SEC v. Chenery (I)
318 U.S. 80 (1943)
SEC v. Chenery (II)
332 U.S. 194 (1947)
SEC v. Chenery (III)
340 U.S. 831 (1950)

  • A utility company called Federal Water Service Corporation wanted to reorganize. As part of that reorganization, through a complex mechanism, the FWSC company officers would make a huge sack of money on a stock swap.
    • The officers would reap this money at the expense of regular shareholders and the financial health of the company.
  • The Security Exchange Commission (SEC), who policed such reorganizations under the Public Utility Holding Act (PUHA) denied the reorganization plan.
    • Until this adjudication, there was nothing in the SEC rules or previous adjudications that would imply that this sort of reorganization was not allowed.
  • The Board came back with a second reorganization plan that didn’t screw the shareholders by offering a sweetheart deal to the officers. The SEC approved this second plan.
    • When the SEC announced their order, they explained that they were approving the amended plan based on their reading of common law court decision. They did not base their decision on the PUHA, the SEC Enabling Act, or the legislative history underlying the SEC’s authority.
  • Some of the FWSC officers sued the SEC.
    • The officers argued that SEC was not allowed to base decisions on case law.
  • The US Supreme Court (in SEC v. Chenery (I)) said that the SEC had based their decision on the wrong thing, and remanded.
    • The US Supreme Court found that the SEC had misinterpreted the case law, and that it didn’t say what the SEC said it said.
    • The Court found that SEC had never issued a rule forbidding the type of scheme the FWSC officers were proposing.
  • On remand, the SEC reached the same conclusions, but this time based their findings on the language, purpose and legislative history of SEC Enabling Act.
  • The FWSC officers sued again.
    • The officers argued that, on remand, all SEC could do was either:
      • Issue a rule forbidding the scheme in the future (which couldn’t be retroactively applied to FWSC), or
      • Approve the original reorganization proposal.
  • The US Supreme Court (in SEC v. Chenery (II)) upheld the SEC.
    • The US Supreme Court found that there are two ways that an Administrative Agency can announce a new policy. They can either:
      • Promulgate a new rule and go through the standard rulemaking process, or
      • They can simply enforce the new policy in an adjudication.
  • The basic take home message from this case is that an Agency might be encouraged to use the rulemaking process to promulgate a new policy, but they don’t have to do that. They can come up with a policy and immediately and without warning start finding against people/companies in adjudications.
    • That means that a company might get their permit denied, or even get fined for doing something that they didn’t know was not allowed!
  • The Chenery Principle says that a court may not affirm an Agency decision on grounds that are different from the grounds that the Agency made their decision.
    • Basically, if the Agency says that a rule should be made because of Reason A, and a court decides that is not a good reason, they can’t then affirm the decision because of Reason B. All they can do is send the case back to the Agency and have them rewrite their rule on a different set of grounds.
      • So, in this case, the Court said that the SEC couldn’t reach their conclusion based on a misinterpretation of case law. But the Court just sent it back to the SEC to develop a different rationale, as opposed to just affirming the SEC’s original conclusion because of the SEC Enabling Act.
      • If the court doesn’t like the grounds, all it means for the Agency is that they get a do-over. The courts won’t make the decision for the Agency.