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CALIFORNIA CORPORATE & SECURITIES LAW

Is A “Rule” An “Order” And Why Would Anyone Care?

Pay-to-Play Rule Challenged

Doug Cornelius recently wrote about the dismissal of a lawsuit challenging the Securities and Exchange Commission’s anti “pay-to-play” rule under the Investment Advisers Act of 1940.  New York Republican State Comm. v. SEC, 2014 U.S. Dist. LEXIS 138964 (D.D.C. Sept. 30, 2014).  In a nutshell, the rule (206(4)-5) prohibits federally registered and certain other investment advisers from providing investment advisory services to a government entity within two years after making a contribution to certain officials of the government entity.  U.S. District Court Judge Beryl A. Howell dismissed the suit for lack of subject matter jurisdiction.  I was intrigued by Judge Howell’s conclusion that a “rule” is the equivalent of an “order”.  Here’s the reason why the distinction (or lack thereof) matters.

The Order/Rule Dichotomy

Someone challenging a federal agency’s action would typically begin in the trial court and then move up the food chain to the Court of Appeals and ultimately the Supreme Court.  Section 213 of the Investment Advisers Act, however, provides “[a]ny person or party aggrieved by an order issued by the Commission under this subchapter may obtain a review of such order . . . in the United States Court of Appeals for the District of Columbia . . .”.  The statute further provides “such court shall have jurisdiction, which . . . shall be exclusive, to affirm, modify, or set aside such order, in whole or in part.”  Note that Section 213 refers to “an order” and the plaintiffs are unquestionably challenging a “rule”.  While none of the parties or the court found a case interpreting the meaning “order” under the Investment Advisers Act, the Administrative Procedure Act defines both “rule” and “order” and makes it clear that an “order” is not a “rule”.  In fact, when teaching administrative law, I spend a considerable amount of time on the difference between a “rule” and an “order”.  As Justice Antonin Scalia has observed, the most significant portions of the APA are based on this dichotomy.  Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 216 (U.S. 1988) (J. Scalia concurring).

The APA defines a “rule” to mean “the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing”.   5 U.S.C. § 551(4).  The APA defines an “order” to mean  “the whole or a part of a final disposition, whether affirmative, negative, injunctive, or declaratory in form, of an agency in a matter other than rule making but including licensing”.  5 U.S.C. § 551(6).  Thus, it is clear that under the APA an “order” cannot be a “rule”.

Problems Abound, But Stare Decisis Decides

The SEC, however, successfully argued that the District Court was bound by the Court of Appeal’s holding in Investment Company Institute v. Board of Governors of the Federal Reserve System, 551 F.2d 1270, 1278 (D.C. Cir. 1977) which held that the term “order” encompasses “rules” for purposes of Section 9 of the Bank Holding Company Act.  It is clear that the Investment Company Institute holding is highly problematical and Judge Howell’s ruling discusses this at length.  However, these problems did not counterbalance the weight of Investment Company Institute as precedent.

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