SEC v. Chenery Corp.
Encyclopedia
SEC v. Chenery Corp., 332 U.S. 194 (1947), is a case, often cited in administrative law
The SEC was charged with deciding whether re-organization of companies that were in violation of the Public Utilities Company Holding Act was approved. The Chenerys were officers, directors, and shareholders of Federal Water Service Corporation.
Originally, in the case called Chenery I, the company submitted a plan to the SEC, which the SEC did not approve. The reason that the SEC gave was that the plan violated certain standards of fraud. The first time this was heard before the Supreme Court in SEC v. Chenery Corporation 318 U.S. 80 (1943), the Court held that the acts committed by the company did not amount to common law fraud and therefore the Securities and Exchange Commission's stated rationale for the charges could not be sustained.
On remand the SEC charged the company's officials on different grounds, under its own enabling act. The court used the case as an opportunity to discuss the merits of policy-making through adjudication and retroactive rule-making. The rejection again went before the Supreme Court as Chenery II.
This time the Supreme Court upheld the rejection. The explanation given was that the rejection in Chenery I was on the basis of standards that had actually not existed. But the SEC was authorized to create their own standards in such cases, so long as they based the rejection on those standards. A court reviewing the SEC (or general agency) action would not approve it simply on the basis of the agency's authority, it had to be approved based on the rationale that the agency provided.
Since the SEC was authorized to create their own standards, they were free to reject re-organization plans based on those standards - so long as that was the stated rationale of the SEC. Therefore, when the SEC, in Chenery II, explained that as the basis for their decision, it was upheld.
The Court reversed the court of appeals on these grounds.
dissented because he felt that the interpretation of its statute given by SEC was not within its power.
Justice Jackson
dissented because he felt that the basis for Chenery I was that the SEC must do rule-making before it applies this principal of law. He felt that the change in opinion was due to the change in a composition of the Court. He also argued that deference to the agency's expertise made no sense where the agency had never seen the particular problem before.
It is worth noting the extent of the turnover in the court between Chenery I and Chenery II. Although the decision seems to distinguish the two cases rather than overturn Chenery I, and this has become part of the doctrine regarding agency action, Justices Douglas and Jackson, who were the sole remaining judges from the majority in Chenery I, both dissented in Chenery II.
Administrative law
Administrative law is the body of law that governs the activities of administrative agencies of government. Government agency action can include rulemaking, adjudication, or the enforcement of a specific regulatory agenda. Administrative law is considered a branch of public law...
Background
A federal water company was accused of illegal stock manipulation.The SEC was charged with deciding whether re-organization of companies that were in violation of the Public Utilities Company Holding Act was approved. The Chenerys were officers, directors, and shareholders of Federal Water Service Corporation.
Originally, in the case called Chenery I, the company submitted a plan to the SEC, which the SEC did not approve. The reason that the SEC gave was that the plan violated certain standards of fraud. The first time this was heard before the Supreme Court in SEC v. Chenery Corporation 318 U.S. 80 (1943), the Court held that the acts committed by the company did not amount to common law fraud and therefore the Securities and Exchange Commission's stated rationale for the charges could not be sustained.
On remand the SEC charged the company's officials on different grounds, under its own enabling act. The court used the case as an opportunity to discuss the merits of policy-making through adjudication and retroactive rule-making. The rejection again went before the Supreme Court as Chenery II.
This time the Supreme Court upheld the rejection. The explanation given was that the rejection in Chenery I was on the basis of standards that had actually not existed. But the SEC was authorized to create their own standards in such cases, so long as they based the rejection on those standards. A court reviewing the SEC (or general agency) action would not approve it simply on the basis of the agency's authority, it had to be approved based on the rationale that the agency provided.
Since the SEC was authorized to create their own standards, they were free to reject re-organization plans based on those standards - so long as that was the stated rationale of the SEC. Therefore, when the SEC, in Chenery II, explained that as the basis for their decision, it was upheld.
Opinion of the Court
The US Supreme Court stated that policy-making through administrative adjudication is not necessarily wrong and may be desirable. Adjudication is more flexible than rule-making and allows policy to be made on an ad hoc basis. This flexibility is important where there may be unforeseeable problems, inexperience with the problem, or the problem is so specialized and varied that a general rule would be impossible. Therefore, the choice between rule-making and adjudication lies in the informed discretion of the agency. However, this particular adjudication might be the application of impermissible retroactivity in interpreting the statute because the SEC seems to have decided after the fact, based on their actions in Chenery I, that the officers' actions were against the law. This type of retroactivity in this case was permissible.The Court reversed the court of appeals on these grounds.
Dissents
Justice DouglasWilliam O. Douglas
William Orville Douglas was an Associate Justice of the United States Supreme Court. With a term lasting 36 years and 209 days, he is the longest-serving justice in the history of the Supreme Court...
dissented because he felt that the interpretation of its statute given by SEC was not within its power.
Justice Jackson
Robert H. Jackson
Robert Houghwout Jackson was United States Attorney General and an Associate Justice of the United States Supreme Court . He was also the chief United States prosecutor at the Nuremberg Trials...
dissented because he felt that the basis for Chenery I was that the SEC must do rule-making before it applies this principal of law. He felt that the change in opinion was due to the change in a composition of the Court. He also argued that deference to the agency's expertise made no sense where the agency had never seen the particular problem before.
It is worth noting the extent of the turnover in the court between Chenery I and Chenery II. Although the decision seems to distinguish the two cases rather than overturn Chenery I, and this has become part of the doctrine regarding agency action, Justices Douglas and Jackson, who were the sole remaining judges from the majority in Chenery I, both dissented in Chenery II.