Resurrecting Court Deference to the Securities and Exchange Commission: Definition of “Security”
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Catholic University Law Review Volume 62 Issue 2 Winter 2013 Article 1 2013 Resurrecting Court Deference to the Securities and Exchange Commission: Definition of “Security” Steven J. Cleveland Follow this and additional works at: https://scholarship.law.edu/lawreview Part of the Administrative Law Commons, and the Securities Law Commons Recommended Citation Steven J. Cleveland, Resurrecting Court Deference to the Securities and Exchange Commission: Definition of “Security”, 62 Cath. U. L. Rev. 273 (2013). Available at: https://scholarship.law.edu/lawreview/vol62/iss2/1 This Article is brought to you for free and open access by CUA Law Scholarship Repository. It has been accepted for inclusion in Catholic University Law Review by an authorized editor of CUA Law Scholarship Repository. For more information, please contact [email protected]. Resurrecting Court Deference to the Securities and Exchange Commission: Definition of “Security” Cover Page Footnote Professor of Law, University of Oklahoma College of Law; J.D., Georgetown University; B.A, University of California, Los Angeles. This Article benefitted from the thoughtful comments of Donald T. Bogan, Brian M. McCall, Emily H. Meazell, Joseph T. Thai, and the participants in a roundtable discussion at the University of Oklahoma. The author is responsible for any errors. This article is available in Catholic University Law Review: https://scholarship.law.edu/lawreview/vol62/iss2/1 RESURRECTING COURT DEFERENCE TO THE SECURITIES AND EXCHANGE COMMISSION: DEFINITION OF “SECURITY” Steven J. Cleveland+ I. IMPEDIMENTS TO CHEVRON’S APPLICABILITY .......................................... 277 A. Chevron’s Applicability to an Agency’s Determination of Its Jurisdiction ...................................................... 277 B. Sufficiency of the Commission’s Political Accountability ................................................................................... 285 1. Accountability to the President ...................................................... 285 2. Accountability to Congress ............................................................. 293 C. Public Versus Private Enforcement ................................................. 297 II. STATUTORY INDICATIONS OF INTERPRETIVE DELEGATION ........................................................................................ 300 A. The Commission’s Authority to Define Terms ..................................................................................... 301 B. The Commission’s Exemptive Powers .............................................. 305 C. Congress’s Context Clause .............................................................. 308 1. Context from Surrounding Sections ........................................... 308 2. Context from Factual Circumstances ........................................ 309 D. Congress’s Overlapping and Circular Definition ........................................................................... 312 III. NON-DEFERENCE AND ITS IMPACT ......................................................... 313 A. United Housing Foundation, Inc. v. Forman .................................... 314 1. Rejecting the Commission’s Position Regarding “Profits” .................................................. 315 2. Rejecting the Commission’s Position Regarding “From the Efforts of Others” ............................................................... 319 B. Reves v. Ernst & Young ................................................................... 321 IV. CONCLUSION .......................................................................................... 324 Congress inevitably enacts ambiguous statutes1 and resolving this statutory uncertainty commonly falls to the courts or the relevant administrative agency. + Professor of Law, University of Oklahoma College of Law; J.D., Georgetown University; B.A, University of California, Los Angeles. This Article benefitted from the thoughtful comments of Donald T. Bogan, Brian M. McCall, Emily H. Meazell, Joseph T. Thai, and the participants in a roundtable discussion at the University of Oklahoma. The author is responsible for any errors. 1. See, e.g., Muscarello v. United States, 524 U.S. 125, 127–29 (1998) (analyzing the various interpretations of the phrase “carries a firearm”); id. at 144 n.6 (Ginsburg, J., dissenting) 273 274 Catholic University Law Review [Vol. 62:273 But, between a court and an agency, which entity should be chiefly responsible for statutory interpretation? In the landmark Chevron decision, the Supreme Court crafted a two-step inquiry for a court’s review of an agency’s statutory interpretation.2 The first step considers whether congressional intent is clear and, if it is, the agency and the court must interpret the statute consistent with the intent of Congress.3 If the statute is ambiguous, however, the second step requires the court to defer to the agency’s reasonable interpretation of the statute.4 The court must defer to the agency’s reasonable interpretation of the statute even if the court would have interpreted the ambiguity differently.5 Although Chevron was groundbreaking in numerous fields, it merely reflected the existent standard operating procedure in the field of securities regulation. Before Chevron, courts routinely deferred to the Securities and Exchange Commission (“SEC” or “Commission”)—the agency Congress charged with administering federal securities laws.6 In particular, before Chevron, courts accorded great weight to the SEC’s interpretation of whether a financial (“And in the television series M*A*S*H, Hawkeye Pierce (played by Alan Alda) presciently proclaims: ‘I will not carry a gun . I’ll carry your books, I’ll carry a torch, I’ll carry a tune, I’ll carry on, carry over, carry forward, Cary Grant, cash and carry, carry me back to Old Virginia, I’ll even ‘hari-kari’ if you show me how, but I will not carry a gun!’” (citation omitted)). Additionally, Congress may intentionally enact ambiguous statutes. See Joseph A. Grundfest & A.C. Pritchard, Statutes with Multiple Personality Disorders: The Value of Ambiguity in Statutory Design and Interpretation, 54 STAN. L. REV. 627, 640 (2002) (suggesting that Congress might rationally choose to use ambiguous terms if intending to allow the courts to resolve disputes with flexible rather than stringent standards). 2. Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842–44 (1984). 3. Id. at 842–43. 4. Id. at 843. 5. See id. at 843 n.11 (noting that a court should not apply its own interpretation of a statute, but must defer to an agency interpretation where it is reasonable). 6. See, e.g., SEC v. Zandford, 535 U.S. 813, 819–20 (2002) (“[The SEC’s] interpretation of the ambiguous text of § 10(b), in the context of formal adjudication, is entitled to deference if it is reasonable . .” (citing United States v. Mead Corp., 533 U.S. 218, 229–30 & n.12 (2001))); United States v. O’Hagan, 521 U.S. 642, 673 (1997) (“[Section] 14(e)’s rulemaking authorization gives the Commission ‘latitude,’ even in the context of a term of art . [W]e owe the Commission’s judgment ‘more than mere deference or weight.’ . [W]e must accord the Commission’s assessment ‘controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.’” (second bracketing in original) (citations omitted)). For examples of the powers that Congress delegated to the Commission, see infra Part II.A–B. 2013] Court Deference to the SEC 275 instrument constituted a “security,” 7 a term that Congress defined ambiguously.8 Since Chevron, the Supreme Court has decided four definition-of-security cases.9 However, the Court referenced neither Chevron nor an alternative deferential standard in any of those cases.10 Additionally, none of the four cases discussed the appropriateness of deference to the Commission. The Court’s failure to accord explicit deference to the SEC in definition-of-security cases does not mean that it ultimately rejects the Commission’s position;11 rather, the SEC’s interpretations generally fare well 7. See, e.g., Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 566 n.20 (1979) (acknowledging that, although an agency’s interpretation is not controlling, “[i]t is a commonplace in our jurisprudence that an administrative agency’s consistent, longstanding interpretation of the statute under which it operates is entitled to considerable weight” (citing United States v. Nat’l Ass’n of Sec. Dealers, 422 U.S. 694, 719 (1975); Saxbe v. Bustos, 419 U.S. 65, 74 (1974); Inv. Co. Inst. v. Camp, 401 U.S. 617, 626–27 (1971); Udall v. Tallman, 380 U.S. 1, 16 (1965))). 8. See 15 U.S.C. § 77b(a)(1) (2006) (defining the term by setting forth more than twenty instruments and including a circular definition: “The term ‘security’ means any . instrument commonly known as a ‘security’”); see also 15 U.S.C. § 78c(a)(10) (2006) (same); SEC v. Edwards, 540 U.S. 389, 393 (2004) (“Congress . enacted a broad definition of ‘security,’ sufficient to ‘encompass virtually any instrument that might be sold as an investment.’” (quoting Reves v. Ernst & Young, 494 U.S. 56, 61 (1990))); infra Part II.D. 9. See Edwards, 540 U.S. at 393; see also Reves, 494 U.S. at 61; Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985); Gould v. Ruefenacht, 471 U.S. 701, 704 (1985). 10. See Mead, 533 U.S. at 234 (“Chevron did nothing to eliminate Skidmore’s holding that an agency’s interpretation may merit some deference whatever its form, given the ‘specialized experience and broader investigations and information’ available to the agency,