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Chamber of Commerce of United States v. Securities & Exchange Commission

Court of Appeals for the D.C. Circuit
443 F.3d 890, 370 U.S. App. D.C. 249 (2006)
ELI5:

Rule of Law:

An administrative agency violates the notice-and-comment requirements of the Administrative Procedure Act (APA) when it relies on extra-record data that is critical to its rulemaking decision without affording interested parties an opportunity for public comment, particularly when a party can demonstrate it was prejudiced by this failure.


Facts:

  • The Securities and Exchange Commission (SEC) identified widespread conflicts of interest and misconduct in the mutual fund industry, which it concluded had harmed investors.
  • To address these issues, the SEC promulgated a rule on July 27, 2004, under the Investment Company Act of 1940.
  • The rule required that for a mutual fund to rely on certain common exemptions, its board must have at least 75% independent directors.
  • The rule also mandated that the board chairperson must be an independent director.
  • The Chamber of Commerce of the United States, an organization that invests in mutual funds, opposed these two conditions.
  • The Chamber wished to retain the option to invest in funds that did not meet the 75% independence or independent chair requirements, believing such funds could offer better returns.

Procedural Posture:

  • The Securities and Exchange Commission (SEC) promulgated a final rule amending the Exemptive Rules under the Investment Company Act of 1940.
  • The Chamber of Commerce petitioned the U.S. Court of Appeals for the D.C. Circuit for review of the rule.
  • In Chamber of Commerce v. SEC (Chamber I), the D.C. Circuit upheld the SEC's authority but remanded the rule, finding the agency had failed to adequately determine the costs of two conditions and had not properly considered a proposed alternative.
  • On remand, the SEC issued a release reaffirming the two conditions without modifying them and did not reopen the rulemaking record for public comment.
  • The Chamber of Commerce filed a new petition for review with the U.S. Court of Appeals for the D.C. Circuit, challenging the SEC's decision on remand.

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Issue:

Does the Securities and Exchange Commission (SEC) violate the notice-and-comment requirements of the Administrative Procedure Act (APA) when, on remand, it relies on data and studies not in the original rulemaking record to justify its cost-benefit analysis without reopening the public comment period?


Opinions:

Majority - Rogers, Circuit Judge.

Yes. The Securities and Exchange Commission (SEC) violated the notice-and-comment requirements of the Administrative Procedure Act (APA) by relying on critical extra-record materials without reopening the comment period. An agency must ensure that the most critical factual material used to support its position is made public and exposed to refutation. Here, the SEC was remanded to determine the costs of its new governance rules. In its response, the Commission relied heavily on privately produced industry bulletins and surveys that were not in the original rulemaking record to create its cost estimates. This extra-record data was not merely 'supplementary' but was essential to the SEC's conclusions, forming the primary basis for its cost calculations. The court rejected the SEC's argument that the information's 'public availability' on the internet excused the lack of a comment period, as this did not guarantee the data's reliability or put parties on notice of the SEC's intent to rely on it. The Chamber of Commerce successfully demonstrated prejudice by showing it had 'something useful to say' about the data, including specific, credible objections to its soundness and the availability of more recent, actual implementation data. The SEC's desire to act quickly before a change in its membership did not constitute 'good cause' to bypass the APA's procedural requirements.



Analysis:

This decision reinforces the procedural discipline required by the Administrative Procedure Act, even when an agency acts on remand under time pressure. It clarifies that an agency cannot cure a deficient record by introducing new, critical data after the comment period has closed without giving the public a chance to respond. The court's interpretation sets a high bar for using 'supplementary' information, effectively preventing agencies from using it as a primary justification for a rule's key components. This case also affirms a relatively low threshold for proving 'prejudice,' strengthening the public's right to participate in rulemaking by ensuring agencies cannot rely on materials that have not been subjected to adversarial scrutiny.

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