Just How Binding Are SEC Statements In An Adopting Release?

Two years ago, I coined the term ““ARR Ratio”.  The ARR Ratio (Adopting Release to Rule Ratio) is calculated by dividing the total number of words in the Adopting Release by the total number of words in the actual text of the rule being adopted.  For example, I calculated the ARR Ratio of the SEC’s Compensation Committee Rule to be 14.44.  The ARR Ratio illustrates that it took the SEC more than 14 times as many words to explain the rule as it did to actually state the rule.

The really important question is what is the legal effect, if any, of preambles to rules?  One might argue that since a preamble is not subject to notice and comment, it is not legally binding under the Administrative Procedure Act (5 U.S.C. § 551 et seq.).  However, the Ninth Circuit Court of Appeals held earlier this week that an administrative law judge could consider the regulatory preamble.  Peabody Coal Co. v. Dir., Office of Workers’ Comp. Programs, 2014 U.S. App. LEXIS 5996 (9th Cir. Apr. 1, 2014).  In reaching this conclusion, the Ninth Circuit distinguished the U.S. Supreme Court’s holding in Wyeth v. Levine, 555 U.S. 555, 129 S. Ct. 1187, 173 L. Ed. 2d 51 (2009) on the basis that the preamble in that case involved a legal interpretation rather than an explanation of the scientific and medical basis for the rules.  The Ninth Circuit also distinguished a holding by the Fourth Circuit Court of Appeals in Home Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th Cir. 2011) on the basis that the preamble at issue in that case contradicted “plain statutory language”.

What the Ninth Circuit seems to be saying is that preambles don’t merit deference if they constitute legal interpretations (Wyeth) or contradict a statute (Home Concrete) but they can be considered as background information by an administrative law judge.  Regardless of these legal distinctions and the Administrative Procedure Act, I expect that the SEC will continue to cite and rely on its statements in adopting releases.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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