The opinion
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
NEW YORK REPUBLICAN STATE
COMMITTEE, et al., Civil Action No. 14-01345
Plaintiffs, Judge Beryl A. Howell
v.
SECURITIES AND EXCHANGE
COMMISSION,
Defendant.
MEMORANDUM OPINION
The New York Republican State Committee and the Tennessee Republican Party seek
declaratory and injunctive relief invalidating and enjoining the defendant, the Securities and
Exchange Commission (“SEC” or “Commission”), from enforcing an SEC regulation, which
was adopted over four years ago and codified at 17 C.F.R. § 275.206(4)–5 (the “Challenged
Rule”). Compl. ¶ 2, ECF No. 1. 1 The Commission counters that this case “was filed in the
wrong court at the wrong time by the wrong plaintiff,” Def.’s Opp’n Mot. Prelim. Inj. at 1
(“Def.’s Opp’n), ECF No. 18, and should be dismissed for lack of subject matter jurisdiction
pursuant to Federal Rule of Civil Procedure 12(b)(1). Def.’s Mot. Dismiss, ECF No. 10. The
1
As explained in Part I.C., infra, in addition to the Challenged Rule, the Complaint expressly targets two other SEC
regulations for invalidation as part of what the plaintiffs define as the SEC’s “Political Contribution Rule”: 17
C.F.R. §§ 275.204–2 and 275.206(4) –3 . See Compl. ¶ 2 (“Through this action, Plaintiffs challenge the lawfulness
of the SEC’s ‘Political Contribution Rule,’ 17 C.F.R. §§ 275.204–2; 275.206(4) –3; and 275.206(4) –5”); id. ¶ 63
(“The Political Contribution Rule is unlawful and violates the APA . . . .”); id. ¶ 91 (“The Political Contribution
Rule creates different contribution limits based upon the speaker’s identity, in violation of the First Amendment.”);
Prayer for Relief (“Plaintiffs respectfully pray for . . . an order and judgment declaring that the SEC’s Political
Contribution Rule violates the APA . . . [and] violates the First Amendment.”). The plaintiffs’ Motion for
Preliminary Injunction also sought to invalidate the same three rules. See Pls.’ Mot. Prelim. Inj., ECF No. 7
(“Plaintiffs New York Republican State Committee and Tennessee Republican Party . . . hereby move for a
preliminary injunction in this case invalidating and enjoining enforcement of 17 C.F.R. §§ 275.204–2; 275.206(4) –
3; and 275.206(4) –5 . . . .”). Nevertheless, the plaintiffs subsequently limited their challenge to only one SEC
regulation, namely 17 C.F.R. § 275.206(4)–5.
1
Court agrees with the Commission: The plaintiffs have failed to meet their burden in
establishing subject matter jurisdiction because this Court is not the proper forum for their
challenge.
I. BACKGROUND
The Investment Advisers Act of 1940, 15 U.S.C. § 80b, et seq., makes it unlawful “for
any investment adviser . . . directly or indirectly . . . to engage in any act, practice, or course of
business which is fraudulent, deceptive, or manipulative.” 15 U.S.C. § 80b-6. Under the Act,
the Commission has the authority to promulgate “rules and regulations . . . reasonably designed
to prevent such acts, practices, and courses of business as are fraudulent, deceptive, or
manipulative.” Id. § 80b-6(4). Invoking this authority in 2010, the SEC adopted the Challenged
Rule, which prohibits a registered investment adviser from providing investment advisory
services for compensation to a government entity within two years after making a contribution to
certain officials of the government entity. See 17 C.F.R. § 275.206(4)-5. The rule targets “pay-
to-play” activities, whereby investment advisers “seek to influence government officials’ awards
of advisory contracts by making or soliciting political contributions to those officials . . . .” See
Political Contributions by Certain Investment Advisers, 75 Fed. Reg. 41018 (July 14, 2010).
A. Adoption of the Challenged Rule
As of 2010, public pension plans totaled $2.6 trillion in assets and represented roughly
one-third of all U.S. pension assets. See id. Government officials are responsible for holding
and managing these assets and, in many instances, are responsible for selecting private
investment advisers to manage a pension plan’s portfolio of assets. Id. at 41018–19. A spate of
investigations and prosecutions over the past decade revealed the reality of abusive pay-to-play
activities in the selection and retention of pension plan investment advisers. Id. at 41019 nn.18–
2
25. For example, in New York, an investment management firm seeking to win investment
business from the New York State Common Retirement Fund paid “kickbacks” to advisers of the
New York State Comptroller in order to secure the business. See id. at 41019 n.18, 20
(referencing SEC v. Morris, et al., No. 09-cv-02518 (S.D.N.Y.)).
The Commission concluded, in light of this and other similar scandals, that “the selection
of advisers . . . has been influenced by political contributions” to the government officials
responsible for selection. 2 75 Fed. Reg. at 41019. The Commission identified two problems
with such influence. First, distorted selection procedures increase the likelihood that less
qualified investment advisers are selected (thereby resulting in lower fund performance) and that
these advisers charge higher fees (thereby resulting in a higher cost to the public). Id. Second,
investment advisers who “seek to influence the award of advisory contracts . . . compromise their
fiduciary obligations . . . and defraud prospective clients.” Id. at 41022. In sum, pay-to-play
practices “distort the process by which investment advisers are selected,” and therefore create “a
conflict of interest between the adviser (whose interest is in being selected) and [the] prospective
client (whose interest is in obtaining the best possible management service).” Id. As a result,
pay-to-play practices are “inconsistent with the high standards of ethical conduct required of
fiduciaries under the Advisers Act.” Id. 3
Accordingly, on July 14, 2010, the SEC adopted the Challenged Rule, which seeks to
limit pay-to-play activity by, among other things, prohibiting investment advisers from receiving
2
The Commission attempted to address this problem in 1999, when the SEC first proposed a rule prohibiting
investment advisers from receiving compensation for investment advisory services for a two year period after
making a contribution to certain elected officials or candidates. See Political Contributions by Certain Investment
Advisers, 64 Fed. Reg. 43,556 (proposed Aug. 10, 1999). A final rule was not issued, but the effort was revived in
2009.
3
Just prior to the Challenged Rule’s adoption, Chairwoman Mary Schapiro remarked that “Pay to play practices are
corrupt and corrupting. They run counter to the fiduciary principles by which funds held in trust should be
managed.” Mary L. Schapiro, Speech by SEC Chairman: Opening Statement at the SEC Open Meeting (June 30,
2010), available at http://www.sec.gov/news/speech/2010/spch063010mls.htm.
3
compensation for work provided to a government entity when the investment adviser, or certain
covered associates, provided a contribution to certain officials of that entity. The rule was “in
the nature of [a] conflict of interest limitation[]” so as to regulate the fiduciary obligations of
investment advisers. Id. at 41023. The Commission determined that a prophylactic rule was
necessary in this instance because “pay to play practices are rarely explicit and often hard to
prove.” Id. at 41022. Moreover, the Commission determined that collective action problems
surrounding pay-to-play activities lessened the likelihood of a private solution as both political
candidates and investment advisers have an incentive to participate in the system. Id.
The Commission explicitly modeled the Challenged Rule on Rule G-37, adopted by the
Municipal Securities Rulemaking Board in 1994, and approved by the SEC, which imposed a
“two-year timeout” for municipal securities dealers who contributed to an official of a municipal
securities bond issuer. See id. at 41020; see also 59 Fed. Reg. 17621 (April 13, 1994). During a
“two-year timeout,” a municipal securities dealer is barred from engaging in municipal securities
business with an issuer if the dealer, or certain related parties, previously contributed to certain
officials of such issuer. 4 The Commission believed that Rule G-37 “significantly curbed pay to
play practices in the municipal securities market.” 75 Fed. Reg. at 41020. Additionally, the
Commission borrowed Rule G-37’s timeout approach because the D.C. Circuit had previously
upheld Rule G-37 against a First Amendment challenge, see Blount v. SEC, 61 F.3d 938 (D.C.
Cir. 1995). 75 Fed. Reg. at 41023 (“[T]he Blount opinion has served as an important guidepost
in helping us shape our rule.”).
4
The Challenged Rule differs from Rule G-37, in that an investment adviser is not barred from providing services to
a government entity following a contribution to an official of that entity; rather, an investment adviser is barred from
receiving compensation for the provision of services but can otherwise still provide services. See 17 C.F.R.
275.206(4)-5.
4
B. Requirements of the Challenged Rule
The Challenged Rule makes it unlawful “for any investment adviser registered . . . with
the Commission . . . to provide investment advisory services for compensation to a government
entity within two years after a contribution to an official of the government entity is made by the
investment adviser or any covered associate of the investment adviser . . . .” 17 C.F.R. §
275.206(4)-5. Other provisions in the same Challenged Rule seek to prevent circumvention of
this primary prohibition. Specifically, in addition to being unable to make the contribution
directly, an investment adviser may not: (1) coordinate and solicit contributions to an official of a
government entity to which the adviser provides or seeks to provide services or to a state
political party where the adviser seeks to provide services, id. § 275.206(4)-5(a)(2)(ii); (2) pay
third parties to solicit government entities unless those third parties are “regulated person[s]”, see
id. § 275.206(4)-5(a)(2)(i); or (3) do “anything indirectly which, if done directly, would” violate
the rule, id. § 275.206(4)-5(d). The rule provides several exceptions, including a “de minimis
exception,” which permits contributions by covered associates to candidates of up to $350 (if the
covered associate is eligible to vote for the candidate) or $150 (if the covered associate is
ineligible to vote for the candidate). Id. § 275.206(4)-5(b)(1). The Commission was urged to
adopt higher contribution limits, but declined because “[t]he $1,000 amount suggested by some
commenters strikes us as a rather large contribution that could influence the hiring decision[.]”
75 Fed. Reg. at 41035.
Additional regulations, which were also initially targeted for invalidation by the plaintiffs
in their Complaint, require investment advisers to “make and keep true, accurate and current . . .
books and records” relating to their business, including political contributions by certain
employees to a government official, entity, state political party, or political action committee, 17
5
C.F.R. § 275.204-2(a)(18)(i)(C), and restrict the ability of investment advisers to retain certain
solicitors to assist in solicitation activities, id. § 275.206(4)-3.
C. The Plaintiffs’ Legal Challenge
The plaintiffs, the New York Republican State Committee and the Tennessee Republican
Party, have state and local officeholders running, or considering running, for federal office. See
Declaration of Jason Weingartner ¶¶ 7–8, Pls.’ Mem. Prelim. Inj., Ex. A. ECF No. 7-2
(“Weingartner Decl.”); Declaration of Frederick Brent Leatherwood ¶¶ 7–8, Pls.’ Mem. Prelim.
Inj., Ex. B., ECF No. 7-3 (“Leatherwood Decl.”). The New York Republican State Committee
asserts that the Challenged Rule harms one if its members, State Senator Lee Zeldin, a candidate
for the U.S. House of Representatives. Weingartner Decl. ¶ 7. As part of the plaintiffs’
operations, the plaintiffs have encountered “potential donors who have declined to contribute” to
certain federal candidates or have otherwise “limited their contributions to certain candidates”
because of the Challenged Rule. Weingartner Decl. ¶ 10; Leatherwood Decl. ¶ 10. Likewise,
“donors and potential donors” have either limited or refrained from making contributions to the
state party because of the Challenged Rule. Weingartner Decl. ¶ 9; Leatherwood Decl. ¶ 9. The
Complaint and the plaintiffs’ initial declarations fail to identify either the names or occupations
of any such donors, and also fail to allege any specific facts evidencing a decline in contributions
to either individual candidates or to the state parties over the course of the four years that the
Challenged Rule has been in effect.
On August 8, 2014, the plaintiffs filed a Motion for Preliminary Injunction seeking to
invalidate the Challenged Rule (and the two additional rules identified in the Complaint at ¶2)
and to enjoin their enforcement as applied to federal campaign contributions. See Pls.’ Mot.
Prelim. Inj., ECF No. 7. Specifically, the plaintiffs “challenge the lawfulness of the SEC’s
6
‘Political Contribution Rule,’ 17 C.F.R. §§ 275.204-2; 275.206(4)-3; and 275.206(4)-5 . . . .”
Compl. ¶ 2. The plaintiffs allege that the Challenged Rule, and the two other rules, “harm
Plaintiffs by restricting their ability to fundraise, harm their members by restricting those
members’ ability to make political contributions, and harm Plaintiffs’ members who are or who
may become candidates for elected office.” Compl. ¶ 40. As noted, although both the
Complaint and the Motion for Preliminary Injunction identified three regulations, 17 C.F.R. §§
275.204-2; 275.206(4)-3; and 275.206(4)-5, as the regulations targeted for invalidation in this
lawsuit, plaintiffs’ counsel clarified during the hearing on the plaintiffs’ motion for a preliminary
injunction that the plaintiffs only seek to enjoin 17 C.F.R. § 275.206(4)-5 as it relates to state
officials running for federal office. See Tr. of Hearing at 6:3–6 (Sept. 12, 2014) (hereinafter “PI
Hearing”) (“What we’re challenging is the limitation on individuals and their ability to make
contributions to candidates who run for federal office . . . .”); see also PI Hearing 7:5–9
(clarifying in response to questioning by the Court regarding 17 C.F.R. § 275.204-2, that “if the
Court invalidates the limitations on the contributions and the SEC still wants to require them to
maintain records of contributions, I don’t know that we’re challenging that here.”); PI Hearing
7:12–18 (responding to Court’s question regarding whether the plaintiffs were challenging “the
cash payments for client solicitations at [17 C.F.R.] 275.206(4)-3,” plaintiffs’ counsel stated
“No.”); PI Hearing 10:6–24.
Less than a week later, on August 13, 2014, the Commission filed a motion to dismiss for
lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). 5 See
Def.’s Mot. Dismiss, ECF No. 10. Thus, pending before the Court are two motions, which
5
The Commission also sought to stay consideration of the plaintiffs’ preliminary injunction motion pending
resolution of the jurisdictional question but this request is denied as moot.
7
together raise threshold issues about whether this Court has subject matter jurisdiction to hear
this case and whether the plaintiffs have standing to bring it.
II. LEGAL STANDARD
“‘Federal courts are courts of limited jurisdiction,’ possessing ‘only that power
authorized by Constitution and statute.’” Gunn v. Minton, 133 S. Ct. 1059, 1064 (2013) (quoting
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). Indeed, federal courts
are “forbidden . . . from acting beyond our authority,” NetworkIP, LLC v. FCC, 548 F.3d 116,
120 (D.C. Cir. 2008), and, therefore, have “an affirmative obligation ‘to consider whether the
constitutional and statutory authority exist for us to hear each dispute.’” James Madison Ltd. by
Hecht v. Ludwig, 82 F.3d 1085, 1092 (D.C. Cir. 1996) (quoting Herbert v. Nat’l Acad. of
Sciences, 974 F.2d 192, 196 (D.C. Cir. 1992)). Absent subject matter jurisdiction over a case,
the court must dismiss it. Arbaugh v. Y&H Corp., 546 U.S. 500, 506-07 (2006); FED. R. CIV. P.
12(h)(3).
When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1),
the court must accept as true all uncontroverted material factual allegations contained in the
complaint and “‘construe the complaint liberally, granting plaintiff the benefit of all inferences
that can be derived from the facts alleged’ . . . and upon such facts determine jurisdictional
questions.” Am. Nat'l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011) (quoting Thomas
v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005)). The court need not accept inferences drawn by
the plaintiff, however, if those inferences are unsupported by facts alleged in the complaint or
amount merely to legal conclusions. See Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir.
2002). Moreover, in evaluating subject matter jurisdiction, the court, when necessary, may
“‘undertake an independent investigation to assure itself of its own subject matter jurisdiction,’”
8
Settles v. United States Parole Comm'n, 429 F.3d 1098, 1107-1108 (D.C. Cir. 2005)(quoting
Haase v. Sessions, 835 F.2d 902, 908 (D.C. Cir. 1987)), and “consider[] facts developed in the
record beyond the complaint,” id. See also Herbert, 974 F.2d at 197 (in disposing of motion to
dismiss for lack of subject matter jurisdiction, “where necessary, the court may consider the
complaint supplemented by undisputed facts evidenced in the record, or the complaint
supplemented by undisputed facts plus the court's resolution of disputed facts.”); Alliance for
Democracy v. FEC, 362 F. Supp. 2d 138, 142 (D.D.C. 2005). The burden of establishing any
jurisdictional facts to support the exercise of the subject matter jurisdiction rests on the plaintiff.
See Hertz Corp. v. Friend, 559 U.S. 77, 96-97 (2010); Thomson v. Gaskill, 315 U.S. 442, 446
(1942); Moms Against Mercury v. FDA, 483 F.3d 824, 828 (D.C. Cir. 2007).
III. DISCUSSION
The Commission challenges the Court’s jurisdiction to hear, and the plaintiffs’ standing
to bring, the present case. For the reasons stated below, this Court lacks subject matter
jurisdiction to entertain the suit as judicial review of the Challenged Rule lies exclusively in the
Court of Appeals. Thus, the Court need not reach the alternative threshold issue raised by the
Commission about whether the plaintiffs have failed to establish standing to bring the present
case. 6 See Moms Against Mercury v. Food & Drug Admin., 483 F.3d 824, 826 (D.C. Cir. 2007)
6
The Commission vigorously contests the plaintiffs’ standing to bring this suit and, indeed, the plaintiffs’ initial
pleadings and declarations offered scant facts in support of their alleged standing. Since the plaintiffs, as political
parties, are not the target of the Challenged Rule, their original standing theory suffered a central difficulty: The
plaintiffs’ standing relied entirely upon the independent actions of third parties not before the Court —i.e.,
investment advisers. “When redress depends on the cooperation of a third party, ‘it becomes the burden of the [party
asserting standing] to adduce facts showing that those choices have been or will be made in such manner as to
produce causation and permit redressability of injury.’” U.S. Ecology v. Dep’t of Interior, 231 F.3d 20, 24–25 (D.C.
Cir. 2000) (emphasis added) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 562 (1992)). Yet the plaintiffs
offered no facts evidencing that, absent the Challenged Rule, investment advisers would take the necessary actions
to ameliorate the plaintiffs’ alleged injuries. The Court may not assume hypothetical facts to confer standing. As the
Supreme Court explained, “[s]tanding . . . is not an ingenious academic exercise in the conceivable . . . [but] requires
. . . a factual showing of perceptible harm.” Summers v. Earth Island Inst., 555 U.S. 488, 499 (2009) (internal
quotation marks omitted, alterations in original). In this sense, the plaintiffs’ initial affidavits failed. The plaintiffs
did not: identify specific members harmed by the rules, see Am. Chemistry Council v. Dep't of Transp., 468 F.3d
9
(“Where both standing and subject matter jurisdiction are at issue, however, a court may inquire
into either and, finding it lacking, dismiss the matter without reaching the other.” (citing Ruhrgas
AG v. Marathon Oil Co., 526 U.S. 574, 584 (1999))).
A. The Court Lacks Subject Matter Jurisdiction
“In this circuit, the normal default rule is that persons seeking review of agency action go
first to district court rather than to a court of appeals.” Am. Petroleum Inst. v. SEC, 714 F.3d
1329, 1332 (D.C. Cir. 2013) (quoting Nat’l Auto. Dealers Ass’n v. FTC, 670 F.3d 268, 270 (D.C.
Cir. 2012)). “Initial review occurs at the appellate level only when a direct-review statute
specifically gives the court of appeals subject-matter jurisdiction to directly review agency
810, 820 (D.C. Cir. 2006) (“[A]n organization bringing a claim based on associational standing must show that at
least one specifically-identified member has suffered an injury-in-fact.”); submit evidence that but for the
Challenged Rule the third parties would have taken the steps desired by plaintiffs, Crete Carrier Corp. v. EPA, 363
F.3d 490, 494 (D.C. Cir. 2004) (“Speculative and unsupported assumptions regarding the future actions of third-
party market participants are insufficient to establish Article III standing.”); or demonstrate that a ruling by this
Court would redress the claimed injuries, Klamath Water v. Federal Energy Regulatory Commission, 534 F.3d 735,
739 (D.C. Cir. 2008) (“In a case like this, in which relief for the petitioner depends on actions by a third party not
before the court, the petitioner must demonstrate that a favorable decision would create ‘a significant increase in the
likelihood that the plaintiff would obtain relief that directly redresses the injury suffered.’” (quoting Utah v. Evans,
536 U.S. 452, 464 (2002))).
To cure these deficiencies, the plaintiffs first asked this Court to “assume” certain facts necessary for the
plaintiffs to establish standing. See PI Hearing at 25:6–10. Finally, on September 17, 2014, after briefing on this
issue was fully ripe, after supplementing their affidavits in their reply briefing, and after the hearing on the
plaintiffs’ motion for preliminary injunction, the plaintiffs belatedly sought leave to file a supplemental declaration
from Tennessee State Senator Jim Tracy, Pls.’ Mot. Leave to File Decl. of Tenn. State Sen. Jim Tracy, ECF No. 26,
which the Court granted, Minute Order, September 17, 2014. Although the Court need not and does not decide the
issue, the plaintiffs’ supplemental filing buttresses the Tennessee Republican Party’s standing. Senator Tracy’s
declaration avers specific facts evidencing an injury-in-fact, caused by the Challenged Rule, and capable of redress
by the Court. Specifically, the Challenged Rule subjects Senator Tracy (a member of the Tennessee Republic Party
and candidate in the Republican Primary for Tennessee’s Fourth Congressional District) to a different contribution
limit than his opponent, who was not a covered official under the Challenged Rule and who therefore may receive
donations from investment advisers free of the Challenged Rule’s restrictions. Additionally, the declaration
identifies specific de minimis contributions made to Senator Tracy’s campaign, in addition to contributions returned
to covered associates by Senator Tracy, so as not to trigger the restrictions imposed by the Challenged Rule. The
declaration even avers facts evidencing the potential harm to Senator Tracy from the reduced contributions (an
electoral defeat by a scant 38 votes out of 77,504 votes cast). See Tracy Decl. ¶ 11. The Commission counters that
Senator Tracy is not a covered official under the regulation regardless of the subjective views of Senator Tracy and
his campaign supporters. Although Senator Tracy’s supporters may have limited their contributions for fear of his
possible status as a covered official under the Challenged Rule, “[a]llegations of subjective ‘chill’ are not . . .
adequate” to confer standing. See United Presbyterian Church in the U.S.A. v. Reagan, 738 F.2d 1375, 1379 (D.C.
Cir. 1984) (Scalia, J.) (alterations in original) (quoting Laird v. Tatum, 408 U.S. 1, 13–14 (1972)). Accordingly,
whether the plaintiffs have standing to bring this case remains in doubt even in light of the plaintiffs’ supplemental
filings.
10
action.” Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir. 2007). In this case, the Commission asserts
that Section 213 of the Investment Advisers Act, codified at 15 U.S.C. § 80b-13(a), strips this
Court of jurisdiction and vests review exclusively in the Court of Appeals. See Def.’s Mot.
Dismiss at 4 (“This Court lacks subject matter jurisdiction because jurisdiction to review
Commission rules promulgated under the Advisers Act is committed exclusively to the court of
appeals.”).
Section 213 provides that “[a]ny person or party aggrieved by an order issued by the
Commission under this subchapter may obtain a review of such order . . . in the United States
Court of Appeals for the District of Columbia,” by filing a petition within sixty days of the
Commission’s order. 15 U.S.C. § 80b-13(a) (emphasis added). Upon filing of the
administrative record, “such court shall have jurisdiction, which . . . shall be exclusive, to affirm,
modify, or set aside such order, in whole or in part.” Id. Section 213 does not expressly address
the review of “rules” promulgated by the Commission under the Investment Advisers Act. The
Commission does not dispute that the Challenged Rule is in fact a “rule” and not an “order.”
See Def.’s Reply in Support of Mot. Dismiss at 2, ECF No. 24 (“[T]he Commission does not
dispute that the pay-to-play rule is a rule.”). Jurisdiction in the instant case, therefore, hinges on
the interpretation of the word “order” in 15 U.S.C. § 80b-13(a) and whether it encompasses
rules, such that jurisdiction for this case vests exclusively in the Court of Appeals. The parties
have not cited, and indeed the Court has not discovered, any opinion interpreting “order” for
purposes of Section 213 of the Investment Advisers Act.
The Commission contends that under Investment Company Institute v. Board of
Governors of the Federal Reserve System, 551 F.2d 1270, 1278 (D.C. Cir. 1977), “[t]he term
‘order’ . . . encompasses rules.” Def.’s Mem. Mot. Dismiss at 5. In Investment Company
11
Institute, the D.C. Circuit interpreted Section 9 of the Bank Holding Act, which also vests
jurisdiction of “orders” in the Court of Appeals, and held that “the purposes underlying Section 9
will best be served if ‘order’ is interpreted to mean any agency action capable of review on the
basis of the administrative record,” including rules and regulations. Inv. Co. Inst. at 1278
(emphasis added). Investment Company Institute stated that it is the “record for review and not
the holding of a quasi-judicial hearing which is . . . the jurisdictional touchstone.” 551 F.2d at
1277. In making this determination, Investment Company Institute acknowledged that certain
non-jurisdictional provisions of the Bank Holding Act specifically referenced “order or
regulation,” which suggested a “narrower meaning” of the word “order.” Id. Investment
Company Institute also recognized that the APA defined “‘order’ as ‘the whole or a part of a
final disposition . . . of an agency in a matter other than rulemaking . . . .” Id. at 1278 (emphasis
added). Nevertheless, the Court determined that “the word ‘order’ has several frequently
utilized meanings which vary in scope, and . . . that different sections of the same statute might
use the word in different ways.” Id.
In the decades since Investment Company Institute, despite the “clear distinction between
the terms ‘rule’ and ‘order,’” it is now “pretty much settled” that “a court of appeals [may]
exercise statutory jurisdiction in a pre-enforcement review of rules where the statutory language
refers only to ‘orders.’” See Charles A. Wright & Charles H. Koch, Jr., 33 Federal Practice &
Proc. Judicial Review § 8299 (1st ed.). Indeed, the D.C. Circuit has exercised direct-review
jurisdiction of agency rules promulgated under the Investment Advisers Act and other statutes
containing nearly identical direct appellate review authority—without jurisdictional
explanation—in numerous cases since Investment Company Institute. See Fin. Planning Ass’n v.
SEC, 482 F.3d 481 (D.C. Cir. 2007) (Investment Advisers Act); Goldstein v. SEC, 451 F.3d 873
12
(D.C. Cir. 2006) (Investment Advisers Act); Chamber of Commerce of the United States v. SEC,
443 F.3d 890 (D.C. Cir. 2006) (Investment Company Act); Am. Equity Inv. Life Ins. Co. v. SEC,
613 F.3d 166 (D.C. Cir. 2010) (Securities Act). In Goldstein v. SEC, 451 F.3d 873 (D.C. Cir.
2006), the D.C. Circuit entertained a challenge to an SEC rule promulgated pursuant to the
Investment Advisers Act. The petitioners’ opening brief described the parties’ confusion
regarding jurisdiction, noting that Section 213 provides only for review of “orders” and not
“rules” and that no court had interpreted Section 213 in the context of a pre-enforcement review
of a rule promulgated under the Investment Advisers Act. 7 See Petitioner’s Opening Brief,
Goldstein v. SEC, No. 04-1434 (D.C. Cir. June 23, 2005). Fully aware of the potential
jurisdictional pitfalls, the D.C. Circuit still heard the case and never remarked on the issue of
subject matter jurisdiction. Since each court has an affirmative obligation to satisfy itself of
jurisdiction, Goldstein v. SEC strongly suggests that jurisdiction to review rules promulgated
under the Investment Advisers Act vests exclusively in the Court of Appeals.
In sum, Investment Company Institute remains binding precedent and mandates that
Section 213, 15 U.S.C. §80b-13(a), be construed to require direct appeal to a Court of Appeals.
Accordingly, this Court lacks subject matter jurisdiction to hear the plaintiffs’ challenge.
B. Issues in Application of Investment Company Institute
Although Investment Company Institute defined “order” to encompass “rules” for
purposes of a direct review statute, the Court recognizes the multiple difficulties, including those
pointed out by the plaintiffs, in applying Investment Company Institute to the present case.
Nevertheless, these difficulties do not overcome the fundamental principle of stare decisis.
7
The parties in Goldstein filed suit in both the district court and the D.C. Circuit in order to preserve their rights.
The district court stayed proceedings pending a ruling by the D.C. Circuit. See Order, Goldstein, et al. v. SEC, No.
04-cv-2216, ECF No. 5. Following the D.C. Circuit’s decision, see 451 F.3d 873 (D.C. Cir. 2006), the parties
voluntarily dismissed the district court proceeding. See Notice of Voluntary Dismissal, No. 04-cv-2216, ECF No. 7.
13
Brooks v. Grundmann, 748 F.3d 1273, 1279 (D.C. Cir. 2014) (“‘The doctrine of stare decisis
compels district courts to adhere to a decision of the Court of Appeals of their Circuit until such
time as the Court of Appeals or the Supreme Court of the United States sees fit to overrule the
decision.’” (quoting Owens-Ill., Inc. v. Aetna Cas. & Sur. Co., 597 F. Supp. 1515, 1520 (D.D.C.
1984))). First, under black letter administrative law an “order” is plainly not a “rule.” Indeed,
the distinction between “rules” and “orders” is the “dichotomy upon which the most significant
portions of the APA are based.” Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 216 (1988)
(Scalia, J. concurring); see also Ala. Power Co. v. FERC, 160 F.3d 7, 11 n.5 (D.C. Cir. 1988)
(“The APA establishes a distinction between rulemaking . . . and adjudication . . . .”). Moreover,
as the D.C. Circuit recognized with respect to a different statute, “[t]he obvious difficulty with
the government’s position is that [the] provision putting exclusive review jurisdiction in the
Court of Appeals speaks of orders, but Congress in passing the APA drew a distinction between
orders, which typically follow adjudications, and regulations.” Nat’l Min. Ass’n v. Dep’t of
Labor, 292 F.3d 849, 856 (D.C. Cir. 2002). 8 Notwithstanding the ordinary distinction in
meaning between “orders” and “rules” in construing a review statute, the decision in Investment
Company Institute was premised primarily upon a policy determination: “If the administrative
record forms the basis for review, requiring petitioners challenging regulations to go first to the
district court results in unnecessary delay and expense, . . . and undesirable bifurcation of the
reviewing function between the district courts and the courts of appeals.” 551 F.2d at 1276
(internal citations omitted). Yet, the Supreme Court has cautioned that, even in the context of
8
The D.C. Circuit determined that jurisdiction was not exclusive to the Court of Appeals in National Mineral
Association based in part upon the distinction between “rules” and “orders.” The Court drew the distinction,
however, only because other language within the statute at issue “ma[d]e rather clear that . . . Congress used the
term ‘order’ to refer to an adjudicatory compensation order, not the promulgation of a regulation . . . .” Nat. Min.
Ass’n., 292 F.3d 856; see also 33 U.S.C. § 921 (entitled “Review of Compensation Orders”). Notably, neither the
Court nor the parties in that case referenced Investment Company Institute. See id.
14
administrative law, “[w]hether initial subject-matter jurisdiction lies initially in the courts of
appeals must of course be governed by the intent of Congress and not by any views we may have
about sound policy.” Florida Power & Light Co. v. Lorion, 470 U.S. 729, 746 (1985); see also
Am. Petroleum Inst. v. SEC, 714 F.3d 1329, 1336 (D.C. Cir. 2013) (same).
Second, by interpreting “order” to include rulemaking, Section 213 provides for a
different meaning of the word “order” based upon the statutory section, since applying this same
interpretation uniformly would render whole clauses within the statute superfluous. See, e.g., 15
U.S.C. § 80b-11 (“The Commission shall have authority from time to time to make, issue,
amend, and rescind such rules and regulations and such orders as are necessary or appropriate to
the exercise of the functions and powers conferred upon the Commission elsewhere in this
subchapter.”); see also Erlenbaugh v. United States, 409 U.S. 239, 243 (1972) (“[A] legislative
body generally uses a particular word with a consistent meaning in a given context.”); Powerex
Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224, 232, (2007) (“A standard principle of
statutory construction provides that identical words and phrases within the same statute should
normally be given the same meaning.”).
Third, such an interpretation appears to strip jurisdiction from any court to hear pre-
enforcement constitutional challenges to SEC rules filed after sixty days from the issuance of the
rule. 9 See 15 U.S.C. § 80b-13 (“Any person or party aggrieved by an order issued by the
Commission under this subchapter may obtain a review of such order in the United States court
of appeals . . . , by filing in such court, within sixty days after the entry of such order, a written
9
Although, the Section 213 uses the permissive “may” rather than the directive “shall,” the D.C. Circuit has made
clear that such language provides the Court of Appeals with exclusive jurisdiction. Telecomm. Research & Action
Ctr. v. Fed. Commc’n Comm’n, 750 F.2d 70, 75 (D.C. Cir. 1984) (“[W]here a statute commits review of agency
action to the Court of Appeals, any suit seeking relief that might affect the Circuit Court's future jurisdiction is
subject to the exclusive review of the Court of Appeals.”); see also Wagner v. Fed. Election Comm'n, 717 F.3d 1007,
1012 (D.C. Cir. 2013) (“Congress sometimes includes the word ‘exclusive’ to make clear that a particular statute
confers exclusive jurisdiction. But the Congress also deploys ‘may’ as a verbal auxiliary in many statutes the courts
have interpreted to confer exclusive jurisdiction.”).
15
petition . . . .”) (emphasis added). This raises grave constitutional concerns. “There may well be
limits as to how severely Congress can restrict the route to judicial review of constitutional
challenges when it keeps that route partially open.” Am. Coal. For Competitive Trade v. Clinton,
128 F.3d 761, 765–66 (D.C. Cir. 1997). By the terms of Section 213, after sixty days, no court
may exercise pre-enforcement jurisdiction over a constitutional challenge to an SEC rule, which
is problematic in situations, like the present, where subsequent Supreme Court jurisprudence
calls into question the constitutionality of the challenged rule. The SEC attempts to forestall
such concerns by permitting the plaintiffs, and other similarly situated parties, to petition the
SEC to amend the rule. Should the SEC reject the proposed amendment, a new sixty day clock
would start within which period the party could file for review in the appropriate Court of
Appeals. See PI Hearing 40:22–41:11; see also Inv. Co. Inst., 551 F.2d at 1281 (“For example, if
a regulation does not become ripe for review within 30 days, an aggrieved party can wait until
sufficient information as to the regulation's concrete effect is available, petition the Board for
reconsideration of the regulation on the basis of the new information, and seek review of the
Board's decision in this court.”); 5 U.S.C. § 553(e) (“Each agency shall give an interested person
the right to petition for the issuance, amendment, or repeal of a rule.”).
Fourth, the D.C. Circuit has subsequently undermined the basis for the decision in
Investment Company Institute. While Investment Company Institute declined to incorporate the
APA definition of order into the direct review statute, the D.C. Circuit has since instructed courts
to “look to the Administrative Procedure Act . . . when an agency’s direct-review statute [does]
not define ‘order.’” Watts, 482 F.3d 501, 505 (D.C. Cir. 2007) (citing APCC Servs., Inc. v.
Sprint Communic’ns Co., 418 F.3d 1238, 1249 (D.C. Cir. 2005)). As noted, under the APA, an
“‘order’ means the whole or a part of a final disposition, whether affirmative, negative,
16
injunctive, or declaratory in form, of an agency in a matter other than rule making . . . .” 5
U.S.C.A. § 551(6) (emphasis added). The Watts framework would seem to require this Court to
exercise jurisdiction over the present case, but Watts did not cite to or discuss the holding of
Investment Company Institute.
Where two D.C. Circuit decisions seemingly conflict, the District Court must still attempt
to harmonize the decisions. See Maxwell v. Snow, 409 F.3d 354, 358 (D.C. Cir. 2005)
(discussing need to read cases in “harmony” because the D.C. Circuit “is bound to follow circuit
precedent until it is overruled either by an en banc court or the Supreme Court”) (citing Brewster
v. Commissioner, 607 F.2d 1369, 1373 (D.C. Cir. 1979)). The Watts court addressed the issue
whether an “SEC decision not to authorize its employees to give deposition testimony in
response to [a] third-party subpoena” constituted an “order” as “used in Section 9 of the
Securities Act and Section 25 of the Exchange Act.” 482 F.3d at 505-06. Watts held that “a
government agency’s decision to assert privilege or otherwise not to comply with a subpoena in
ongoing civil litigation . . . is simply an ordinary litigation decision, not an agency’s ‘final
disposition’” and was therefore not subject to direct appellate review. Id. at 506. A decision to
the contrary, the Watts court reasoned, would “frustrate the traditional role of district courts in
resolving discovery disputes” and would create a “bifurcated procedure” for review, permitting
review of certain discovery matters in the Court of Appeals while the underlying litigation
simultaneously “chugged along in the district court.” Id. Such a result would be “cumbersome,
duplicative, and ultimately nonsensical.” Id. The plaintiffs’ legal challenge in the instant case
concerns not a discovery dispute but a constitutional challenge to a final agency rule. Direct
review in the Court of Appeals would not be “cumbersome, duplicative, and ultimately
nonsensical,” see id., but would instead permit the parties to “avoid[] an unnecessary layer of
17
judicial review,” see Inv. Co. Inst., 551 F.2d at 322. Thus, although Watts applied a different
framework for resolving the definition of “order”—by looking to the APA—the policy
justifications regarding efficient judicial review animating the result in Watts are consistent with
the justifications relied upon in Investment Company Institute, and favor direct appellate review
in the instant case.
Finally, interpreting “orders” to mean both “orders” and “rules” creates the anomalous
result seen in American Petroleum Institute. v. SEC, 714 F.3d 1329 (D.C. Cir. 2013). American
Petroleum Institute concerned a challenge under Section 25 of the Exchange Act. Like Section
213 of the Investment Advisers Act, Section 25(a) provided for appellate review of SEC
“orders.” Unlike Section 213 of the Investment Advisers Act, however, Section 25(b)
specifically provided for agency review of certain, but not all, “rules” promulgated under the
Exchange Act. The D.C. Circuit declined to apply the Investment Company Institute framework,
reasoning that “applying Investment Company Institute to Section 25 would render Section 25(b)
superfluous since all Commission rules would be reviewable in this court under Section
25(a).” 10 Id. at 1333. Thus, in statutes where Congress explicitly provides for appellate review
of only certain agency rules, as in Section 25(b) of the Exchange Act, Congress in effect strips
the appellate court of jurisdiction to review directly all remaining agency rules even if not
enumerated in the statute. Id. What appears to be an affirmative grant of appellate jurisdiction
to review agency rules becomes, in reality, an affirmative revocation of jurisdiction to review all
agency rules not otherwise enumerated in the direct review statute.
10
On this point, American Petroleum Institute’s reasoning is ironic, as Investment Company Institute explicitly
recognized that its interpretation resulted in superfluous language. See Inv. Co. Inst., 551 F.2d at 1278 (determining
that “the word ‘order’ has several frequently utilized meanings which vary in scope” and that require “different
sections of the same statute [to] use the word in different ways” in order to avoid superfluous language).
18
Accordingly, the plaintiffs’ reliance on American Petroleum Institute is inapposite.
American Petroleum Institute did not overturn or even cabin the default rule announced in
Investment Company Institute. Rather, American Petroleum Institute determined that Congress
could override the Investment Company Institute presumption by providing for explicit review of
certain agency rules, thereby rendering district court review appropriate for all remaining rules.
While this creates an anomalous result, the decision does not relieve this Court from binding
precedent nor mandate a different result in the present case.
Both parties argue at length regarding the inferences to be drawn from these anomalous
results and from the history surrounding Investment Company Institute and American Petroleum
Institute. The plaintiffs argue that Section 25(b) of the Exchange Act demonstrates that
Congress knows how to provide for direct appellate review of agency rules and that its failure to
provide for direct review in the Investment Advisers Act means that jurisdiction lies in the
district court. Pls.’ Opp’n Def.’s Mot. Dismiss or Stay, at 11, ECF No. 20. The Commission
notes that Section 25(b) was drafted prior to Investment Company Institute, which established a
new default rule that “orders” includes agency “rules.” According to the Commission, Congress
has not altered the language of the Investment Advisers Act because it was satisfied that
Investment Company Institute established direct appellate review of agency rules. Def.’s Reply
in Support of Mot. Dismiss, at 7 n.1, ECF No. 24. In the end, both parties rely too heavily on
inferences drawn from congressional silence. See Michigan v. Bay Mills Indian Cmty., 134 S.Ct.
2024, 2052 (2014) (“[A]rgument from legislative inaction is unavailing. As a practical matter, it
is ‘impossible to assert with any degree of assurance that congressional failure to act represents
affirmative congressional approval of' one of this Court's decisions.’” (quoting Patterson v.
McLean Credit Union, 491 U.S. 164, 175 n.1 (1989) (internal quotation marks and citation
19
omitted)); Kimbrough v. United States, 552 U.S. 85, 103 (2007) (“[W]e decline to read any
implicit directive into . . . congressional silence.”); Brown v. Gardner, 513 U.S. 115, 121 (1994)
(“[C]ongressional silence lacks persuasive significance" (internal quotation marks omitted));
Girouard v. United States, 328 U.S. 61, 69 (1946) (“It is at best treacherous to find in
congressional silence alone the adoption of a controlling rule of law.”); Helvering v. Hallock,
309 U.S. 106, 121 (1940) (“[W]e walk on quicksand when we try to find in the absence of
corrective legislation a controlling legal principle.”).
***
The Court is cognizant that the holding of Investment Company Institute produces curious
results but that case remains binding precedent in this Circuit and on this Court. 11 This case
must therefore be dismissed for want of subject matter jurisdiction. 12
IV. CONCLUSION
The Court holds that Section 213 of the Investment Advisers Act strips this Court of
jurisdiction to hear the pending challenge to the SEC’s rule, 17 C.F.R. § 275.206(4)–5,
regulating pay-to-play activity by investment advisers. Accordingly, the Commission’s motion
to dismiss for lack of subject matter jurisdiction is granted. 13 The plaintiffs’ motion for a
preliminary injunction is denied as moot.
11
The plaintiffs make one last argument in passing, claiming that even if Investment Company Institute remains
binding on the Court, the administrative record in this case is not sufficient to permit judicial review, at least as to
the plaintiffs’ First Amendment claim. See Pls.’ Opp’n Mot. Dismiss at 12. Yet, during the hearing on the
plaintiffs’ motion for preliminary injunction, counsel conceded that discovery was likely unnecessary. See PI
Hearing at 16:11–17:2 (clarifying in response to questioning by the Court that “I don’t think [discovery is] necessary
to resolve the case, but if the Court finds it’s necessary or the plaintiffs or the defendants seek it, you know, there is
some limited discovery that could be helpful to the Court.”). Moreover, in Blount v. SEC, the D.C. Circuit
considered a first amendment challenge to a nearly identical rule based solely on the administrative record. 61 F.3d
938 (D.C. Cir. 1995).
12
While the Court might ordinarily transfer the case to the Court of Appeals, both parties in this case agree that the
case should be dismissed rather than transferred. See Pls.’ Opp’n at 18 n.4; Def.'s Mem. Mot. Dismiss at 7–8.
13
As noted, supra note 5, the Commission also requested a stay of the plaintiffs’ preliminary injunction motion
pending resolution of the jurisdictional questions, which request is denied as moot.
20
The case is dismissed.
An appropriate Order accompanies this opinion.
Digitally signed by Hon. Beryl A. Howell
DN: cn=Hon. Beryl A. Howell, o=U.S.
District Court for the District of Columbia,
Date: September 30, 2014 ou=United States District Court Judge,
email=Howell_Chambers@dcd.uscourts.
gov, c=US
Date: 2014.09.30 18:32:02 -04'00'
__________________________
BERYL A. HOWELL
United States District Judge
21