Securities and Exchange Commission v. Chenery Corporation (Chenery II)

Supreme Court of the United States
332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed.1995 (1947)

ELI5:

Rule of Law:

An administrative agency may formulate new standards of conduct and policy through either general rulemaking or ad hoc adjudicative proceedings. The choice between these methods lies within the agency's informed discretion and an order from an adjudication is not invalid simply because it has a retroactive effect.

Facts:

Federal Water Service Corporation (Federal) was a holding company registered under the Public Utility Holding Company Act of 1935 and was undergoing a reorganization.
While successive reorganization plans were pending before the Securities and Exchange Commission (SEC), officers, directors, and controlling stockholders of Federal purchased a substantial amount of Federal's preferred stock on the open market.
The management group's admitted purpose in purchasing the stock was to protect its interests and gain voting power in the newly reorganized company.
The purchases were made without any fraud, misrepresentation, or failure to disclose.
Under the proposed reorganization plan, the preferred stock purchased by the management would be converted into common stock of the new corporation, giving them a significant ownership and control stake.

Procedural Posture:

The Securities and Exchange Commission (SEC), an administrative agency, reviewed a reorganization plan for Federal Water Service Corporation.
The SEC issued an order approving the plan only on the condition that stock purchased by management during the reorganization be surrendered at cost plus dividends, justifying this on its interpretation of existing judicial precedents.
The management (respondents) sought review in the U.S. Court of Appeals for the D.C. Circuit, which reversed the SEC's order.
The SEC appealed to the U.S. Supreme Court, which in SEC v. Chenery Corp. (Chenery I), affirmed the Court of Appeals, holding that the SEC's order could not be upheld on the judicial grounds it had provided, and remanded the case to the SEC.
On remand, the SEC reached the same result but based its new order on its interpretation of the standards within the Public Utility Holding Company Act.
The Court of Appeals again reversed the SEC, holding that the Supreme Court's prior decision barred the Commission from taking this action.
The SEC again petitioned the U.S. Supreme Court for review.

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Issue:

Does an administrative agency have the authority to announce and apply a new standard of conduct through an individual adjudicative order, rather than through its prospective rulemaking power, even if that standard retroactively affects the parties in the proceeding?

Opinions:

Majority - Mr. Justice Murphy

Yes. An administrative agency must be equipped to act either by general rule or by individual order, and the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the agency. The SEC's first order was rejected because it was based on inapplicable judicial precedents, not because the agency lacked the power to address the issue. On remand, the SEC properly based its decision on its expertise and its statutory mandate under the Holding Company Act to ensure reorganization plans are 'fair and equitable.' The fact that applying this new standard has a retroactive effect is not fatal; the potential harm to public investors from management's conflicting interests outweighs the ill effect of retroactivity on the managers who purchased the stock. The Commission's judgment, based on its experience and an understanding of statutory policy, is a product of the administrative process that courts should not disturb unless it lacks a rational and statutory foundation.

Dissenting - Mr. Justice Jackson

No. The Court's decision approves of administrative lawlessness and allows an agency to create and apply new rules retroactively, which undermines the principle that people should be governed by laws they can know in advance. The SEC's order is not a general rule but a 'personal deprivation' that takes property from specific individuals. The majority's deference to 'administrative experience' is contradictory, as the Court also admits the Commission had never been confronted with this specific problem before. This ruling reduces judicial review to a 'mere feint' and allows an agency to act without a basis in pre-existing law, essentially making the agency a law unto itself. The administrative process is meant to apply the law, not to dispense with it.

Analysis:

This case, known as Chenery II, is a cornerstone of administrative law, establishing the broad discretion of agencies to choose between rulemaking and adjudication to formulate policy. It affirms that agencies can 'make law' on a case-by-case basis, giving them the flexibility to address novel or complex problems that are not suited for a general rule. The decision significantly empowers administrative agencies but also raises enduring questions about fairness, predictability, and the retroactivity of agency-made law, as articulated in the dissent. The core principle remains that a court reviews an agency's action based on the rationale the agency provides, and if that rationale is grounded in the agency's statutory authority and expertise, it will be upheld.

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