August 6, 2017

August 04, 2017

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Court Rejects Securities and Exchange Commission (SEC)’s Interpretation That All Exchange Act Reports Are Public

SEC Misreads The Dodd-Frank Act

Commenting on the SEC’s short-lived resource extraction rule, Professor Stephen Bainbridge recently posted: Can’t anybody at the SEC do basic cost benefit analysis? I hesitate to enter into a wortwechsel with Professor Bainbridge, but I disagree.  The SEC’s error was much worse than simply flubbing a cost-benefit analysis – it fundamentally misread the law.

The case in question is American Petroleum Institute v. Securities & Exchange Comm’n,2013 U.S. Dist. LEXIS 92280 (July 2, 2013).  The procedural posture was the plaintiffs’ motion for summary judgment.  Judge John D. Bates wrote that under the Administrative Procedure Act, a court must “hold unlawful and set aside agency action, findings, and conclusions” that are:

  • “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A),

  • in excess of statutory authority, 5 U.S.C. § 706(2)(C), or

  • “without observance of procedure required by law,” 5 U.S.C. § 706(2)(D).

Applying Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), Judge Bates gave no deference to the SEC’s interpretation of the Dodd-Frank Act because the SEC had concluded that its interpretation of the statute was mandated by Congress.

Here’s where Judge Bates’ analysis became interesting.  Since periodic and other reports filed with the SEC are now instantly available on EDGAR, I hadn’t given much thought to whether all Exchange Act reports filed with the SEC are “public”.  Here is what Judge Bates had to say:

Viewing the Exchange Act as a whole further crystallizes that “report,” as used throughout the Act, contains no unstated (yet clear) public filing requirement. The Exchange Act expressly addresses the content and form of “[r]eports by [an] issuer of security” without saying anything about public access. See 15 U.S.C. § 78m(a), (b). Furthermore, other provisions of the Act use “report” to refer to documents filed with the Commission alone.

SEC Among The Goats As Ovid Among The Goths

Another interesting aspect of Judge Bates’ opinion was his conclusion that the SEC’s failure to grant requested exemptions was “arbitrary and capricious”.  Here, the problem wasn’t a flawed cost-benefit analysis but the SEC’s willingness to sacrifice practicality for the purposes of the statute.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...