“You have won the O’Hagan case. I hold you exclusively responsible for this great victory by the Commission. You have shown the same great legal skills that you used when you were at our firm and were the cause of our great victory over the Commission in the Dirks case. I hope never to find myself in a position where I have to face your formidable talents in opposition again.”
June 30, 1997 Letter from Milton V. Freeman to Eric Summergrad
A new and unexpected challenge to the SEC’s administrative decision making arose in the early 1990s. The Circuit Court for the District of Columbia, one of the most important courts for handling appeals from administrative agencies, began taking a more activist role against SEC regulations. In numerous decisions, including Business Roundtable 62, Teicher v SEC 63, Chamber of Commerce v. SEC 64, Goldstein v. SEC 65, Financial Planning Association v. SEC 66, American Equity Investment Life Insurance Co. v SEC 67, and coming full circle to the most recent Business Roundtable case 68, the SEC experienced a formidable losing streak.
The courts had traditionally recognized the need for agency flexibility in choosing methods for setting policy, especially where Congress is unable to predict future regulatory needs. The D.C. Circuit Court’s decisions, rebuking the agency over its handling of procedural rule-making, strikes at the heart of one of the SEC’s most significant functions. In light of recent economic upheaval and of Congressional response, the SEC faces increased regulatory burdens in administering the new legislation. The decisions from the D C Circuit Court require yet another adjustment by the SEC in making rules consistent with Congressional intent, managing its litigation strategy, and responding to judicial setbacks.69
From 1988 to 2004, the Supreme Court heard only seventeen securities cases, a virtual dearth of decisions compared to the Powell period where it heard almost three cases per term.70 The SEC General Counsel’s Office had to make strategic decisions that influenced appellate courts, even where the agency was not a party to the action. The SEC used amicus briefs in cases where the SEC was not a party to the litigation but where they, in collaboration with the Solicitor General’s Office, received permission from the court to file briefs stating the agency’s position. Especially in an era where fewer securities cases were coming to the Court, this practice allowed the SEC to provide advice.
Recent scholarship demonstrates the value of the involvement of the SEC General Counsel’s Office in asserting the SEC’s position, even in cases where the SEC is not a party. The SEC policy is to work with the Solicitor General’s Office to obtain consent to appeal cases or file briefs in cases before the Supreme Court. Since Justice Powell’s departure, in cases where the Solicitor General argued the SEC’s position where the SEC was not a party, the SEC’s view prevailed in over three-fifths of the cases. Even where the SEC filed an amicus brief but did not argue the case, the SEC won nearly half of the time. On the other hand, where the SEC took no position in the case, the court took an expansive view of securities law in only one of eleven cases.71
The practice of the SEC General Counsel’s Office played an important role in articulating the securities law expertise of the agency. Without a strong securities counterforce on the Supreme Court, such as Justice Powell, the SEC was far more likely to be successful. In choosing carefully which cases it decides to pursue, a lesson the agency learned early in Electric Bond and Share, the SEC continues to be “a pivotal player in the making of securities law” in the courts.72
(62) 905 F. 2d 406 (D.C. Circuit, 1990) which held that the SEC exceeded its statutory authority under the Exchange Act in adopting the one share, one vote rule barring exchanges and NASDAQ from listing common shares with unequal voting rights.
(63) 177 F.3rd 1016 (D.C. Circuit, 1999), which struck down an SEC order barring an individual convicted of securities fraud from becoming an investment advisor because the Court held the agency had exceeded its statutory authority.
(64) Two cases arose out of the same facts. The first, Chamber of Commerce I, 412 F. 3rd 133 (2005), struck down the SEC’s adoption of corporate governance rules for mutual funds as a violation of the Administrative Procedure Act because the agency failed to consider either the cost of the rules or alternatives to them, and the second, Chamber of Commerce v. SEC II, 443 F. 3rd 890 (1990), which ruled that the SEC again violated the APA by readopting the same rules two weeks after the Court’s prior opinion.
(65) 451 F. 3rd 873 (D.C. Circuit 2006), which held that the SEC’s attempt to regulate hedge fund investors was inconsistent with the Investment Company Act and with the SEC’s own prior interpretations of the Act.
(66) 482 F. 3rd 481 (D.C. Circuit 2007), which held that the SEC rule exempting certain brokers from the Investment Advisors Act was inconsistent with the Act.
(67) 613 F. 3rd 166 (D.C. Circuit 2010), which held that the SEC’s adoption of a rule excluding fixed index annuities from the Securities Act exemption annuity contracts violated the Securities Act because the SEC failed to adequately consider the effects of the rule on efficiency, competition and capital formation.
(68) Business Roundtable v. SEC, decided July 2011, where the Court struck down the SEC’s adoption of proxy access rules as a violation of the APA because the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments, contradicted itself; and failed to respond to substantial problems raised by commenters.”
(70) Ibid.
(71) Ibid.
(72) Ibid.
Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.
Ed Greene served at the SEC from 1978 to 1982, first as director of the Division of Corporation Finance under Chairman Harold Williams, then as General Counsel under Chairman John Shad. He was involved in several ground-breaking projects. As director of Corporation Finance, he led efforts to integrate and improve disclosures around Initial Public Offerings (IPOs), and spearheaded efforts to create faster access to markets for shelf registrations. As general counsel, he negotiated the agency’s first Memorandum of Understanding (MOU), which became a template for future cooperative agreements between governments. Mr. Greene was a founding trustee of the SEC Historical Society.
From 1968 to 1978, Harvey Pitt served on the staff of the SEC, eventually becoming the agency's youngest-ever General Counsel in 1975 at age 30. From 2001 - 2003 he was the 26th SEC Chairman. For nearly 25 years prior to serving as SEC Chairman, Mr. Pitt was a partner in the law firm, Fried, Frank LLP. After he left the SEC, he founded the strategic consulting firm, Kalorama Partners, LLC. He was a founding trustee and first President of the SEC Historical Society.
