Adjudicate or Rule Make? That May Not Be A Question For The Courts
Friday, October 24, 2014

Professor Stephen Bainbridge yesterday passed along Henry G. Manne’s criticism of the SEC’s use of adjudication in lieu of rulemaking.  For those who haven’t taken my Administrative Law class, there are actually two types of adjudication and three different rulemaking procedures under the Administrative Procedure Act.

Under the APA, adjudication is defined as the process by which an agency issues an “order”.  5 U.S.C. § 551(7).  See Is a “Rule” an “Order” and Why Would Anyone Care?  Adjudications that are “required by statute to be determined on the record after opportunity for agency hearing” are considered “formal adjudications” under the APA.  All other adjudications are considered to be informal.  The Securities Exchange Act of 1934 includes numerous statutes prescribing formal adjudications.  For example Section 21B(2) provides:

In any proceeding instituted under section 21C against any person, the Commission may impose a civil penalty, if the Commission finds, on the record after notice and opportunity for hearing, that such person—

(A) is violating or has violated any provision of this title, or any rule or regulation issued under this title; or

(B) is or was a cause of the violation of any provision of this title, or any rule or regulation issued under this title.

Most rulemaking today is governed by the APA’s notice and comment procedures.  Formal rulemaking is similar to an adjudication and is rarely used or required.  The third rulemaking procedure is sometimes called “publication rulemaking” because the APA requires only that the rule be published in the Federal Register. 

As Dean Manne points out, the big “advantage” of proceeding by adjudication is that the agency avoids the notice and comment requirements of the APA which are both burdensome and time consuming.  Any challenge to the SEC’s use of adjudication rather than rulemaking is likely to run into the U.S. Supreme Court’s decision in SEC v. Chenery Corp., 332 U.S. 194 (1947) (“And the choice made between proceeding by general rule or by individual, ad hoclitigation is one that lies primarily in the informed discretion of the administrative agency. SeeColumbia Broadcasting System v. United States, 316 U.S. 407, 421.”).  However, it may be possible to argue an abuse of discretion when “the new standard, adopted by adjudication, departs radically from the agency’s previous interpretation of the law, where the public has relied substantially and in good faith on the previous interpretation, where fines or damages are involved, and where the new standard is very broad and general in scope and prospective in application.”  Pfaff v. United States HUD, 88 F.3d 739, 748 (9th Cir. 1996) citing NLRB v. Bell Aerospace Co. Div. of Textron, Inc., 416 U.S. 267 (U.S. 1974).

The Chenery case referred to above is the second case involving C.T. Chenery.  I discuss the first Chenery case in this post.

 

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