerage accounts as an alternative to commissions. According to the SEC, these accounts provide customers with the same traditional package of brokerage services, but instead of paying a commission on each trade, a customer pays either a fixed fee or a fee based on the amount of assets in the account. See id. at 20,425.
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 “repriced 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
There is no evidence that the “special compensation” requirement was included in section 202(a)(11)(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)(11)(C) 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
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 sеrvices.” Certain Broker-Dealers, 70 Fed. Reg. at 20,425. Under fee-based brokerage programs, by contrast, “compensation no longer depends on the number of transactions . . ., thus reducing incentives . . . to churn accounts, recommend unsuitable securities, or engage in high-pressure sales tactics.” Notice of Proposed Rulemaking, 64 Fed. Reg. 61,226, 61,228 (Nov. 10, 1999). The SEC feared that, if fee-based brokers remained subject to the IAA‘s administrative burdens while commission-based brokers did not, a salutary evolution toward the former would be discouraged. See Certain Broker-Dealers, 70 Fed. Reg. at 20,426.
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
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 challengе 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.
IV
The SEC‘s interpretation of the Investment Advisers Act is “a reasonable interpretation of an ambiguous statute.” Christensen v. Harris County, 529 U.S. 576, 586-87 (2000). This is not to suggest that my colleagues’ interpretation is unreasonable, but only to acknowledge that when there are two reasonable interpretations of a statutory provision, a court must bow to the “interpretation made by the . . . agency.” Chevron, 467 U.S. at 844. Doing so, I respectfully dissent from the opinion of the court.
Notes
Section (a)(1)(ii), 70 Fed. Reg. 20,454.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 to 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.
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.Clause (C) of section 202 (a) (11) amounts to a recognition that brokers and dealers commonly give a certain amount of advice to their customers in thе 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.
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.
Congress added a seventh exception in 2006. My citations, like the court‘s, are to the pre-amendment statute.