Tuesday, September 16, 2014

Chapter 6 (Law Articulated by Regulatory Agencies: The Administrative Function): From "Elements of Law" to "Introduction to the Law and Legal System of the United States"--Building an Introductory Course to the Legal Curriculum for the 21st Century

(Pix (c) Larry Catá Backer 2014)

Since 2010, I have been posting on the development of a new course I have been developing for our first year law school students, "Elements of Law." The course originally had a quite modest objective--to introduce law students to legal research and reasoning through case law, statutory interpretation, and legal history, processes, and institutions. I chose to broaden its objectives within these specific parameters and development a framing and concepts course that would provide a deep foundation to law students on the legal system they were undertaking to study.
Grounded in the principles of the sociology of law, the course has morphed into an effort to introduce students to law as a self-referencing system with its own particular structures, premises, constraints and language, with its own logic and taboos and its own means of understanding the world. That systemicity (cf. Peter Checkland, Systems Thinking, Systems Practice, Chichester : John Wiley and Sons Ltd, 1999) is then a critical element in the way in which the legal system (in this case of the United States) interacts with the world, both as a legal and as a socio-economic-political actor. The course has also expanded from its original narrow and technical focus, to a broader focus on principles and the use of language and logic to build and operate a system of law. That broadening has made it possible to offer the course not just to first year law students, but also to graduate students in the social sciences and in international affairs, as a grounding in the legal systems that are important in their respective fields.

This post produces some of the materials I will be presenting to the class. I offer these materials in hopes that they may prove of use and that you might share comments, perspectives and suggestions as I develop those materials on this site. Thanks.

This post includes a draft of Chapter 6 (Law Articulated by Regulatory Agencies: The Administrative Function).

Chapter 6

Law Articulated by Regulatory Agencies ― The Administrative Function

I. Introduction.

            In the preceding chapters students have been introduced to three of the major forms of law that make up the legal system of the United States. The first was judicially administered law—corresponding roughly to what remains of the common law and equity.  The second was the law articulated by the legislature, statutes.  This is what many non-lawyers commonly understand as “law”.  Together, these constituted the sum of the law-making authority of the early Republic.  But changes, significant ones for law, came as a consequence of industrialization in the 19th century.  Those changes challenged the traditional bases of law to continue to order society in a way responsive to the needs of the new institutions, cultures and activities of the emerging national economic market and to hold together the fabric of a state increasingly transformed by waves of immigration. Moreover, the need for socialization attendant on immigration and the requirements for social adjustments made necessary by the end of slavery from the mid 19th century, fueled a taste for the sort of social legislation that might have been novel in earlier periods.

            Social regulation, and the regulation of market activities required a distinct type of government culture—one that need to play not merely the role of legislator, executive and judge, but also the increasingly important role of manager.  Managerialism was new to government in the 19th century.  It has become the central element of how government functions int eh 21st century.  Managerialism requires constant supervision and rules that treat with great specificity highly technical areas of behavior or conduct.  Everything from safety standards to the standardization of products called for new forms of government.  That new form of government was created through the establishment and enlargement of the functions of administrative agencies.  These governmental offices were established to fill out and enforce on an ongoing basis legislation that increasingly merely set goals, targets or objectives and delegated the details to organizations charged with their realization. 

            This chapter, then, considers the law produced by these administrative or regulatory agencies.  These constitute an increasingly important set of “rules” promulgated by agencies on the basis of power delegated to them by the legislature through statutory “law.”  They are not a substitute for law but a means for filling in gaps of law that is no longer able to specify with any degree of detail the rules necessary to meet the sometimes needs of regulation in highly technical fields. We will consider how this form of law making differs from statutes and the law of private disputes administered through courts.

II. Chapter Readings

·      Edward L. Glaeser and Andrei Schleifer, The Rise of the Regulatory State[1] Journal of Economic Literature XLI:401-425 (2003). READ ALL BUT SECTION 3

·      United States Securities and Exchange Commission, The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation (undated).[2]

·      Backer, Larry Catá, Global Panopticism: States, Corporations and the Governance Effectsof Monitoring Regimes.[3] Indiana Journal of Global Legal Studies, Vol. 15, 2008. READ PARTS I-V (pp. 101-138 in SSRN version).

The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation,[4]
Securities and Exchange Commission
(some footnotes added and links omitted)


The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.

As our nation's securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation.
And the common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC's actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth.

The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation's economy. To insure that this objective is always being met, the SEC continually works with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience.

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

One of the major sources of information on which the SEC relies to bring enforcement action is investors themselves — another reason that educated and careful investors are so critical to the functioning of efficient markets. To help support investor education, the SEC offers the public a wealth of educational information on this Internet website,[[5]] which also includes the EDGAR database [[6]] of disclosure documents that public companies are required to file with the Commission.

Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations. In particular, the Chairman of the SEC, together with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the Commodity Futures Trading Commission, serves as a member of the President's Working Group on Financial Markets.

This article is an overview of the SEC's history, responsibilities, activities, organization, and operation. More detailed information about many of these topics is available throughout this website.

Creation of the SEC

The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.

Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, half became worthless.

When the stock market crashed in October 1929, public confidence in the markets plummeted. Investors large and small, as well as the banks who had loaned to them, lost great sums of money in the ensuing Great Depression. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions.

Based on the findings in these hearings, Congress — during the peak year of the Depression — passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the SEC, was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing. The main purposes of these laws can be reduced to two common-sense notions:

  • Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
  • People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.

Monitoring the securities industry requires a highly coordinated effort. Congress established the Securities and Exchange Commission in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC.

Organization of the SEC

The SEC consists of five presidentially-appointed Commissioners, with staggered five-year terms (see SEC Organization Chart;[[7]] text version [[8]] also available). One of them is designated by the President as Chairman of the Commission — the agency's chief executive. By law, no more than three of the Commissioners may belong to the same political party, ensuring non-partisanship. The agency's functional responsibilities are organized into five Divisions and 23 Offices, each of which is headquartered in Washington, DC. The Commission's approximately 3,500 staff are located in Washington and in 11 Regional Offices [[9]] throughout the country.
It is the responsibility of the Commission to:

  • interpret and enforce federal securities laws;
  • issue new rules and amend existing rules;
  • oversee the inspection of securities firms, brokers, investment advisers, and ratings agencies;
  • oversee private regulatory organizations in the securities, accounting, and auditing fields; and
  • coordinate U.S. securities regulation with federal, state, and foreign authorities.

The Commission convenes regularly at meetings that are open to the public and the news media unless the discussion pertains to confidential subjects, such as whether to begin an enforcement investigation.


Division of Corporation Finance

The Division of Corporation Finance [[10]] assists the Commission in executing its responsibility to oversee corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Division's staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commission's rules and recommends to the Commission new rules for adoption.
The Division of Corporation Finance reviews documents that publicly-held companies are required to file with the Commission. The documents include:

  • registration statements for newly-offered securities;
  • annual and quarterly filings (Forms 10-K and 10-Q);
  • proxy materials sent to shareholders before an annual meeting;
  • annual reports to shareholders;
  • documents concerning tender offers (a tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price); and
  • filings related to mergers and acquisitions.

These documents disclose information about the companies' financial condition and business practices to help investors make informed investment decisions. Through the Division's review process, the staff checks to see if publicly-held companies are meeting their disclosure requirements and seeks to improve the quality of the disclosure. To meet the SEC's requirements for disclosure, a company issuing securities or whose securities are publicly traded must make available all information, whether it is positive or negative, that might be relevant to an investor's decision to buy, sell, or hold the security.

Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. Working closely with the Office of the Chief Accountant, the Division monitors the activities of the accounting profession, particularly the Financial Accounting Standards Board (FASB), that result in the formulation of generally accepted accounting principles (GAAP). Increasingly, the Division also monitors the use by U.S. registrants of International Financial Reporting Standards (IFRS), promulgated by the International Accounting Standards Board.

The Division's staff provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law. For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give it advice on compliance with the appropriate disclosure requirement.

The Division uses no-action letters to issue guidance in a more formal manner. A company seeks a no-action letter from the staff of the SEC when it plans to enter uncharted legal territory in the securities industry. For example, if a company wants to try a new marketing or financial technique, it can ask the staff to write a letter indicating whether it would or would not recommend that the Commission take action against the company for engaging in its new practice.

How the SEC Rulemaking Process Works
Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. Major pieces of legislation, such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Sarbanes-Oxley Act, provide the framework for the SEC's oversight of the securities markets. These statutes are broadly drafted, establishing basic principles and objectives. To ensure that the intent of Congress is carried out in specific circumstances — and as the securities markets evolve technologically, expand in size, and offer new products and services — the SEC engages in rulemaking.
Rulemaking can involve several steps: concept release, rule proposal, and rule adoption.
Concept Release: The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique and/or complicated that the Commission seeks out public input on which, if any, regulatory approach is appropriate. A concept release is issued describing the area of interest and the Commission's concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public's feedback is taken into consideration as the Commission decides which approach, if any, is appropriate.
Rule Proposal: The Commission publishes a detailed formal rule proposal for public comment. Unlike a concept release, a rule proposal advances specific objectives and methods for achieving them. Typically the Commission provides between 30 and 60 days for review and comment. Just as with a concept release, the public comment is considered vital to the formulation of a final rule.
Rule Adoption: Finally, the Commissioners consider what they have learned from the public exposure of the proposed rule, and seek to agree on the specifics of a final rule. If a final measure is then adopted by the Commission, it becomes part of the official rules that govern the securities industry.

Division of Trading and Markets

The Division of Trading and Markets [[11]] assists the Commission in executing its responsibility for maintaining fair, orderly, and efficient markets. The staff of the Division provide day-to-day oversight of the major securities market participants: the securities exchanges; securities firms; self-regulatory organizations (SROs) including the Financial Industry Regulatory Authority (FInRA), the Municipal Securities Rulemaking Board (MSRB), clearing agencies that help facilitate trade settlement; transfer agents (parties that maintain records of securities owners); securities information processors; and credit rating agencies.

The Division also oversees the Securities Investor Protection Corporation (SIPC), which is a private, non-profit corporation that insures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms. It is important to remember that SIPC insurance does not cover investor losses arising from market declines or fraud.

The Division's additional responsibilities include:

  • carrying out the Commission's financial integrity program for broker-dealers;
  • reviewing (and in some cases approving, under authority delegated from the Commission) proposed new rules and proposed changes to existing rules filed by the SROs;
  • assisting the Commission in establishing rules and issuing interpretations on matters affecting the operation of the securities markets; and
  • surveilling the markets.

Division of Investment Management

The Division of Investment Management [[12]] assists the Commission in executing its responsibility for investor protection and for promoting capital formation through oversight and regulation of America's $26 trillion investment management industry. This important part of the U.S. capital markets includes mutual funds and the professional fund managers who advise them; analysts who research individual assets and asset classes; and investment advisers to individual customers. Because of the high concentration of individual investors in the mutual funds, exchange-traded funds, and other investments that fall within the Division's purview, the Division of Investment Management is focused on ensuring that disclosures about these investments are useful to retail customers, and that the regulatory costs which consumers must bear are not excessive.

The Division's additional responsibilities include:

  • assisting the Commission in interpreting laws and regulations for the public and SEC inspection and enforcement staff;
  • responding to no-action requests and requests for exemptive relief;
  • reviewing investment company and investment adviser filings;
  • assisting the Commission in enforcement matters involving investment companies and advisers; and
  • advising the Commission on adapting SEC rules to new circumstances.
Division of Enforcement

First and foremost, the SEC is a law enforcement agency. The Division of Enforcement [[13]] assists the Commission in executing its law enforcement function by recommending the commencement of investigations of securities law violations, by recommending that the Commission bring civil actions in federal court or as administrative proceedings before an administrative law judge, and by prosecuting these cases on behalf of the Commission. As an adjunct to the SEC's civil enforcement authority, the Division works closely with law enforcement agencies in the U.S. and around the world to bring criminal cases when appropriate.

The Division obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, the self-regulatory organizations and other securities industry sources, and media reports.

All SEC investigations are conducted privately. Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. With a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following an investigation, SEC staff present their findings to the Commission for its review. The Commission can authorize the staff to file a case in federal court or bring an administrative action. In many cases, the Commission and the party charged decide to settle a matter without trial.

Common conduct that may lead to SEC investigations include:
  • misrepresentation or omission of important information about securities;
  • manipulating the market prices of securities;
  • stealing customers' funds or securities;
  • violating broker-dealers' responsibility to treat customers fairly;
  • insider trading (violating a trust relationship by trading while in possession of material, non-public information about a security); and
  • selling unregistered securities.

Whether the Commission decides to bring a case in federal court or within the SEC before an administrative law judge may depend upon the type of sanction or relief that is being sought. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding,[[14]] but an order barring someone from acting as a corporate officer or director must be obtained in federal court. Often, when the misconduct warrants it, the Commission will bring both proceedings.

  • Civil action: The Commission files a complaint with a U.S. District Court and asks the court for a sanction or remedy. Often the Commission asks for a court order, called an injunction, that prohibits any further acts or practices that violate the law or Commission rules. An injunction can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties, or the return of illegal profits (called disgorgement). The court may also bar or suspend an individual from serving as a corporate officer or director. A person who violates the court's order may be found in contempt and be subject to additional fines or imprisonment.
  • Administrative action: The Commission can seek a variety of sanctions through the administrative proceeding process. Administrative proceedings differ from civil court actions in that they are heard by an administrative law judge (ALJ), who is independent of the Commission. The administrative law judge presides over a hearing and considers the evidence presented by the Division staff, as well as any evidence submitted by the subject of the proceeding. Following the hearing the ALJ issues an initial decision [[15]] that includes findings of fact and legal conclusions. The initial decision also contains a recommended sanction. Both the Division staff and the defendant may appeal all or any portion of the initial decision to the Commission. The Commission may affirm the decision of the ALJ, reverse the decision, or remand it for additional hearings. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement.
Division of Economic and Risk Analysis

The Division of Economic and Risk Analysis assists the Commission in executing its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation by integrating robust economic analysis and rigorous data analytics into the work of the SEC. The Division has a broad role in Commission activities, interacting with nearly every Division and Office, providing sophisticated and data-driven economic and risk analyses to help inform the agency's policymaking, rulemaking, enforcement, and examinations.

There are two main functions for the Division. First, DERA staff provide vital support in the form of economic analyses in support of Commission rulemaking and policy development. Second, the Division also provides economic analysis and research, risk assessment, and data analytics to critically support the agency's resources on matters presenting the greatest perceived risks in litigation, examinations, and registrant reviews, as well as providing economic support for enforcement matters.

Among the functions performed by the Division are:

  • Analyzing the potential economic effects of Commission rulemakings or other Commission actions. In this role, offices within DERA works closely with the other Divisions and Offices to help examine the need for regulatory action, analyze the potential economic effects of rules and other Commission actions, develop data-driven analyses of market activity, and assist in evaluating public comments and studies.
  • Providing quantitative and qualitative research and support related to risk assessment. DERA staff help the Commission to anticipate, identify, and manage risks, focusing on early identification of potential fraud and illegal or questionable activities. Staff collects, analyzes, and disseminates information to the Commission and its Staff about regulated entities and market activity.
  • Assisting the Division of Enforcement by, for example, providing economic and quantitative analysis and support in enforcement proceedings and settlement negotiations.

Office of the General Counsel

The General Counsel [[16]] is appointed by the Chairman as the chief legal officer of the Commission, with overall responsibility for the establishment of agency policy on legal matters. The General Counsel serves as the chief legal advisor to the Chairman regarding all legal matters and services performed within, or involving, the agency, and provides legal advice to the Commissioners, the Divisions, the Offices, and other SEC components as appropriate.

The General Counsel represents the SEC in civil, private, or appellate proceedings as appropriate, including appeals from the decisions of the federal district courts or the Commission in enforcement matters, and appeals from the denial of requests under the Freedom of Information Act. Through its amicus curiae program, the General Counsel often intervenes in private appellate litigation involving novel or important interpretations of the securities laws, and the Office is responsible for coordinating with the Department of Justice in the preparation of briefs on behalf of the United States involving matters in which the SEC has an interest.

The General Counsel is also responsible for determining the adherence by attorneys in the SEC to appropriate professional standards, as well as for providing advice on standards of conduct to Commissioners and staff, as appropriate. It is responsible for the final drafting of all proposed legislation that the Chairman or the Commission choose to submit for consideration to the Congress or the states, and for coordinating the SEC staff positions on such legislation.

Office of the Chief Accountant

The Chief Accountant is appointed by the Chairman to be the principal adviser to the Commission on accounting and auditing matters. The Office of the Chief Accountant [[17]] assists the Commission in executing its responsibility under the securities laws to establish accounting principles, and for overseeing the private sector standards-setting process. The Office works closely with the Financial Accounting Standards Board, whose accounting standards the Commission has recognized as generally accepted for purposes of the federal securities laws, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants.

In addition to its responsibility for accounting standards, the Commission is responsible for the approval or disapproval of auditing rules put forward by the Public Company Accounting Oversight Board, a private-sector regulator established by the Sarbanes-Oxley Act to oversee the auditing profession. The Commission also has thorough-going oversight responsibility for all of the activities of the PCAOB, including approval of its annual budget. To assist the Commission in the execution of these responsibilities, the Office of the Chief Accountant is the principal liaison with the PCAOB. The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements.

Because of its expertise and ongoing involvement with questions concerning the financial books and records of public companies registered with the SEC, the Office of the Chief Accountant is often called upon to assist in addressing issues that arise in the context of Commission enforcement actions.

Office of Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations [[18]] administers the SEC's nationwide examination and inspection program for registered self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, investment companies, and investment advisers. The Office conducts inspections to foster compliance with the securities laws, to detect violations of the law, and to keep the Commission informed of developments in the regulated community. Among the more important goals of the examination program is the quick and informal correction of compliance problems. When the Office finds deficiencies, it issues a "deficiency letter" identifying the problems that need to be rectified and monitor the situation until compliance is achieved. Violations that appear too serious for informal correction are referred to the Division of Enforcement.

Office of Credit Ratings

The Office of Credit Ratings ("OCR" or the "Office") [[19]] assists the Commission in executing its responsibility for protecting investors, promoting capital formation, and maintaining fair, orderly, and efficient markets through the oversight of credit rating agencies registered with the Commission as nationally recognized statistical rating organizations or "NRSROs."

The staff of OCR monitors the activities and conducts examinations of NRSROs to assess and promote compliance with statutory and Commission requirements. The monitoring activities are geared towards informing Commission policy and rulemaking and include identifying and analyzing risks, monitoring industry trends, and administering and monitoring the NRSRO registration process as well as the periodic updates by existing registrant of their Forms NRSRO. The examination activities of the Office are focused on conducting legislatively mandated annual, risk-based examinations of all registered NRSROs to assess compliance with federal securities laws and Commission rules. The Office also conducts special risk-targeted examinations based on credit market issues and concerns and to follow up on tips, complaints, and NRSRO self-reported incidents. The Office collaborates and coordinates with other Commission Offices and Divisions as warranted to enhance the Office's ability to serve the public interest and protect users of credit ratings.

OCR is responsible for drafting annual public reports to Congress addressing adopted and proposed rules, the status of registrants and applicants, and the state of competition, transparency, and issues related to the management of conflicts of interest. The Office also drafts an annual public report summarizing the examinations of all NRSROs. The Office may be called upon to leverage its expertise to conduct ad-hoc research as warranted by industry or credit market conditions and draft statutorily mandated studies.

Office of International Affairs

The SEC works extensively in the international arena to promote cooperation among national securities regulatory agencies, and to encourage the maintenance of high regulatory standards worldwide. The Office of International Affairs [[20]] assists the Chairman and the Commission in the development and implementation of the SEC's international regulatory and enforcement initiatives. The Office negotiates bilateral and multilateral agreements for Commission approval on such subjects as regulatory cooperation and enforcement assistance, and oversees the implementation of such arrangements. It is also responsible for advancing the Commission's agenda in international meetings and organizations. The Office also conducts a technical assistance program for countries with emerging securities markets, which includes training both in the United States and in the requesting country. Over 100 countries currently participate in this program.

Office of Investor Education and Advocacy

The Office of Investor Education and Advocacy [[21]] has three main functional areas:

The Office of Investor Assistance responds to questions, complaints, and suggestions from the members of the public. Tens of thousands of investors contact the SEC each year using the agency's online forms [[22]] or our . . . hotline . . . to ask questions on a wide range of securities-related topics, to complain about problems with their investments or their financial professionals, or to suggest improvements to the agency's regulations and procedures.

The Office of Investor Education carries out the SEC's investor education program, which includes producing and distributing educational materials,[[23]] participating in educational seminars and investor-oriented events, and partnering with federal agencies, state regulators, and others on investor literacy initiatives.

The Office of Policy has responsibility for reviewing agency action from the perspective of the individual investor, including conducting investor surveys and focus groups. It also plays a role in the Commission's efforts to help ensure that investor disclosures are written in plain English.

Office of the Chief Operating Officer

The Office of the Chief Operating Officer [[24]] assists the Chairman in developing and executing the management policies of the SEC. The Office formulates budget and authorization strategies, supervises the allocation and use of SEC resources, promotes management controls and financial integrity, manages the administrative support offices, and oversees the development and implementation of the SEC's automated information systems. The Office has five main functional areas:

The Office of Financial Management [[25]] administers the financial management and budget functions of the SEC. The Office assists the Chairman and the Executive Director in formulating budget and authorization requests, monitors the utilization of agency resources, and develops, oversees, and maintains SEC financial systems. These activities include cash management, accounting, fee collections, travel policy development, and oversight and budget justification and execution.

The Office of Support Operations [[26]] assists the Chairman and the Executive Director in managing the agency's facilities and assets, and provides a wide range of support services to the SEC staff. The Office serves the Headquarters Office and all Regional Office locations on matters including property management, office lease acquisition and administration, space renovation, supplies and office equipment management, transportation, mail distribution, publications, printing, and desktop publishing. Also, OSO is responsible for the processing of requests under the Freedom of Information and Privacy Acts, the management of all agency records in accordance with the Federal Records Act, and maintaining the security and safety of all SEC facilities.

The Office of Human Resources [[27]] assists the Chairman in recruiting and retaining the best and the brightest professional staff in the federal workforce, and in ensuring that the SEC remains the employer of choice within the federal government. The Office has overall responsibility for the strategic management of the SEC's human capital. In addition, it is responsible for ensuring compliance with all federal regulations for the following areas: recruitment, staffing, retention, and separation; position management and classification; compensation and benefits counseling and processing; leadership and employee development; performance management and awards; employee relations; labor relations; the SEC's disability, work/life, and telework programs; employee records processing and maintenance; and employee financial disclosure. The Office also represents the Commission as the liaison to the U.S. Office of Personnel Management and other Federal Government agencies, various public and private-sector professional human resources organizations, and educational institutions in matters relating to human capital management.

The Office of Information Technology [[28]] supports the Commission and staff of the SEC in all aspects of information technology. The Office has overall management responsibility for the Commission's IT program including application development, infrastructure operations and engineering, user support, IT program management, capital planning, security, and enterprise architecture. The Office operates the Electronic Data Gathering Analysis and Retrieval (EDGAR) system,[[29]] which electronically receives, processes, and disseminates more than 500,000 financial statements every year. The Office also maintains a very active website that contains a wealth of information about the Commission and the securities industry, and also hosts the EDGAR database for free public access.

Office of Legislative Affairs and Intergovernmental Relations

The Office of Legislative Affairs and Intergovernmental Relations [[30]] serves as the agency's formal liaison with the Congress, other Executive Branch agencies, and state and local governments. The staff carefully monitor ongoing legislative activities and initiatives on Capitol Hill that affect the Commission and its mission. Through regular communication and consultation with House and Senate members and staff, the Office communicates legislators' goals to the agency, and communicates the agency's own regulatory and management initiatives to the Congress.

The Office is responsible for responding to congressional requests for testimony of SEC officials, as well as requests for documents, technical assistance, and other information. In addition, the Office monitors legislative and oversight hearings that pertain to the securities markets and the protection of investors, even when an SEC witness is not present.

Office of Public Affairs

The Office of Public Affairs [[31]] assists the Commission in making the work of the SEC open to the public, understandable to investors, and accountable to taxpayers. It helps every other SEC Division and Office accomplish the agency's overall mission — to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Office coordinates the agency's relations with the media and the general public, in this country and around the world.

In addition to publicizing the work of the Commission and its staff, the Office assists in the enforcement of the Commission's policy concerning the confidentiality of law enforcement and investigative information, which is designed to protect the privacy rights of American citizens. The Office reviews and distributes within the agency press coverage of the SEC and of Commission-related issues, including the securities industry and the financial markets. It also provides limited research where policy and public affairs goals overlap.

Office of the Secretary

The Secretary of the Commission is appointed by the Chairman, and is responsible for the procedural administration of Commission meetings, rulemaking, practice, and procedure. Among the responsibilities of the Office [[32]] are the scheduling and recording of public and non-public meetings of the Commission; the administration of the process by which the Commission takes action without a meeting (called the seriatim process); the administration of the duty-officer process (by which a single Commissioner is designated to authorize emergency action); the maintenance of records of Commission actions; and the maintenance of records of financial judgments in enforcement proceedings. The Office also provides advice to the Commission and the staff on questions of practice and procedure.

The Office reviews all SEC documents submitted by the staff to the Commission. These include rulemaking releases,[[33]] SEC enforcement orders [[34]] and litigation releases,[[35]] SRO rulemaking notices and orders,[[36]] and actions taken by SEC staff pursuant to delegated authority. In addition, it receives and tracks documents filed in administrative proceedings, requests for confidential treatment, and comment letters on rule proposals. The Office is responsible for publishing official documents and releases of Commission actions in the Federal Register and the SEC Docket, and it posts them on the SEC Internet website, www.sec.gov. The Office also monitors compliance with the Government in the Sunshine Act.

Office of Equal Employment Opportunity

Because the SEC's employees are its most important resource, the Office of Equal Employment Opportunity [[37]] works to ensure that the agency's professional staff come from diverse backgrounds that reflect the diversity of the investing public. Equal employment opportunity at the SEC is a continuing commitment. To maintain neutrality in resolving disputes, the EEO Office is independent of any other SEC office. The EEO Director reports to the Chairman. The primary mission of the EEO Office is to prevent employment discrimination, including discriminatory harassment, so that all SEC employees have the working environment to support them in their efforts to protect investors, maintain healthy markets, and promote capital formation.

Office of the Inspector General

The Office of the Inspector General [[38]] conducts internal audits and investigations of SEC programs and operations. Through these audits and investigations, the Inspector General seeks to identify and mitigate operational risks, enhance government integrity, and improve the efficiency and effectiveness of SEC programs.

Office of Administrative Law Judges

The Commission's Office of Administrative Law Judges [[39]] consists of independent judicial officers who conduct hearings and rule on allegations of securities law violations in cases initiated by the Commission. When the Commission initiates a public administrative proceeding, it refers the cases to the Office, where it is assigned to an individual Administrative Law Judge (ALJ). The ALJ then conducts a public hearing that is similar to a non-jury trial in the federal courts. Just as a federal judge can do, an ALJ issues subpoenas, rules on motions, and rules on the admissibility of evidence. At the conclusion of the hearing, the parties submit proposed findings of fact and conclusions of law. The ALJ prepares an initial decision [[40]] that includes factual findings and legal conclusions that are matters of public record. Parties may appeal an initial decision to the Commission, which can affirm, reverse, modify, set aside or remand for further proceedings. Appeals from Commission action are to a United States Court of Appeals.

The Laws That Govern the Securities Industry

Securities Act of 1933

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:

  • require that investors receive financial and other significant information concerning securities being offered for public sale; and
  • prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.

Purpose of Registration

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

The Registration Process

In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:

  • a description of the company's properties and business;
  • a description of the security to be offered for sale;
  • information about the management of the company; and
  • financial statements certified by independent accountants.
All companies, both domestic and foreign, must file their registration statements electronically. These statements and the accompanying prospectuses become public shortly after filing, and investors can access them using EDGAR.[[41]] Registration statements are subject to examination for compliance with disclosure requirements.

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

  • private offerings to a limited number of persons or institutions;
  • offerings of limited size;
  • intrastate offerings; and
  • securities of municipal, state, and federal governments.
By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering these types of securities to the public.

Securities Exchange Act of 1934

With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, and American Stock Exchange are SROs. The Financial Industry Regulatory Authority, which operates the NASDAQ system, is also an SRO.

The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.
The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Corporate Reporting

Companies with more than $10 million in assets whose equity securities are held by more than a specified number of holders must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.

Proxy Solicitations
The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.

Tender Offers

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.

Insider Trading

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

Registration of Exchanges, Associations, and Others

The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.

The exchanges and the Financial Industry Regulatory Authority (FINRA) are identified as self-regulatory organizations (SRO). SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are published for comment before final SEC review and approval.

The full text of this Act can be read at: http://www.sec.gov/about/laws/sea34.pdf.

Trust Indenture Act of 1939

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act. The full text of this Act can be read at: http://www.sec.gov/about/laws/tia39.pdf.

Investment Company Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. The full text of this Act is available at: http://www.sec.gov/about/laws/ica40.pdf.

Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the Commission. The full text of this Act is available at: http://www.sec.gov/about/laws/iaa40.pdf.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at:  http://uscode.house.gov/download/pls/15C98.txt. (Please check the Classification Tables  [[42]] maintained by the US House of Representatives Office of the Law Revision Counsel for updates to any of the laws.)  You can find links to all Commission rulemaking and reports issued under the Sarbanes-Oxley Act at:  http://www.sec.gov/spotlight/sarbanes-oxley.htm.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 by President Barack Obama. The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency. The full text of the Act is available at: http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. (Please check the Classification Tables maintained by the US House of Representatives Office of the Law Revision Counsel [[43]] for updates to any of the laws.) You can find links to all Commission rulemaking and reports issued under the Dodd Frank Act at: http://www.sec.gov/spotlight/dodd-frank.shtml.

Jumpstart Our Business Startups (JOBS) Act

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act [[44]] was signed into law by President Barack Obama. The JOBS Act requires the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations. For more information on the JOBS Act, see our Jumpstart Our Business Startups (JOBS) Act Spotlight page.[[45]]


III. Law Articulated by Regulatory Agencies ― The Administrative Function

            We have been unpacking what might at first appear to be a rather straightforward inquiry: “what is law?” The least interesting (though necessary) purpose was to lay a foundation for much of what is to follow. The more interesting was to begin to suggest that the answer has at least to distinct aspects: one goes to function and the other goes to form. Though tightly intertwined in everyday operation, it is useful to disentangle them to understand each strand better. To that end I stated with the same reading that Western students might have encountered on their first day in law school near the end of the foundational period of the development of Western legal culture, the Institutes[46] written during the reign of the Eastern Roman Emperor Justinian.

            First, the Institutes introduced the student to the core question of the function of law in its broadest sense. It drew the connection between law and justice, suggesting the idea, now central to conventional Western legal theory, that law is the manifestation of justice. It then suggested a division within justice that is also well known to Western legal theory: that the manifestation of justice in law requires attention both to process and substantive norms. The Institutes offer two general process principles, accessibility and predictability. These now serve as the fountainhead of much of what passes for Western principles of process expressed in the constitutional law of states. The Institutes offer a more ambiguous approach to the connection between justice and its substantive aspects. It suggests, at its general level that justice (and law as the manifestation of justice) is welfare maximizing (“give man his due”). But it offers no specifics other than to suggest that the answer is contextual. More concretely, the Institutes frame the issue of the substantive function of justice by reference to its manifestation in the sources. The sources of law, then, are also the sources of its substance.

            With the quest for the sources of law, and the derivation from its appropriate application to the residents of a particular state, the Institutes introduce the student to the forms of law in its broadest sense. The Institutes draw the connection between the substance of justice (and its manifestation in law) and the form in which law takes, identifying three distinct sources of law―natural law, the law of nations and “local” law. These sources provide the matrix within which the substance of law is composed. This is so because, for the Institutes, sources of law describe the formal as well as the normative structures of law: that is, a source of law includes its form, the institutions or persons who may create it, its relative authority in relation to other forms, and the basis for discovering its substance. Natural law is immutable. It is based either on scientific or divine “truth” of the kind that is incapable of refutation, except on its own terms (by other divine or scientific truths). It is common to all people (especially where a social system is grounded in a universalizing religion). The law of nations is based on the customs and traditions observed by people of all states. It is not international law in the modern sense of agreements among states in their legislative or regulatory capacities, but rather it includes those governance systems now more commonly understood as transnational private law. The best example of thislaw of nations was the old law merchant and in its modern form the emerging systems of private governance of supply chain relationships. The third source of law, the local law of a state, is also based on custom and tradition but more importantly is manifested by the actions of institutional actors who have been empowered to act on behalf of the people. But it also embraces the customary law of the people of a certain place. Both the law of states and local law are grounded in consent and focused on the traditions and customs of the subject populations. Yet they can also be expressed by the authority of individuals and institutions―the government of a state―which has been vested with the authority to act in the name of the people. And thus law, government, justice, process, science, religion, custom, process and consent are all bound up together and manifested in law through the forms which have emerged through custom. At bottom, and beyond the complexity of its form and manifestations, law may be understood to be those rules that a community consents to be bound by, even when individuals within that community do not.

            With that foundation we began to consider in more detail those forms of law (and their form and sources) that serve as the framework of the U.S. domestic legal order. We began with an examination of the premises and legal culture of the common law. The fundamental insight centered on the relationship between the form of common law and its function and substance. These together define a means of declaring law that remains influential in the United States. Common law in its essence referenced a system in which the Crown (now the government) offered to mediate disputes among private parties. The dispute had to of a kind recognized as within the universe of judicially resolvable disputes, codified by reference to the writs available from the clerks of the Crown Chancery and accepted as within the jurisdiction of the court from which the plaintiff sought relief. The writ itself included a promise, also enforceable by the courts, of a minimum standard of process rights (notice and an opportunity to be heard before judgment was rendered). The court would base its resolution of the dispute through a process of deductive reasoning grounded in the essence of rights at issue, derived from the statements of other courts considering disputes grounded in the same writ, and reasoned by analogy to the resolution of similar claims previously rendered by that court or by other courts considering the same claim. The court did not make law; it applied the law within the tightly constraining matrix of prior cases. The tie to custom and customary expectation was reinforced by the role of a jury to which was assigned the task of finding “facts” on which the court could apply the reasoning of other courts and thus, the“ law.”

            The remedy available was usually reduced to money damages to make the victim whole. To this equity added a number of additional private (and some public) claims that could be asserted by individuals and a number of additional remedies (injunction, constructive trust, specific performance, etc.). Most importantly, it inserted notions of fairness in judging claims (dirty hands, laches, and the like). Thus the form of common law and equity (application to a court vested with jurisdiction over a matter of private dispute between parties grounded through the filing of a claim based on an appropriately stated claim for relief) also served to define its function (dispute resolution among private litigants driven by the litigants themselves) and substance (the development of rights to relief based on the aggregated resolution of similar disputes that reflected the expectations of the community as refined and applied by the courts). In this way common law was flexible in the sense that it changed as community expectations and needs changed; it was autonomous of the state in the sense that legislation was unnecessary to the development of these rules and the courts served to drive the development of these rules applied in a consistent way through the mediation of a class of lawyers well versed in the (to them at least) accessible body of decisions. Common law was driven by litigants with claims; and in this sense it was conservative, resisting an instrumental use of law. It was conservative and presented a moving target, the current version of the “law” to be applied necessarily had to include past and current judicial applications of the standard in the cases. To know the law required very sophisticated knowledge of the cases. When one thinks about what it means to “think like a lawyer” in the U.S. system, it tends to reference this closed, self-referencing and litigant driven system of deducing law from the aggregate of its prior applications.

            We then examined the culture and structure of statutory law. A century ago, a consideration of statutory law would have been a short appendix to the consideration of common law in the United States. But the situation has been reversed here and it is now of central importance for U.S. law students to consider statutes as an integral part of their education. That consideration must be grounded both on the peculiarities of the “culture” of statutory law in the United States and the way in which statutory law co-exists with and draws on common law in ways incomprehensible to civil law. Statutes are as old as common law.

            The Institutes remind us that from earliest times in the West the power to use law instrumentally, that is to have a government in place with the authority to issue commands with the purpose of managing or changing behavior among a subject population. These commands we have come to understand as statutory law when issued by an institution of government which exercises its power in a manner specified in the rules for the organization of states and the exercise of power delegated to it from the people. At the time of the Institutes and in contemporary common law origin states, customary law and statutes co-existed within the same regulatory space. But this changed in most countries in Europe and Latin America (at least as a formal matter) with the triumph of the French Revolution (and especially its approach to the relationship between law and the state). We noted two principal moving causes. The first was the philosophy of the Enlightenment which embraced the idea that science and good management principles could be used to make society and the individuals within them better and more productive (perhaps even happier). The second was the increasing failures of then-current systems to meet the regulatory needs of societies confronting the rapid and socially destabilizing forces of industrialization. Customary law, grounded in a premise of stability, was inadequate to the task of maintaining order at a time of rapid social, technological, political and economic changes. Statutes offered a more efficient alternative to regulation in terms of social transformation. Statutes did not have to wait for litigants; it was more responsive to popular demand for solutions to general problems, it could be applied directly throughout a jurisdiction, it could be used instrumentally and it was generally accessible in the form of written commands.

            In the wake of the French Revolution many states sought to apply “scientific” principles to the construction of “modern” states by jettisoning the complex of ancient customs, rights, royal and aristocratic prerogatives and obligations in favor of a tightly integrated system of rules with the objectives of bettering individuals and the society to which they belonged. To that end that apparatus of the state, its government, was assigned the sole right to develop and implement law through either administrative regulations (discussed in our next class) or legislation. In many European states, by the beginning of the 20th century, the philosophy of law posited (though the situation on the ground was of course less clear) that only the state could make law and then only through the appropriate bodies following the appropriate rules for making law. Courts applied this law but had no authority to make or declare it (of course this was also easier to maintain in theory than in fact).

            In the U.K. the U.S. and other states based on English common law a different approach was taken. Rather than abandon common law, states supplemented common law with a statutory overlay. Where regulation was required to meet problems not addressed by common law or equity, statutes could fill the void directly; otherwise they sought to steer, change, or supplement common law in a number of respects that reflected conscious judgment about the way law should develop. But statutes required a different approach to application than common law. Courts did not have to aggregate cases to derive the rule and the factual constraints within which it must be applied. The statute spoke for itself. Reference had to be made to the words of the statute and perhaps to the intention of its drafters. That intent might be found in intrinsic sources―the provision itself, in the section in which it could be found, or in the entire statutory provision itself. That intention was immutable (unlike the standards of common law). In a number of jurisdictions that intent might also be derived from extrinsic sources―legislative debates, reports and other evidence of motive or objective.

            This grafting process also produced a very different judicial culture in relation to application of statutes in disputed between litigants. Courts tended to apply the philosophy of common law judging to statutory enactments. Statutes in derogation of the common law might be construed narrowly, or they could be construed broadly but applied only within the narrow context of the issue they addressed, or they could be integrated into common law systems and treated as part of common law, from which legal principles could be derived and applied deductively to solve problems generally. Courts were also confronted with the problem of statutory ambiguity, either because statutes were poorly drafted (the product of political compromise and interpretation avoidance), or failed to include sufficient detail, or were unclear about the mechanics of its implementation. To this problem, common law courts either engaged in statutory construction that corrected errors, developed and engaged in elaborate standards for gap-filling open textured statutes and developed substantial common law under-structures that elaborated statutes their reach, application and construction. This served to import some of the values of common law cultures to increasingly elaborate statutory systems. In any case, in Anglo-American legal cultures statutes and common law found ways to be drawn together, existing both side by side and as part of integrated regulatory schemes.

            But even statutes ultimately failed to live up to their promise―and that failure was in evidence almost from the time U.S. governments sought to divert the thrust of law making from courts based common law to legislatively driven statutory law. Like common law, statutory law increasingly was understood as an inefficient means of managing behavior. Statutes were useful for commanding specific behavior (in the criminal law for example) and announcing objectives (clean air and protection of children from defective products, for example), but they proved unable to actually set out with precision those rules necessary to manage these policy objectives and more importantly statutes proved too inflexible to be modified as conditions changed. These problems were structural―legislatures were hardly capable of acquiring the expertise necessary to adequately develop comprehensive rules for managing the increasingly complex behaviors they were called upon to control. More importantly, legislatures are political bodies and the process of passing legislation is closely constrained by the needs of assuring democratic accountability. As a consequence legislation is often difficult to enact and quick responses to changing conditions practically impossible to expect form a legislature. Yet the appetite for managing activity―from transportation, economic markets, product standards, trade, commodities, environmental consequences of activity, education, and the like―required resort to a form of law making that could avoid the passivity of common law and the structural rigidity of legislation. The current consensus is that administrative regulations, rules enacted by non-elected officials under authority of a delegation of legislative power from democratically elected institutions―serve that purpose.

            So today we consider what might be the most significant form of formal regulation, one that impact of our lives in the most immediate and minute ways―administrative regulations.The first of our readings, Edward L. Glaeser and Andrei Shleifer, The Rise of the Regulatory State[47]Journal of Economic Literature XLI:401-425 (2003), provides a historical and conceptual basis for the rise of the modern administrative state. The second reading, Backer, Larry Catá, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes,[48] Indiana Journal of Global Legal Studies, Vol. 15, 2008, provides a glimpse of the culture of administrative regulation.

            Glaeser and Shleifer start by reminding readers of the status quo before 1900, one in which litigation was viewed as the preferred default method for resolving commercial disputes. This situation changed radically between 1887 (with the passage of the Interstate Commerce Act) and 1917 (and the effective end of the progressive movement in the U.S.). This period marked not merely a move toward statute as a preferred means of managing behavior, but also set the foundation for the elaboration of increasingly complex and intrusive administrative regulatory systems through which government could more effectively engage in the social control of a wide range of economic activity. Glaeser and Shleifer develop a theory of law enforcement. They develop a theory based on a premise of the necessity of instrumental efficiency of statutes to guide their analysis. “In our theory, whatever law enforcement strategy the society chooses, private individuals will seek to subvert its workings to benefit themselves. The efficiency of alternative institutional arrangements depends in part on their vulnerability to such subversion.”[49]

            First they consider standard public interest theory, which is premised on the idea that regulation deals with market failures and externalities but which may not explain why neither tort nor contract law could successfully address these problems as effectively.[50] They note that by the beginning of the 20th century, it became more efficient for American society to rely on regulation than on either statutes or litigation as a means of creating regulatory structures. Commercialization and industrialization created large companies that could more easily afford to influence justice, prevail in litigation as experienced repeat players, purchase legal talent and experts and avoid paying judgments. Smaller companies and individuals found their interests better protected through statute and administrative regulation. From the authors’ perspective, “the regulation of markets was a response to the dissatisfaction with litigation as a mechanism of social control of business.”[51] Recalling our discussion of the connection between law and justice, the authors note that writers of the 1930s “saw regulation as a political response to the failure of private litigation to keep up with the community ideas of justice.”[52] More importantly, perhaps, it was an approach that suggested obtaining policy objectives at lower transaction costs to society. That is, administrative regulation might increase the transaction costs of rich and powerful actors of subverting the system to their own benefit.[53] The central question for administrative regulation, then, if regulatory efficiency (and social welfare maximization) are fundamental goals for using law instrumentally to create rules that “give every man his due” then the issue of litigation versus administrative regulation becomes an empirical one with results dependent on the character of each society: the unreliability of courts versus corruption of regulating agencies. (Ibid., 404). The issue for each society, then, the authors argue, is not whether administrative regulation is necessary, but what mix of administrative regulation, statutes and cases will produce the maximum benefit at the least social cost. (Ibid.).

            The authors then describe the movement from common law to administrative regulation in the United States (Ibid., 404-408). Their thesis is that the road to administrative regulation in the United States was paved by money and power and the efforts to reduce their ability to subvert (and therefore preserve the legitimacy) of the state. They describe the way that powerful business interests used that power to maintain the dominance of common law, and through common law to minimize their exposure to liability. This was accomplished through interventions in ideological warfare (regulations as un-American and a threat to common law), and a range of subversion tactics: strategic selection of judges that would advance an appropriate ideological agenda, strategic use of trial tactics and the investment of substantial sums in delaying tactic litigation, bribery (witnesses, judges and legislators), and structural political corruption (city “
machines“ and the like).[54] In the 19th century, it seems, the well-heeled always fared better in part because they had more resources to effectively use the legal system against less well-resourced opponents. But the move toward principles of mass democracy, and the increasing availability of voting power eventually tilted the contests between these groups from courts to legislatures and administrative agencies (Ibid., 407, 418) so that by the 1930s the administrative state had replaced the judiciary as the principal source of social control of business. (Ibid). Thus regulation as a means of lawmaking has a substantially important political objective―to shift power from powerful actors to mass actors by moving the locus of regulation from a judiciary viewed as corrupt to a legislature that is viewed as more accountable to mass pressure through elections. (Ibid., 415).

            Yet, like judges and legislators, administrative regulators can also be corrupted. Within the administrative state corruption follows two distinct paths―the first is old fashioned bribery and subversion, the second and most successful is an informal “capture” of regulatory agencies through sustained practices of interventions and the management of information used to build administrative regulations. (Ibid., 417). From this historical accounting the authors proposes set of implications about the role of administrative regulation in modern states. First, in states where corruption is likely and governmental institutions weak, it might be best to avoid any sort of regulatory intervention. They make a case for private or transnational governance alternatives to law, a subject we will consider in our next class (Ibid., 420). Regulation is desirable where the state has developed substantial governance capacity within a rule of law framework and especially to correct business activity with high likelihood of social damage. (Ibid., 421). Ironically, litigation as a regulatory strategy works best only in the most advanced states, states with a high degree of structural impediments to individual subversion of the system. (Ibid). In essence, the highest degree of state intervention in and management of private activity is possible only in those states that have themselves developed a governmental apparatus the institutions with the technical expertise and the culture of ethics strong enough to do their jobs and resist corruption.

            In the United States, the current framework of administrative regulations is fairly straightforward. Regulations are rules with the effect of law, which are enacted by and administered under an agency of the state which has been created by statutes which (1) establish the structures and authority of regulatory agencies, (2) define the scope of their authority to enact regulation, and (3) delegate specific regulatory authority. These may be specified in one or several statutes and the legislature may amend or revoke regulatory power as the legislature likes. All regulation is treated as a delegation of legislative authority―agencies are exercising legislative authority but only to the extent the legislature has permitted such exercise. All such regulations may be amended or voided neither by subsequent legislation nor by action of the regulatory agency. Unlike statutes, which are the product of political negotiation and must be enacted in accordance with the procedures for legislation specified in state or federal constitutions, regulations are easier to enact, modify or repeal. But regulation is still subject to a set of
procedural constraints. Federal agencies are subject, for example, to the constraints of the Administrative Procedure Act,[55] which specifies the manner in which regulations may be enacted. The object of these is to ensure, to some extent, that regulatory activity is open to some measure of public scrutiny and accountability. In the United States, the federal government makes federal regulations accessible through publication in the Federal Register,[56] which serves as the daily journal of the United States government. The regulations are also codified within a Code of Federal Regulations,[57] which includes the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government. It is divided into 50 titles that represent broad areas subject to Federal regulation.

            Where regulations are issues, statutes tend to be quite general, specifying the objectives of the statute and assigning responsibility for drafting and implementing rules to operationalize the statutory goals to administrative agencies. These rules are far more specific and reflect an expertise that that may be beyond that of the legislature. Yet administrative regulations may also suffer from the same deficiencies as statutes: they may be badly drafted, they may leave ambiguities, and they may not be flexible enough to deal with rapidly changing regulatory environments. It is thus not uncommon for courts to treat regulations, when asked to apply them, in a way that is similar to judicial approaches to statutes. Because of the level of detail and the presumption of expertise, courts have tended to defer to agency factual findings. Courts also will look to both the statute and sometimes extrinsic sources within the agency to resolve ambiguities. Some regulations have also spawned a substantial common law style jurisprudence. A great example of the later is SEC Rule 10b-5, codified at 1
7 C.F.R.240.10b-5.[58] The judicial glosses on the regulation, prohibiting fraud in connection with transactions in securities has been substantial and represents something like a common law of securities fraud. Likewise, the Federal Rules of Civil Procedure, enacted under authority of the Rules Enabling Act, 28 U.S.C. § 2072 has also produced an enormous jurisprudence, the study of which makes up the bulk of a first year law course in procedure. These rules are efficient precisely because agencies with expertise over the subject matter of the rule making delegation can be more flexible in rule making. Yet in substantial respect, regulations bear much of the same character of statutes, whose form and “culture” they mimic.

            Having set the context for regulation, it is important for the student of the U.S. legal system to begin to understand the system in situ and to get a glimpse of the context in which regulation arises.  It suggests, that like the institution of common law, regulation can only be understood in the U.S. legal system in terms of its relationship with the administrative agency within which it is created, administered and within which applied to resolve disputes. Just as common law cannot be understood without a knowledge of the courts within which it was developed and applied, so regulations cannot be understood outside of the context of administrative agencies. Though each agency conforms to the same set of general principles for their operation, something we will consider in more detail in later chapters,  the character and extent of regulation in a particular agency is substantially determined by its specific character, objectives, and jurisdiction.

            To that end, the second reading provides, as an introductory example, a description of the integration of institutional frameworks, and the regulation that is produced thereby.  The example, is deliberately presented as a self description, in this case of one of the more important agencies producing regulation in the United States, the Securities and Exchange Commission.  As one reads through this self description, one notes the importance of the nature of the relationships between agency structure, the limits and nature of jurisdictional competence created through statute, the forms of regulation, and the institutions established both to create it , enforce it, and interpret it.  The significant consequences of combining quasi-executive, quasi-legislative, and quasi-judicial powers in one agency, within the structures of a national government built on principles of the separation of those powers as a fundamental tenet of its organization, will be explored in later chapters.  For now the student can consider the way in which both organizational structures and the character and scope of regulation are affected by the power of a single unit of government to exercise legislative, executive and judicial power, grounded on the regulations it itself develops.  

            The self-description of the regulatory process is especially useful.  Notice the way in which the process of regulation is quite consciously instrumental—the approach is almost the mirror reverse of that at the heart of common law and equity practice.  Here the SEC is constantly on the look out for issues requiring management and control.  That executive function is then translated into action through its legislative function—the process of establishing regulation to meet or solve issues or manage behaviors thought to impact on the mandate of the agency and that might touch on its goals and objectives.  These regulations then serve as the basis for the assertion of executive authority against those who fail to comply, and those issues of non-compliance may be heard first, and resolved within the administrative hearings process built into the authority of the agency itself.  

            Notice as well that the regulatory authority of the agency is also deeply embedded in international regulatory currents.  This represents an interesting extension of administrative authority beyond the territorial boundaries of the state, a topic we will consider in later chapters.  It does suggest that the instrumentalism inherent in statutes, combined with the managerialism at the core of regulatory systems, tend to be well suited for the management of activities, especially economic activities, that cross borders. 

            The issue of agency power, and its alignment with the powers of the elected branches has always been troublesome.  Consider an important early case in that connection:


295 U.S. 602 (1935)
Decided May 27, 1935

Mr. Justice SUTHERLAND delivered the opinion of the Court.

Plaintiff brought suit in the Court of Claims against the United States to recover a sum of money alleged to be due the deceased for salary as a Federal Trade Commissioner from October 8, 1933, when the President undertook to remove him from office, to the time of his death on February 14, 1934. The court below has certified to this court two questions (Act of February 13, 1925, s 3(a), c. 229, 43 Stat. 936, 939, 28 U.S.C. s 288 (28 USCA s 288)), in respect of the power of the President to make the removal. The material facts which give rise to the questions are as follows:

William E. Humphrey, the decedent, on December 10, 1931, was nominated by President Hoover to succeed himself as a member of the Federal Trade Commission, and was confirmed by the United States Senate. He was duly commissioned for a term of seven years, expiring September 25, 1938; and, after taking the required oath of office, entered upon his duties. On July 25, 1933, President Roosevelt addressed a letter to the commissioner asking for his resignation, on the ground ‘that the aims and purposes of the Administration with respect to the work of the Commission can be carried out most effectively with personnel of my own selection,’ but disclaiming any reflection upon the commissioner personally or upon his services. The commissioner replied, asking time to consult his friends. After some further correspondence upon the subject, the President on August 31, 1933, wrote the commissioner expressing the hope that the resignation would be forthcoming, and saying: ‘You will, I know, realize that I do not feel that your mind and my mind go along together on either the policies or the administering of the Federal Trade Commission, and, frankly, I think it is best for the people of this country that I should have a full confidence.’

The commissioner declined to resign; and on October 7, 1933, the President wrote him: ‘Effecti ve as of this date you are hereby removed from the office of Commissioner of the Federal Trade Commission.’

Humphrey never acquiesced in this action, but continued thereafter to insist that he was still a member of the commission, entitled to perform its duties and receive the compensation provided by law at the rate of $10,000 per annum. Upon these and other facts set forth in the certificate, which we deem it unnecessary to recite, the following questions are certified:

‘1. Do the provisions of section 1 of the Federal Trade Commission Act, stating that ‘any commissioner may be removed by the President for inefficiency, neglect of duty, or malfeasance in office’, restrict or limit the power of the President to remove a commissioner except upon one or more of the causes named?

‘If the foregoing question is answered in the affirmative, then—

‘2. If the power of the President to remove a commissioner is restricted or limited as shown by the foregoing interrogatory and the answer made thereto, is such a restriction or limitation valid under the Constitution of the United States?’

The Federal Trade Commission Act, c. 311, 38 Stat. 717, 718, ss 1, 2, 15 U.S.C. ss 41, 42 (15 USCA ss 41, 42), creates a commission of five members to be appointed by the President by and with the advice and consent of the Senate, and section 1 provides: ‘Not more than three of the commissioners shall be members of the same political party. The first commissioners appointed shall continue in office for terms of three, four, five, six, and seven years, respectively, from the date of the taking effect of this Act (September 26, 1914), the term of each to be designated by the President, but their successors shall be appointed for terms of seven years, except that any person chosen to fill a vacancy shall be appointed only for the unexpired term of the commissioner whom he shall succeed. The commission shall choose a chairman from its own membership. No commissioner shall engage in any other business, vocation, or employment. Any commissioner may be removed by the President for inefficiency. neglect of duty, or malfeasance in office. * * *’

Section 5 of the act (15 USCA s 45) in part provides that:

‘Unfair methods of competition in commerce are declared unlawful.
‘The commission is empowered and directed to prevent persons, partnerships, or corporations, except banks, and common carriers subject to the Acts to regulate commerce, from using unfair methods of competition in commerce.’

In exercising this power, the commission must issue a complaint stating its charges and giving notice of hearing upon a day to be fixed. A person, partnership, or corporation proceeded against is given the right to appear at the time and place fixed and show cause why an order to cease and desist should not be issued. There is provision for intervention by others interested. If the commission finds the method of competition is one prohibited by the act, it is directed to make a report in writing stating its findings as to the facts, and to issue and cause to be served a cease and desist order. If the order is disobeyed, the commission may apply to the appropriate Circuit Court of Appeals for its enforcement. The party subject to the order may seek and obtain a review in the Circuit Court of Appeals in a manner provided by the act.

Section 6 (15 USCA s 46), among other things, gives the commission wide powers of investigation in respect of certain corporations subject to the act, and in respect of other matters, upon which it must report to Congress with recommendations. Many such investigations have been made, and some have served as the basis of congressional legislation.

Section 7 (15 USCA s 47), provides that: ‘In any suit in equity brought by or under the direction of the Attorney General as provided in the antitrust Acts, the court may, upon the conclusion of the testimony therein, if it shall be then of opinion that the complainant is entitled to relief, refer said suit to the commission, as a master in chancery, to ascertain and report an appropriate form of decree therein. The commission shall proceed upon such notice to the parties and under such rules of procedure as the court may prescribe, and upon the coming in of such report such exceptions may be filed and such proceedings had in relation thereto as upon the report of a master in other equity causes, but the court may adopt or reject such report, in whole or in part, and enter such decree as the nature of the case may in its judgment require.’

First. The question first to be considered is whether, by the provisions of section 1 of the Federal Trade Commission Act already quoted, the President’s power is limited to removal for the specific causes enumerated therein. The negative contention of the government is based principally upon the decision of this court in Shurtleff v. United States, 189 U.S. 311, 23 S.Ct. 535, 537, 47 L.Ed. 828. That case involved the power of the President to remove a general appraiser of merchandise appointed under the Act of June 10, 1890, 26 Stat. 131. Section 12 of the act provided for the appointment by the President, by and with the advice and consent of the Senate, of nine general appraisers of merchandise, who ‘may be removed from office at any time by the President for inefficiency, neglect of duty, or malfeasance in office.’ The President removed Shurtleff without assigning any cause therefor. The Court of Claims dismissed plaintiff’s petition to recover salary, upholding the President’s power to remove for causes other than those stated. In this court Shurtleff relied upon the maxim expressio unius est exclusio alterius; but this court held that, while the rule expressed in the maxim was a very proper one and founded upon justifiable reasoning in many instances, it ‘should not be accorded controlling weight when to do so would involve the alteration of the universal practice of the government for over a century, and the consequent curtailment of the powers of the Executive in such an unusual manner.’ What the court meant by this expression appears from a reading of the opinion. That opinion, after saying that no term of office was fixed by the act and that, with the exception of judicial officers provided for by the Constitution, no civil officer had ever held office by life tenure since the foundation of the government, points out that to construe the statute as contended for by Shurtleff would give the appraiser the right to hold office during his life or until found guilty of some act specified in the statute, the result of which would be a complete revolution in respect of the general tenure of office, effected by implication with regard to that particular office only.

‘We think it quite inadmissible,’ the court said (189 U.S. 311, at pages 316, 318, 23 S.Ct. 535, 537, 47 L.Ed. 828), ‘to attribute an intention on the part of Congress to make such an extraordinary change in the usual rule governing the tenure of office, and one which is to be applied to this particular office only, without stating such intention in plain and explicit language, instead of leaving it to be implied from doubtful inferences. * * * We cannot bring ourselves to the belief that Congress ever intended this result while omitting to use language which would put that intention beyond doubt.’

These circumstances, which led the court to reject the maxim as inapplicable, are exceptional. In the face of the unbroken precedent against life tenure, except in the case of the judiciary, the conclusion that Congress intended that, from among all other civil officers, appraisers alone should be selected to hold office for life was so extreme as to forbid, in the opinion of the court, any ruling which would produce that result if it reasonably could be avoided. The situation here presented is plainly and wholly different. The statute fixes a term of office, in accordance with many precedents. The first commissioners appointed are to continue in office for terms of three, four, five, six, and seven years, respectively; and their successors are to be appointed for terms of seven years—any commissioner being subject to removal by the President for inefficiency, neglect of duty, or malfeasance in office. The words of the act are definite and unambiguous.

The government says the phrase ‘continue in office’ is of no legal significance and, moreover, applies only to the first Commissioners. We think it has significance. It may be that, literally, its application is restricted as suggested; but it, nevertheless, lends support to a view contrary to that of the government as to the meaning of the entire requirement in respect of tenure; for it is not easy to suppose that Congress intended to secure the first commissioners against removal except for the causes specified and deny like security to their successors. Putting this phrase aside, however, the fixing of a definite term subject to removal for cause, unless there be some countervailing provision or circumstance indicating the contrary, which here we are unable to find, is enough to establish the legislative intent that the term is not to be curtailed in the absence of such cause. But if the intention of Congress that no removal should be made during the specified term except for one or more of the enumerated causes were not clear upon the face of the statute, as we think it is, it would be made clear by a consideration of the character of the commission and the legislative history which accompanied and preceded the passage of the act.
The commission is to be nonpartisan; and it must, from the very nature of its duties, act with entire impartiality. It is charged with the enforcement of no policy except the policy of the law. Its duties are neither political nor executive, but predominantly quasi judicial and quasi legislative. Like the Interstate Commerce Commission, its members are called upon to exercise the trained judgment of a body of experts ‘appointed by law and informed by experience.’ Illinois Cent. &c. R.R. v. Inter. Com. Comm., 206 U.S. 441, 454, 27 S.Ct. 700, 704, 51 L.Ed. 1128; Standard Oil Co. v. United States, 283 U.S. 235, 238, 239, 51 S.Ct. 429, 75 L.Ed. 999.

The legislative reports in both houses of Congress clearly reflect the view that a fixed term was necessary to the effective and fair administration of the law. In the report to the Senate (No. 597, 63d Cong., 2d Sess., pp. 10, 11) the Senate Committee on Interstate Commerce, in support of the bill which afterwards became the act in question, after referring to the provision fixing the term of office at seven years, so arranged that the membership would not be subject to complete change at any one time, said: ‘The work of this commission will be of a most exacting and difficult character, demanding persons who have experience in the problems to be met—that is, a proper knowledge of both the public requirements and the practical affairs of industry. It is manifestly desirable that the terms of the commissioners shall be long enough to give them an opportunity to acquire the expertness in dealing with these special questions concerning industry that comes from experience.’

The report declares that one advantage which the commission possessed over the Bureau of Corporations (an executive subdivision in the Department of Commerce which was abolished by the act) lay in the fact of its independence, and that it was essential that the commission should not be open to the suspicion of partisan direction. The report quotes (p. 22) a statement to the committee by Senator Newlands, who reported the bill, that the tribunal should be of high character and ‘independent of any department of the government. * * * a board or commission of dignity, permanence, and ability, independent of executive authority, except in its selection, and independent in character.’

The debates in both houses demonstrate that the prevailing view was that the Commission was not to be ‘subject to anybody in the government but * * * only to the people of the United States’; free from ‘political domination or control’ or the ‘probability or possibility of such a thing’; to be ‘separate and apart from any existing department of the government—not subject to the orders of the President.’
More to the same effect appears in the debates, which were long and thorough and contain nothing to the contrary. While the general rule precludes the use of these debates to explain the meaning of the words of the statute, they may be considered as reflecting light upon its general purposes and the evils which it sought to remedy. Federal Trade Commission v. Raladam Co., 283 U.S. 643, 650, 51 S.Ct. 587, 75 L.Ed. 1324, 79 A.L.R. 1191.

Thus, the language of the act, the legislative reports, and the general purposes of the legislation as reflected by the debates, all combine to demonstrate the congressional intent to create a body of experts who shall gain experience by length of service; a body which shall be independent of executive authority, except in its selection, and free to exercise its judgment without the leave or hindrance of any other official or any department of the government. To the accomplishment of these purposes, it is clear that Congress was of opinion that length and certainty of tenure would vitally contribute. And to hold that, nevertheless, the members of the commission continue in office at the mere will of the President, might be to thwart, in large measure, the very ends which Congress sought to realize by definitely fixing the term of office.

We conclude that the intent of the act is to limit the executive power of removal to the causes enumerated, the existence of none of which is claimed here; and we pass to the second question.

Second. To support its contention that the removal provision of section 1, as we have just construed it, is an unconstitutional interference with the executive power of the President, the government’s chief reliance is Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160. That case has been so recently decided, and the prevailing and dissenting opinions so fully review the general subject of the power of executive removal, that further discussion would add little of value to the wealth of material there collected. These opinions examine at length the historical, legislative, and judicial data bearing upon the question, beginning with what is called ‘the decision of 1789’ in the first Congress and coming down almost to the day when the opinions were delivered. They occupy 243 pages of the volume in which they are printed. Nevertheless, the narrow point actually decided was only that the President had power to remove a postmaster of the first class, without the advice and consent of the Senate as required by act of Congress. In the course of the opinion of the court, expressions occur which tend to sustain the government’s contention, but these are beyond the point involved and, therefore, do not come within the rule of stare decisis. In so far as they are out of harmony with the views here set forth, these expressions are disapproved. A like situation was presented in the case of Cohens v. Virginia, 6 Wheat, 264, 399, 5 L.Ed. 257, in respect of certain general expressions in the opinion in Marbury v. Madison, 1 Cranch, 137, 2 L.Ed. 60. Chief Justice Marshall, who delivered the opinion in the Marbury Case, speaking again for the court in the Cohens Case, said: ‘It is a maxim, not to be disregarded, that general expressions, in every opinion, are to be taken in connection with the case in which those expressions are used. If they go beyond the case, they may be respected, but ought not to control the judgment in a subsequent suit, when the very point is presented for decision. The reason of this maxim is obvious. The question actually before the court is investigated with care, and considered in its full extent. Other principles which may serve to illustrate it, are considered in their relation to the case decided, but their possible bearing on all other cases is seldom completely investigated.’

And he added that these general expressions in the case of Marbury v. Madison were to be understood with the limitations put upon them by the opinion in the Cohens Case. See, also, Carroll v. Lessee of Carroll et al., 16 How. 275, 286—287, 14 L.Ed. 936; O’Donoghue v. United States, 289 U.S. 516, 550, 53 S.Ct. 740, 77 L.Ed. 1356.

The office of a postmaster is so essentially unlike the office now involved that the decision in the Myers Case cannot be accepted as controlling our decision here. A postmaster is an executive officer restricted to the performance of executive functions. He is charged with no duty at all related to either the legislative or judicial power. The actual decision in the Myers Case finds support in the theory that such an officer is merely one of the units in the executive department and, hence, inherently subject to the exclusive and illimitable power of removal by the Chief Executive, whose subordinate and aid he is. Putting aside dicta, which may be followed if sufficiently persuasive but which are not controlling, the necessary reach of the decision goes far enough to include all purely executive officers. It goes no farther; much less does it include an officer who occupies no place in the executive department and who exercises no part of the executive power vested by the Constitution in the President.

The Federal Trade Commission is an administrative body created by Congress to carry into effect legislative policies embodied in the statute in accordance with the legislative standard therein prescribed, and to perform other specified duties as a legislative or as a judicial aid. Such a body cannot in any proper sense be characterized as an arm or an eye of the executive. Its duties are performed without executive leave and, in the contemplation of the statute, must be free from executive control. In administering the provisions of the statute in respect of ‘unfair methods of competition,’ that is to say, in filling in and administering the details embodied by that general standard, the commission acts in part quasi legislatively and in part quasi judicially. In making investigations and reports thereon for the information of Congress under section 6, in aid of the legislative power, it acts as a legislative agency. Under section 7, which authorizes the commission to act as a master in chancery under rules prescribed by the court, it acts as an agency of the judiciary. To the extent that it exercises any executive function, as distinguished from executive power in the constitutional sense, it does so in the discharge and effectuation of its quasi legislative or quasi judicial powers, or as an agency of the legislative or judicial departments of the government.1

If Congress is without authority to prescribe causes for removal of members of the trade commission and limit executive power of removal accordingly, that power at once becomes practically all-inclusive in respect of civil officers with the exception of the judiciary provided for by the Constitution. The Solicitor General, at the bar, apparently recognizing this to be true, with commendable candor, agreed that his view in respect of the removability of members of the Federal Trade Commission necessitated a like view in respect of the Interstate Commerce Commission and the Court of Claims. We are thus confronted with the serious question whether not only the members of these quasi legislative and quasi judicial bodies, but the judges of the legislative Court of Claims, exercising judicial power (Williams v. United States, 289 U.S. 553, 565—567, 53 S.Ct. 751, 77 L.Ed. 1372), continue in office only at the pleasure of the President.
[5] We think it plain under the Constitution that illimitable power of removal is not possessed by the President in respect of officers of the character of those just named. The authority of Congress, in creating quasi legislative or quasi judicial agencies, to require them to act in discharge of their duties independently of executive control cannot well be doubted; and that authority includes, as an appropriate incident, power to fix the period during which they shall continue, and to forbid their removal except for cause in the meantime. For it is quite evident that one who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of independence against the latter’s will.

The fundamental necessity of maintaining each of the three general departments of government entirely free from the control or coercive influence, direct or indirect, of either of the others, has often been stressed and is hardly open to serious question. So much is implied in *630 the very fact of the separation of the powers of these departments by the Constitution; and in the rule which recognizes their essential coequality. The sound application of a principle that makes one master in his own house precludes him from imposing his control in the house of another who is master there. James Wilson, one of the framers of the Constitution and a former justice of this court, said that the independence of each department required that its proceedings ‘should be free from the remotest influence, direct or indirect, of either of the other two powers.’ Andrews, The Works of James Wilson (1896), vol. 1, p. 367. And Mr. Justice Story in the first volume of his work on the Constitution (4th Ed.) s 530, citing No. 48 of the Federalist, said that neither of the departments in reference to each other ‘ought to possess, directly or indirectly, an overruling influence in the administration of their respective powers.’ And see O’Donoghue v. United States, supra, 289 U.S. 516, at pages 530-531, 53 S.Ct. 740, 77 L.Ed. 1356.

The power of removal here claimed for the President falls within this principle, since its coercive influence threatens the independence of a commission, which is not only wholly disconnected from the executive department, but which, as already fully appears, was created by Congress as a means of carrying into operation legislative and judicial powers, and as an agency of the legislative and judicial departments.

In the light of the question now under consideration, we have re-examined the precedents referred to in the Myers Case, and find nothing in them to justify a conclusion contrary to that which we have reached. The so-called ‘decision of 1789’ had relation to a bill proposed by Mr. Madison to establish an executive Department of Foreign Affairs. The bill provided that the principal officer was ‘to be removable from office by the President of the United States.’ This clause was changed to read ‘whenever the principal officer shall be removed from office by the President of the United States,’ certain things should follow, thereby, in connection with the debates, recognizing and confirming, as the court thought in the Myers Case, the sole power of the President in the matter. We shall not discuss the subject further, since it is so fully covered by the opinions in the Myers Case, except to say that the office under consideration by Congress was not only purely executive, but the officer one who was responsible to the President, and to him alone, in a very definite sense. A reading of the debates shows that the President’s illimitable power of removal was not considered in respect of other than executive officers. And it is pertinent to observe that when, at a later time, the tenure of office for the Comptroller of the Treasury was under consideration, Mr. Madison quite evidently thought that, since the duties of that office were not purely of an executive nature but partook of the judiciary quality as well, a different rule in respect of executive removal might well apply. 1 Annals of Congress, cols. 611-612.

In Marbury v. Madison, supra, 1 Cranch, 137, at pages 162, 165-166, 2 L.Ed. 60, it is made clear that Chief Justice Marshall was of opinion that a justice of the peace for the District of Columbia was not removable at the will of the President; and that there was a distinction between such an officer and officers appointed to aid the President in the performance of his constitutional duties. In the latter case, the distinction he saw was that ‘their acts are his acts’ and his will, therefore, controls; and, by way of illustration, he adverted to the act establishing the Department of Foreign Affairs, which was the subject of the ‘decision of 1789.’

The result of what we now have said is this: Whether the power of the President to remove an officer shall prevail over the authority of Congress to condition the power by fixing a definite term and precluding a removal except for cause will depend upon the character of the office; the Myers decision, affirming the power of the President alone to make the removal, is confined to purely executive officers; and as to officers of the kind here under consideration, we hold that no removal can be made during the prescribed term for which the officer is appointed, except for one or more of the causes named in the applicable statute.

To the extent that, between the decision in the Myers Case, which sustains the unrestrictable power of the President to remove purely executive officers, and our present decision that such power does not extend to an office such as that here involved, there shall remain a field of doubt, we leave such cases as may fall within it for future consideration and determination as they may arise.

In accordance with the foregoing, the questions submitted are answered:

Question No. 1, Yes.
Question No. 2, Yes.
Mr. Justice McREYNOLDS agrees that both questions should be answered in the affirmative. A separate opinion in Myers v. United States, 272 U.S. 52, at page 178, 47 S.Ct. 21, at page 46, 71 L.Ed. 160, states his views concerning the power of the President to remove appointees.


Notes and Questions.

1.  How does the issue in the case touch on the regulatory power of the agency?  Why might there be a concern about regulation and control of the members of the agency?

3.  How does the court resolve the issue of the amalgamation of the entirety of governmental power, separated among the three branches of government but recombined within an agency?

3.  How does the court understand the role and place of the agency within our government?  How does the court understand their legislative function?

4.  The extent of regulatory authority, like those of statutes are constrained by the jurisdictional limits of agency power.  Unlike states or the federal government, those jurisdictional limits include those discernable from the statutes which established the agency and conferred quasi legislative (regulatory) power on it.  The following case suggests the way the issue of authority has come to dominate litigation over regulatory power.  

406 F.3d 689
United States Court of Appeals,
District of Columbia Circuit.
No. 04–1037. | Argued Feb. 22, 2005. Decided May 6, 2005.

HARRY T. EDWARDS, Circuit Judge.

It is axiomatic that administrative agencies may issue regulations only pursuant to authority delegated to them by Congress. The principal question presented by this case is whether Congress delegated authority to the Federal Communications Commission (“Commission” or “FCC”) in the Communications Act of 1934, 47 U.S.C. § 151 et seq. (2000) ( “Communications Act” or “Act”), to regulate apparatus that can receive television broadcasts when those apparatus are not engaged in the process of receiving a broadcast transmission. In the seven decades of its existence, the FCC has never before asserted such sweeping authority. Indeed, in the past, the FCC has informed Congress that it lacked any such authority. In our view, nothing has changed to give the FCC the authority that it now claims.

This case arises out of events related to the nation’s transition from analog to digital television service (“DTV”). Since the 1940s, broadcast television stations have transmitted their programs over the air using an analog standard. DTV is a technological breakthrough that permits broadcasters to transmit more information over a channel of electromagnetic spectrum than is possible through analog broadcasting. Consumer Elecs. Ass’n v. FCC, 347 F.3d 291, 293 (D.C.Cir.2003). Congress has set December 31, 2006, as the target date for the replacement of analog television service with DTV. See 47 U.S.C. § 309(j)(14).

In August 2002, in conjunction with its consideration of the technological challenges related to the transition from analog service to DTV, the Commission issued a notice of proposed rulemaking to inquire, inter alia, whether rules were needed to prevent the unauthorized copying and redistribution of digital television programming. See Digital Broadcast Copy Protection, 17 F.C.C.R. 16,027, 16,028 (2002) (“NPRM”). Thousands of comments were filed in response to the agency’s NPRM. Owners of digital content and television broadcasters urged the Commission to require DTV reception equipment to be manufactured with the capability to prevent unauthorized redistributions of digital content. Numerous other commenters voiced strong objections to any such regulations, contending that the FCC had no authority to control how broadcast content is used after it has been received. In November 2003, the Commission adopted “broadcast flag” regulations, requiring that digital television receivers and other devices capable of receiving digital television broadcast signals, manufactured on or after July 1, 2005, include technology allowing them to recognize the broadcast flag. See Digital Broadcast Content Protection, 18 F.C.C.R. 23,550 (2003) (codified at 47 C.F.R. pts. 73, 76). The broadcast flag is a digital code embedded in a DTV broadcasting stream, which prevents digital television reception equipment from redistributing broadcast content. The broadcast flag affects receiver devices only after a broadcast transmission is complete. The American Library Association, et al. (“American Library” or “petitioners”), nine organizations representing a large number of libraries and consumers, filed the present petition for review challenging these rules.

In adopting the broadcast flag rules, the FCC cited no specific statutory provision giving the agency authority to regulate consumers’ use of television receiver apparatus after the completion of a broadcast transmission. Rather, the Commission relied exclusively on its ancillary jurisdiction under Title I of the Communications Act of 1934.

The Commission recognized that it may exercise ancillary jurisdiction only when two conditions are satisfied: (1) the Commission’s general jurisdictional grant under Title I covers the regulated subject and (2) the regulations are reasonably ancillary to the Commission’s effective performance of its statutorily mandated responsibilities. See 18 F.C.C.R. at 23,563. The Commission’s general jurisdictional grant under Title I plainly encompasses the regulation of apparatus that can receive television broadcast content, but only while those apparatus are engaged in the process of receiving a television broadcast. Title I does not authorize the Commission to regulate receiver apparatus after a transmission is complete. As a result, the FCC’s purported exercise of ancillary authority founders on the first condition. There is no statutory foundation for the broadcast flag rules, and consequently the rules are ancillary to nothing. Therefore, we hold that the Commission acted outside the scope of its delegated authority when it adopted the disputed broadcast flag regulations.

The result that we reach in this case finds support in the All Channel Receiver Act of 1962 and the Communications Amendments Act of 1982. These two statutory enactments confirm that Congress never conferred authority on the FCC to regulate consumers’ use of television receiver apparatus after the completion of broadcast transmissions.

As petitioners point out, “the Broadcast Flag rules do not regulate interstate ‘radio communications’ as defined by Title I, because the Flag is not needed to make a DTV transmission, does not change whether DTV signals can be received, and has no effect until after the DTV transmission is complete.” Petitioners’ Br. at 23. We agree. Because the Commission overstepped the limits of its delegated authority, we grant the petition for review.


The Communications Act of 1934 was “implemented for the purpose of consolidating federal authority over communications in a single agency to assure ‘an adequate communication system for this country.’ ” Motion Picture Ass’n of Am., Inc. v. FCC, 309 F.3d 796, 804 (D.C.Cir.2002) (quoting S. REP. No. 73–781, at 3 (1934)). Title I of the Act creates the Commission “[f]or the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.” 47 U.S.C. § 151. Title I further provides that the Commission “shall execute and enforce the provisions” of the Act, id., and states that the Act’s provisions “shall apply to all interstate and foreign communication by wire or radio,” id. § 152(a).

The FCC may act either pursuant to express statutory authority to promulgate regulations addressing a variety of designated issues involving communications, see, e.g., 47 U.S.C. § 303(f) (granting the Commission authority to prevent interference among radio and television broadcast stations), or pursuant to ancillary jurisdiction, see, e.g., 47 U.S.C. § 154(i) (“[t]he Commission may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions”).

Although somewhat amorphous, ancillary jurisdiction is nonetheless constrained. In order for the Commission to regulate under its ancillary jurisdiction, two conditions must be met. First, the subject of the regulation must be covered by the Commission’s general grant of jurisdiction under Title I of the Communications Act, which, as noted above, encompasses “ ‘all interstate and foreign communication by wire or radio.’ ” United States v. Southwestern Cable Co., 392 U.S. 157, 167, 88 S.Ct. 1994, 20 L.Ed.2d 1001 (1968) (quoting 47 U.S.C. § 152(a)). Second, the subject of the regulation must be “reasonably ancillary to the effective performance of the Commission’s various responsibilities.” Id. at 178, 88 S.Ct. 1994. Digital television is a technological breakthrough that allows broadcasters to transmit either an extremely high quality video programming signal (known as high definition television) or multiple streams of video, voice, and data simultaneously within the same frequency band traditionally used for a single analog television broadcast. See Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, 11 F.C.C.R. 17,771, 17,774 (1996). In 1997, the FCC set a target of 2006 for the cessation of analog service. See Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, 12 F.C.C.R. 12,809, 12,850 (1997). Congress subsequently provided that television broadcast licenses authorizing analog service should not be renewed to authorize such service beyond December 31, 2006. See 47 U.S.C. § 309(j)(14).

In August 2002, the FCC issued a notice of proposed rulemaking regarding digital broadcast copy protection. See Digital Broadcast Copy Protection, 17 F.C.C.R. 16,027 (2002) (“NPRM”). The Commission sought comments on, among other things, whether to adopt broadcast flag technology to prevent the unauthorized copying and redistribution of digital media. See id. at 16,028–29. The broadcast flag, or Redistribution Control Descriptor, is a digital code embedded in a digital broadcasting stream, which prevents digital television reception equipment from redistributing digital broadcast content. See id. at 16,027. The effectiveness of the broadcast flag regime is dependent on programming being flagged and on devices capable of receiving broadcast DTV signals (collectively “demodulator products”) being able to recognize and give effect to the flag. Under the rule, new demodulator products (e.g., televisions, computers, etc.) must include flag-recognition technology. This technology, in combination with broadcasters’ use of the flag, would prevent redistribution of broadcast programming. The broadcast flag does not have any impact on a DTV broadcast transmission. The flag’s only effect is to limit the capacity of receiver apparatus to redistribute broadcast content after a broadcast transmission is complete.

The NPRM also sought comments on whether the Commission had the authority to mandate recognition of the broadcast flag in consumer electronics devices. Id. at 16,029–30. The Commission requested commenters to address whether “this [is] an area in which the Commission could exercise its ancillary jurisdiction under Title I of the Act.” Id. The FCC also asked “commenters to identify any statutory provisions that might provide the Commission with more explicit authority to adopt digital broadcast copy protection rules,” such as 47 U.S.C. § 336(b)(4) and (b)(5), id., which authorize the Commission to regulate the issuance of licenses for digital television services, see 47 U.S.C. § 336(a)-(b).

Unsurprisingly, there was an enormous response to the NPRM. . . .  Opponents of regulation argued that the threat from content redistribution was overstated in light of technological limitations to widespread Internet retransmission. See id. at 23,553. In addition, critics of the proposed rules expressed concerns about implementation costs and suggested that the broadcast flag both was an inadequate tool to protect content and would stifle innovation. Id. at 23,557.

On the question of the Commission’s authority to promulgate broadcast flag regulations, proponents pointed to 47 U.S.C. § 336. See Flag Order, 18 F.C.C.R. at 23,562. Enacted as part of the Telecommunications Act of 1996, Pub.L. No. 104–104, § 201, 110 Stat. 56, 107, 47 U.S.C. § 336 sets forth certain criteria pursuant to which the Commission may issue new licenses for advanced television services. Proponents also argued that, even if the Commission lacked express statutory authority under § 336, the FCC was authorized to adopt broadcast flag rules pursuant to its ancillary jurisdiction. See Joint Comments of the Motion Picture Association of America, Inc., et al., 12/6/02, J.A. 760, 798–807.

Opponents contended that the Commission lacked jurisdiction to implement broadcast flag rules. They pointed out that the plain text of § 336 authorized the FCC to regulate only DTV broadcast licensees and the quality of the signal transmitted by such licensees. . . .

In November 2003, the FCC adopted regulations requiring demodulator products manufactured on or after July 1, 2005 to recognize and give effect to the broadcast flag. See Flag Order, 18 F.C.C.R. at 23,570, 23,576, 23,590–91. . . . .

In explaining the source of its authority to promulgate the broadcast flag rules, the Commission did not invoke 47 U.S.C. § 336. Rather, the Commission purported to rely solely on its ancillary jurisdiction under Title I of the Communications Act of 1934. See id. at 23,563. . . .

The instant petition for review, filed by nine organizations representing numerous libraries and consumers, challenges the FCC’s Flag Order on three grounds: (1) the Commission lacks statutory authority to mandate that demodulator products recognize and give effect to the broadcast flag; (2) the broadcast flag regime impermissibly conflicts with copyright law; and (3) the Commission’s decision is arbitrary and capricious for want of reasoned decisionmaking. The Motion Picture Association of America (“MPAA”) intervened in support of the Commission. In its brief to the court, MPAA also contested petitioners’ Article III standing. After hearing oral argument, the court requested additional submissions from the parties on the question of standing. See Am. Library Ass’n v. FCC, 401 F.3d 489 (D.C.Cir.2005) ( “Am. Library I ”).

As explained below, we are now satisfied that at least one member of one of the petitioner groups has standing to pursue this challenge to the FCC’s broadcast flag rules. The court therefore has jurisdiction to consider the petition for review. On the merits, we hold that the FCC lacked statutory authority to impose the broadcast flag regime. Therefore, we grant the petition for review without reaching petitioners’ other challenges to the Flag Order.


A. Standing


B. The Limits of the FCC’s Delegated Authority Under the Communications Act

* * * * * *

As noted above, the principal issue in this case is whether the Commission acted outside the scope of its delegated authority when it adopted the disputed broadcast flag regulations. The FCC, like other federal agencies, “literally has no power to act ... unless and until Congress confers power upon it.” La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986). The Commission “has no constitutional or common law existence or authority, but only those authorities conferred upon it by Congress.” Michigan v. EPA, 268 F.3d 1075, 1081 (D.C.Cir.2001). Hence, the FCC’s power to promulgate legislative regulations is limited to the scope of the authority Congress has delegated to it. Id. (citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988)).

1. The Applicable Standard of Review

In assessing whether the Commission’s Flag Order exceeds the agency’s delegated authority, we apply the familiar standards of review enunciated by the Supreme Court in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), and United States v. Mead Corp., 533 U.S. 218, 226–27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). In reviewing agency action under Chevron, “if the intent of Congress is clear,” the court “must give effect to [that] unambiguously expressed intent.” Chevron, 467 U.S. at 842–43, 104 S.Ct. 2778 (“Chevron Step One”). If “Congress has not directly addressed the precise question at issue,” and the agency has acted pursuant to an express or implied delegation of authority, the agency’s statutory interpretation is entitled to deference, as long as it is reasonable. Id. at 843–44, 104 S.Ct. 2778 (“Chevron Step Two”). The FCC argues here that the court should defer to the agency’s interpretation of its ancillary jurisdiction under Chevron, because, in its view, the regulations promulgated in the Flag Order reflect a reasonable application of the agency’s ancillary authority under the Communications Act. The agency’s self-serving invocation of Chevron leaves out a crucial threshold consideration, i.e., whether the agency acted pursuant to delegated authority.

As the court explained in Motion Picture Ass’n of America, Inc. v. FCC, 309 F.3d 796, 801 (D.C.Cir.2002) (“MPAA ”), an “agency’s interpretation of [a] statute is not entitled to deference absent a delegation of authority from Congress to regulate in the areas at issue.” The court observed that the Supreme Court’s decision in Mead “reinforces” the command in Chevron that “deference to an agency’s interpretation of a statute is due only when the agency acts pursuant to ‘delegated authority.’ ” Id. (quoting Mead, 533 U.S. at 226, 121 S.Ct. 2164). See also Cal. Indep. Sys. Operator Corp. v. FERC, 372 F.3d 395, 399 (D.C.Cir.2004); Bluewater Network v. EPA, 370 F.3d 1, 11 (D.C.Cir.2004); AT&T Corp. v. FCC, 323 F.3d 1081, 1086 (D.C.Cir.2003); Ry. Labor Executives’ Ass’n v. Nat’l Mediation Bd., 29 F.3d 655, 670–71 (D.C.Cir.1994) (en banc).

* * * **

Petitioners’ principal claim here is that the challenged broadcast flag regulations emanated from an ultra vires action by the FCC. We agree. This being the case, the regulations cannot survive judicial review under Chevron/Mead. Our judgment is the same whether we analyze the FCC’s action under the first or second step of Chevron. “In either situation, the agency’s interpretation of the statute is not entitled to deference absent a delegation of authority from Congress to regulate in the areas at issue.” MPAA, 309 F.3d at 801 (citing Ry. Labor Executives, 29 F.3d at 671). In this case, as explained below, the FCC’s interpretation of its ancillary jurisdiction reaches well beyond the agency’s delegated authority under the Communications Act. We therefore hold that the broadcast flag regulations exceed the agency’s delegated authority under the statute.

2. Ancillary Jurisdiction Under the Communications Act of 1934

As explained above, the only basis advanced by the Commission as a source for its authority to adopt the broadcast flag regime was its ancillary jurisdiction under Title I of the Communications Act of 1934. See Flag Order, 18 F.C.C.R. at 23,563–64. As the Commission recognized, its ancillary jurisdiction is limited to circumstances where: (1) the Commission’s general jurisdictional grant under Title I covers the subject of the regulations and (2) the regulations are reasonably ancillary to the Commission’s effective performance of its statutorily mandated responsibilities. See id. at 23,563 (citing Southwestern Cable, 392 U.S. at 177–78, 88 S.Ct. 1994).

The insurmountable hurdle facing the FCC in this case is that the agency’s general jurisdictional grant does not encompass the regulation of consumer electronics products that can be used for receipt of wire or radio communication when those devices are not engaged in the process of radio or wire transmission. Because the Flag Order does not require demodulator products to give effect to the broadcast flag until after the DTV broadcast has been completed, the regulations adopted in the Flag Order do not fall within the scope of the Commission’s general jurisdictional grant. Therefore, the Commission cannot satisfy the first precondition to its assertion of ancillary jurisdiction.

The Supreme Court has delineated the parameters of the Commission’s ancillary jurisdiction in three cases: United States v. Southwestern Cable Co., 392 U.S. 157, 88 S.Ct. 1994, 20 L.Ed.2d 1001 (1968), United States v. Midwest Video Corp., 406 U.S. 649, 92 S.Ct. 1860, 32 L.Ed.2d 390 (1972) (“Midwest Video I ”), and FCC v. Midwest Video Corp., 440 U.S. 689, 99 S.Ct. 1435, 59 L.Ed.2d 692 (1979) (“Midwest Video II ”). In Southwestern Cable and Midwest Video I, the Court upheld the Commission’s regulation of cable television systems as a valid exercise of its ancillary jurisdiction, but also made clear that the Commission’s ancillary authority has limits. In Midwest Video II, the Court found that the Commission had overstepped those limits. Because Southwestern Cable, Midwest Video I, and Midwest Video II are central to our analysis of whether the Commission lawfully exercised its ancillary jurisdiction in this case, we discuss these cases in some detail.

In Southwestern Cable, the Supreme Court recognized that the Communications Act confers a sphere of ancillary jurisdiction on the FCC. See 392 U.S. at 177–78, 88 S.Ct. 1994. The principal question presented was whether the FCC had the authority to regulate cable television systems (“CATV”), absent any express congressional grant of authority to the FCC to regulate in this area. See id. at 164–67, 88 S.Ct. 1994. The Court’s conclusion that the FCC did have such authority rested on two factors. First, it was beyond doubt that CATV systems involved interstate “ ‘communication by wire or radio,’ ” id. at 168, 88 S.Ct. 1994 (quoting 47 U.S.C. § 152(a)), and, thus, were covered by Title I’s general jurisdictional grant. Second, the Court concluded that at least some level of CATV regulation was “reasonably ancillary to the effective performance of the Commission’s various responsibilities [delegated to it by Congress] for the regulation of television broadcasting.” Id. at 178, 88 S.Ct. 1994. Because these two conditions were satisfied, the Court held that, to the degree it was in fact reasonably ancillary to the Commission’s responsibilities over broadcast, the FCC had the power to regulate cable television as “ ‘public convenience, interest or necessity requires,’ ” so long as the regulations were “ ‘not inconsistent with law.’ ” Id. (quoting 47 U.S.C. § 303(r)).

Four years later, the Court applied the two-part test enunciated in Southwestern Cable to review a rule adopted by the FCC providing that no CATV system with 3,500 or more subscribers could carry the signal of any television broadcast station unless the system distributed programming that had originated from a source other than the broadcast signals and the system had facilities for local program production. See Midwest Video I, 406 U.S. at 653–54 & n. 6, 92 S.Ct. 1860. The regulation was designed to increase the number of outlets for community self-expression and the programming choices available to the public. See id. at 654, 92 S.Ct. 1860.

A closely divided Court held that the Commission’s rule was a valid exercise of its ancillary jurisdiction. In an opinion by Justice Brennan, a plurality of the Court began its analysis by recognizing the two requirements for the Commission’s exercise of ancillary jurisdiction: (1) that the regulation must cover interstate or foreign communication by wire or radio and (2) that the regulation must be reasonably ancillary to the Commission’s effective performance of its statutorily mandated responsibilities. See id. at 662–63, 92 S.Ct. 1860. The parties before the Court in Midwest Video I did not dispute that the first precondition was met. See id. at 662, 92 S.Ct. 1860. Furthermore, the plurality concluded that the regulation was reasonably ancillary to the Commission’s responsibilities for the regulation of broadcast television, because the Commission reasonably concluded that the rule would “ ‘further the achievement of long-established regulatory goals in the field of television broadcasting by increasing the number of outlets for community self-expression and augmenting the public’s choice of programs and types of services.’ ” Id. at 667–68, 92 S.Ct. 1860 (quoting Commission report accompanying the disputed regulation).

Chief Justice Burger provided the fifth vote to sustain the regulation at issue in Midwest Video I, but he concurred only in the judgment. Chief Justice Burger agreed that, in light of the “pervasive powers” conferred upon the Commission and its “generations of experience,” the Court should sustain the Commission’s authority to impose the regulation at issue. Id. at 676, 92 S.Ct. 1860 (Burger, C.J., concurring in the result). Nonetheless, he noted: “Candor requires acknowledgment, for me at least, that the Commission’s position strains the outer limits of even the open-ended and pervasive jurisdiction that has evolved by decisions of the Commission and the courts.” Id.

Seven years later, in Midwest Video II, the Court considered whether another FCC effort to regulate cable television was a permissible exercise of the Commission’s ancillary jurisdiction. This time the Court decided that the Commission had gone too far. The rules at issue required that cable television systems carrying broadcast signals and having at least 3,500 subscribers develop at least a 20–channel capacity, make certain channels available for third-party access, and furnish equipment for access purposes. 440 U.S. at 691, 99 S.Ct. 1435. The Court held that the rules exceeded the Commission’s authority. Id. at 708–09, 99 S.Ct. 1435. Specifically, because the Communications Act explicitly directed the Commission not to treat broadcasters as common carriers, the Court concluded that it was not reasonably ancillary to the Commission’s effective performance of its responsibilities relating to broadcast television for the Commission to impose common-carrier obligations on cable television systems. See id. at 702–05, 708–09, 99 S.Ct. 1435. While the Court recognized that the statutory bar on treating broadcasters as common carriers did not apply explicitly to cable systems, the Court explained that, “without reference to the provisions of the Act directly governing broadcasting, the Commission’s jurisdiction under [Title I] would be unbounded.” Id. at 706, 99 S.Ct. 1435. The Court refused to countenance such a boundless view of the Commission’s jurisdiction, noting that, “[t]hough afforded wide latitude in its supervision over communication by wire, the Commission was not delegated unrestrained authority.” Id. As the Commission correctly explained in the Flag Order, Midwest Video II stands for the proposition that “if the basis for jurisdiction over cable is that the authority is ancillary to the regulation of broadcasting, the cable regulation cannot be antithetical to a basic regulatory parameter established for broadcast.” Flag Order, 18 F.C.C.R. at 23,563 n. 70.

The Court’s decisions in Southwestern Cable, Midwest Video I, and Midwest Video II were principally focused on the second prong of the ancillary jurisdiction test. This is unsurprising, because the subject matter of the regulations at issue in those cases—cable television—constituted interstate communication by wire or radio, and thus fell within the scope of the Commission’s general jurisdictional grant under Title I of the Communications Act. However, these cases leave no doubt that the Commission may not invoke its ancillary jurisdiction under Title I to regulate matters outside of the compass of communication by wire or radio. As we have explained:

While the Supreme Court has described the jurisdictional powers of the FCC as ... expansive, there are limits to those powers. No case has ever permitted, and the Commission has never, to our knowledge, asserted jurisdiction over an entity not engaged in “communication by wire or radio.”

Accuracy in Media, Inc. v. FCC, 521 F.2d 288, 293 (D.C.Cir.1975) (additional internal quotation marks omitted) (citing Nat’l Broad. Co. v. United States, 319 U.S. 190, 219, 63 S.Ct. 997, 87 L.Ed. 1344 (1943)); see also id. at 294 (“Jurisdiction over CATV [in Southwestern Cable ] was expressly predicated upon a finding that the transmission of video and aural signals via the cable was ‘interstate ... communication by wire or radio.’ ” (quoting Southwestern Cable, 392 U.S. at 168, 88 S.Ct. 1994)); Midwest Video I, 406 U.S. at 662, 92 S.Ct. 1860 (making clear that the Commission’s jurisdiction is limited to activities involving communication by wire or radio). This principle is crucial, because the issue here is precisely whether the Flag Order asserts jurisdiction over matters that are beyond the compass of wire or radio communication.

Southwestern Cable, Midwest Video I, and Midwest Video II are also relevant to the present controversy for a second reason. In each of these decisions, the Court followed a very cautious approach in deciding whether the Commission had validly invoked its ancillary jurisdiction, even when the regulations under review clearly addressed “communication by wire or radio.” As the Seventh Circuit has noted: “The Court [in Southwestern Cable ] appeared to be treading lightly even where the activity at issue” involved cable television, which “easily falls within” Title I’s general jurisdictional grant. Ill. Citizens Comm. for Broad. v. FCC, 467 F.2d 1397, 1400 (7th Cir.1972). The Seventh Circuit’s characterization is equally apt with respect to the Court’s opinions in Midwest Video I and Midwest Video II.

We think that the Supreme Court’s cautionary approach in applying the second prong of the ancillary jurisdiction test suggests that we should be at least as cautious in this case. Great caution is warranted here, because the disputed broadcast flag regulations rest on no apparent statutory foundation and, thus, appear to be ancillary to nothing. Just as the Supreme Court refused to countenance an interpretation of the second prong of the ancillary jurisdiction test that would confer “unbounded jurisdiction on the Commission, Midwest Video II, 440 U.S. at 706, 99 S.Ct. 1435, we will not construe the first prong in a manner that imposes no meaningful limits on the scope of the FCC’s general jurisdictional grant.

In light of the parameters of the Commission’s ancillary jurisdiction established by Southwestern Cable, Midwest Video I, and Midwest Video II, this case turns on one simple fact: the Flag Order does not require demodulator products to give effect to the broadcast flag until after the DTV broadcast is complete. The Flag Order does not regulate the actual transmission of the DTV broadcast. In other words, the Flag Order imposes regulations on devices that receive communications after those communications have occurred; it does not regulate the communications themselves. Because the demodulator products are not engaged in “communication by wire or radio” when they are subject to regulation under the Flag Order, the Commission plainly exceeded the scope of its general jurisdictional grant under Title I in this case.

In seeking to justify its assertion of jurisdiction in the Flag Order, the Commission relies on the fact that the Communications Act defines “radio communication” and “wire communication” to include not only the “transmission of ... writing, signs, signals, pictures, and sounds” by aid of wire or radio, but also “all instrumentalities, facilities, apparatus, and services (among other things, the receipt, forwarding, and delivery of communications) incidental to such transmission.” 47 U.S.C. § 153(33) (defining “radio communication”); id. § 153(52) (defining “wire communication”). The Flag Order asserts: “Based on this language, [the Commission finds] that television receivers are covered by the statutory definitions and therefore come within the scope of the Commission’s general authority outlined in [Title I] of the Communications Act.” 18 F.C.C.R. at 23,563–64. The Commission thus apparently believed that, given the definitions of “wire communication” and “radio communication” in Title I, it could assert jurisdiction over television receivers even when those receivers were not engaged in broadcast transmission simply because they are apparatus used for the receipt of communications. See also FCC Br. at 26. We reject this position, for it rests on a completely implausible construction of the Communications Act.

The statute does not give the FCC authority to regulate any “apparatus” that is associated with television broadcasts. Rather, the statutory language cited by the FCC refers only to “apparatus” that are “incidental to ... transmission.” In other words, the language of § 153(33) and (52) plainly does not indicate that Congress intended for the Commission to have general jurisdiction over devices that can be used for receipt of wire or radio communication when those devices are not engaged in the process of radio or wire transmission.

The language relied upon by the Commission in the statutory definitions of “wire communication” and “radio communication” was part of the original Communications Act of 1934. See Pub.L. No. 73–416, § 3(a)-(b), 48 Stat. 1064, 1065; see also Southwestern Cable, 392 U.S. at 168, 88 S.Ct. 1994 (quoting this language). The Commission acknowledges that, in the more than 70 years that the Act has been in existence, it has never previously sought to exercise ancillary jurisdiction over reception equipment after the transmission of communication is complete. See Recording of Oral Argument at 34:45–35:23. This is not surprising, since the Commission’s current interpretation of the statute’s definitional language would render step one of the Supreme Court’s two-part **368 *704 test for determining whether a subject is within the Commission’s ancillary jurisdiction essentially meaningless.

[10] We can find nothing in the statute, its legislative history, the applicable case law, or agency practice indicating that Congress meant to provide the sweeping authority the FCC now claims over receiver apparatus. And the agency’s strained and implausible interpretations of the definitional provisions of the Communications Act of 1934 do not lend credence to its position. As the Supreme Court has reminded us, Congress “does not ... hide elephants in mouseholes.” Whitman v. Am. Trucking Ass’n, 531 U.S. 457, 468, 121 S.Ct. 903, 149 L.Ed.2d 1 (2001). In sum, we hold that, at most, the Commission only has general authority under Title I to regulate apparatus used for the receipt of radio or wire communication while those apparatus are engaged in communication.

Our holding is consistent with the Seventh Circuit’s well-reasoned decision in Illinois Citizens, which concluded that the FCC may not lawfully exercise jurisdiction over activities that do not constitute communication by wire or radio. See 467 F.2d at 1399–1400. In that case, the Illinois Citizens Committee for Broadcasting filed a complaint with the FCC, alleging that the proposed construction of the Sears Tower in Chicago “would throw ‘multiple ghost images’ on television receivers in many areas of the Greater Chicago Metropolitan Area.” Id. at 1398. The petitioners called upon the FCC to take steps to prevent this interference, including, if necessary, ordering Sears, Roebuck & Co. to cease construction of the tower until the company had taken measures to ensure that television viewers would continue to receive an adequate signal. The Commission denied the requested relief on the ground that it lacked jurisdiction over the construction of the Sears Tower, and the Illinois Citizens Committee sought review by the Seventh Circuit. See id. at 1398–99.

The Illinois Citizens Committee argued that, in light of Southwestern Cable, the FCC had the power to regulate “all activities which ‘substantially affect communications.’ ” Id. at 1399. The Seventh Circuit flatly rejected this argument as unsupported by the Communications Act or judicial decisions interpreting the Act.

* * * * * :

In Motion Picture Ass’n, this court concluded that the Commission lacked authority under Title I of the Communications Act to promulgate regulations that significantly implicated program content. Focusing specifically on 47 U.S.C. § 151, which is part of Title I and which the FCC conceded was the only possible source of authority that could justify its adoption of the video description rules at issue in the case, we explained:
Under [§ 151], Congress delegated authority to the FCC to expand radio and wire transmissions, so that they would be available to all U.S. citizens. Section [151] does not address the content of the programs with respect to which accessibility is to be ensured. In other words, the FCC’s authority under [§ 151] is broad, but not without limits.
309 F.3d at 804 (full citations omitted) (citing Midwest Video I, 406 U.S. at 667–68, 92 S.Ct. 1860, and Southwestern Cable, 392 U.S. at 172, 88 S.Ct. 1994). Just as no provision in Title I addresses program content, no provision in Title I addresses requirements for demodulator products not engaged in communication by wire or radio.

In sum, because the rules promulgated by the Flag Order regulate demodulator products after the transmission of a DTV broadcast is complete, these regulations exceed the scope of authority Congress delegated to the FCC. And because the Commission can only issue regulations on subjects over which it has been delegated authority by Congress, the rules adopted by the Flag Order are invalid at the threshold jurisdictional inquiry. As was true in Aid Ass’n for Lutherans, “our judgment in this case is the same whether we analyze the agency’s statutory interpretation under Chevron Step One or Step Two. ‘In either situation, the agency’s interpretation of the statute is not entitled to deference absent a delegation of authority from Congress to regulate in the areas at issue.’ ” 321 F.3d at 1175 (quoting MPAA, 309 F.3d at 801). “An agency construction of a statute cannot survive judicial review if a contested regulation reflects an action that exceeds the agency’s authority.” Id. at 1174. It does not matter whether the unlawful action arises because the regulations at issue are “contrary to clear congressional intent” as ascertained through use of the “traditional tools of statutory construction,” Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. 2778, or “utterly unreasonable and thus impermissible.” Aid Ass’n for Lutherans, 321 F.3d at 1174. The FCC has no congressionally delegated authority to regulate receiver apparatus after a transmission is complete. We therefore hold that the broadcast flag regulations exceed the agency’s delegated authority under the statute.

3. Subsequent Congressional Legislation

We think that, for the reasons discussed above, the FCC never has possessed ancillary jurisdiction under the Communications Act of 1934 to regulate consumer electronic devices that can be used for receipt of wire or radio communication when those devices are not engaged in the process of radio or wire transmission. Indeed, in the more than 70 years of the Act’s existence, the Commission has neither claimed such authority nor purported to exercise its ancillary jurisdiction in such a far-reaching way. See Flag Order, 18 F.C.C.R. at 23,566 (“We recognize that the Commission’s assertion of jurisdiction over manufacturers of equipment in the past has typically been tied to specific statutory provisions and that this is the first time the Commission has exercised ancillary jurisdiction over consumer equipment manufacturers in this manner.”).

* * * * *

It is enough here for us to find that the Communications Act of 1934 does not indicate a legislative intent to delegate authority to the Commission to regulate consumer electronic devices that can be used for receipt of wire or radio communication when those devices are not engaged in the process of radio or wire transmission. That is the end of the matter. It turns out, however, that subsequent legislation enacted by Congress confirms the limited scope of the agency’s ancillary jurisdiction and makes it clear that the broadcast flag regulations exceed the agency’s delegated authority under the statute.

The first such congressional enactment of note is the All Channel Receiver Act (“ACRA”), Pub.L. No. 87–529, 76 Stat. 150 (codified at 47 U.S.C. §§ 303(s), 330(a)). Enacted in 1962, the ACRA granted the Commission authority to require that televisions sold in interstate commerce are “capable of adequately receiving all frequencies allocated by the Commission to television broadcasting.” 47 U.S.C. § 303(s). . . . .

It is clear, however, that, in enacting the ACRA, Congress did not “give the Commission unbridled authority” to regulate receiving apparatus. EIA, 636 F.2d at 696. This was confirmed when the Commission attempted to set a standard requiring television manufacturers to take steps to improve the quality of UHF reception beyond what could be attained with then-existing technology. On review, this court ruled that the Commission overstepped its delegated authority and vacated the Commission’s action. See id. at 698. The court held that, while the ACRA granted the Commission “limited ... authority to ensur[e] that all sets ‘be capable of adequately receiving’ all television frequencies,” Congress had intentionally restricted this jurisdictional grant to preclude wide-ranging FCC “receiver design regulation.” Id. at 695, 696.

* * * * *

A second congressional enactment that confirms the limited scope of the agency’s ancillary jurisdiction is the Communications Amendments Act of 1982, Pub.L. No. 97–259, § 108, 96 Stat. 1087, 1091–92. As part of the Communications Amendments Act of 1982, Congress authorized the Commission to impose performance standards on household consumer electronics to ensure that they can withstand radio interference. See 47 U.S.C. § 302a(a). The legislative history of 47 U.S.C. § 302a demonstrates that this enactment was intended by Congress to give the Commission authority it did not previously possess over receiver equipment. . . . .  Congress’s principal purpose in enacting 47 U.S.C. § 302a was clearly to expand the Commission’s authority beyond the scope of its then-existing jurisdiction, which is inconsistent with the FCC’s current view that it always has had sweeping jurisdiction over receiver apparatus under Title I of the Communications Act.


The FCC argues that the Commission has “discretion” to exercise “broad authority” over equipment used in connection with radio and wire transmissions, “when the need arises, even if it has not previously regulated in a particular area.” FCC Br. at 17. This is an extraordinary proposition. “The [Commission’s] position in this case amounts to the bare suggestion that it possesses plenary authority to act within a given area simply because Congress has endowed it with some authority to act in that area. We categorically reject that suggestion. Agencies owe their capacity to act to the delegation of authority” from Congress. See Ry. Labor Executives’ Ass’n, 29 F.3d at 670. The FCC, like other federal agencies, “literally has no power to act ... unless and until Congress confers power upon it.” La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986). In this case, all relevant materials concerning the FCC’s jurisdiction—including the words of the Communications Act of 1934, its legislative history, subsequent legislation, relevant case law, and Commission practice—confirm that the FCC has no authority to regulate consumer electronic devices that can be used for receipt of wire or radio communication when those devices are not engaged in the process of radio or wire transmission.

Because the Commission exceeded the scope of its delegated authority, we grant the petition for review, and reverse and vacate the Flag Order insofar as it requires demodulator products manufactured on or after July 1, 2005 to recognize and give effect to the broadcast flag.

So ordered.


Notes and Questions.

1.  Can you describe the jurisdictional issue in the case?

2.  Consider the way in which the court went about determining the constraints on agency power to regulate.  Was this based strictly on statute, or did the court apply a judicially elaborated “law” of agency jurisdiction?  Consider in that light the way that common law reasoning—the cultural decision parameters of common law is overlaid on issues of statutory construction and regulatory interpretation.

            If the first reading helped the student understand the context in which social tastes for administrative regulations arose, and if the second reading provided a glimpse of the institutional context in which administrative regulation is embedded, then the last of readings, Larry Catá Backer, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes.[59] Indiana Journal of Global Legal Studies, is meant to suggest how administrative regulation can be naturalized within a social, economic and political system so that it does not exist outside of the activities it regulates but deeply within as part of those activities themselves. More importantly, it suggests that the character of administrative regulation is not always the same as statutes. That is, administrative regulations have been developing a set of methodologies substantially broader than those of statutes. While statutes still command action and set standards of behavior, administrative regulations do not merely manage behavior within markets but also set up systems of surveillance and assessment through which regulatory goals can be internalized by the objects of regulations. This has one most significant consequence―the costs of enforcement, that is the transaction costs of implementing regulations decrease as the objects of regulation become their own monitors.

            Increasingly, public bodies are requiring, or permitting, private entities to monitor and report on the conduct and activities of a host of actors. It increasingly serves public bodies as a substitute for lawmaking. Surveillance is a flexible engine. It can be used to decide what sorts of facts constitute information, to determine what sorts of information ought to be privileged and which do not matter, to gather that information, to empower people or entities to gather information, and to act on the information gathered. In its domestic form it can be used to assign authority over certain types of information to private enterprises and then hold those enterprises to account on the basis of the information gathered. In its transnational form it can be used to construct a set of privileged information that can be gathered and distributed voluntarily by private entities on the basis of systems created and maintained by international public or private organizations as an alternative to formal regulation and to provide a means of harmonizing behavior without law. Surveillance in its various forms provides a unifying technique with which governance can be effectuated across the boundaries of power fractures without challenging formal regulatory power or its limits. It avoids the barrier between the public and private spheres; it substantially increases the regulatory palette of states without the complications of the usual limitations of public formal lawmaking—especially those of accountability and transparency.

            The consequences of surveillance, particularly those consequences on the shape of governance, are to a great extent a function of the character of the surveillance power elaborated. The principal effects will tend to promote a further convergence of public and private regulatory power. This convergence arises from a fracturing of traditional divisions of power. A sovereign is said to lose its character as such when it “acts, not as regulator of a market, but in the manner of a private player within it.” The reciprocal principle has not been accepted de jure; a private actor is not said to lose its character as a private actor when it acts in the manner of a sovereign. Still, private players now are required to play the role of regulator and have sought that role for themselves de facto. And, increasingly, public bodies are requiring, or permitting, private entities to monitor and report on the conduct and activities of a host of actors.

            Surveillance, then, functions as more than a descriptor of methodology. Surveillance is a new form of lawmaking through which the old boundaries between the public and private, national and transnational, are made irrelevant. The construction of complex systems of conscious and permanent visibility, as both normative systems and bundles of specific techniques, affects the power relationships among states, economic entities, and individuals. It represents modalities of fractures and complications in assertions of regulatory power, replicating its forms and effects throughout society. Its privatization tends to complicate the distinction between private and public institutions and between assertions of private (market or personal welfare maximizing) and public (regulatory or stakeholder welfare maximization). Surveillance cuts across borders—it embodies the techniques and sensibilities of an essentially transnational response to problems of governance.

            To understand the complexities and vectors of surveillance is to grasp the shape of converging public/private governance in this century. To that end, the article suggests an approach to the unbundling of the normative and methodological assumptions of surveillance usefully divided into four aspects: (1) normative, (2) informatics, (3) control, and (4) governance. The reading, then, seeks to introduce the student to the transformation of surveillance from a technique of governance (how regulations are effectuated) to a regulation itself (the functional role of technique becomes the substance of the measure without an intervening regulatory creation and adoption process) (reading 1-12).

            The reading starts with a discussion of the normative role of surveillance, that is, how it is that a technique of implementation can substitute for the form of regulation, focusing on its sources and forms. Consider, for example “race.” A regulation may require the monitoring a race in connection with some activity (to further the objective of reducing the effects of racism in society). Race can be viewed as “data” something that can be collected. But to get to the point where “race” can be reduced to raw data that can be harvested and then used in the enforcement of regulatory schemes, something “regulatory” happens first―the collecting body has to determine the meaning of race. That determination, of course, affects not merely the mechanics of collection but has significant ramification for the targeted populations identified or missed in decisions about what constitutes “race” and what does not. Where funds are distributed by reference to race indicators, for example, inclusion or exclusion can have significant effects on the way in which regulatory systems operate and on the functional application of “law.” And the choices may implicate substantially important social issues―how does one measure “whiteness”? how does one determine hispanicity―race, ethnicity, markers? and so on. Beyond issues of data identification, the process of data collection (who collects the data and how it is collected) , and the process of evaluating the data (what is important, how is it organized and to what purpose is that data managed to conclusion) all affect the character of governmental responses and management of those areas for which it has data gathering authority. Lastly the uses of evaluation may have significant consequences for further regulation, judicial construction of other regulations, statutes and common law and for managing societal understanding of “facts” with political consequences.

            The focus on surveillance adds a layer of complexity to the idea of law. Until now, we have been thinking about law in its traditional forms. That is law is understood as either a set of consequences for taking an action (common law) or as commands designed to manage activity (statute and regulation). Each provides a clear expression that identifies conduct and declares the consequences of acting or failing to act in the identified way. But with the advent of the regulatory state this form of lawmaking also fails to appropriately respond to the needs for which regulation arose. Where the object of regulation is the constant monitoring and management of activity, a set of commands may not be sufficient to respond to threats to the activity that is the subject of regulation. Regulations that are meant to protect quality control, the integrity of markets, the discharges of pollutants, or the market behaviors of individuals or entities may not be adequately responsive is structured as a set of commands subject to enforcement for violation.

            Continuous monitoring and correction may be what is required. But law is quite ineffective as a tool for continuous monitoring and intervention, Either the law must create structures through which the subject population monitors and corrects itself or it must adapt its techniques to suit the objectives of constancy in managing and controlling particular regulatory spaces (like markets). To that end, the techniques of assessment and of monitoring appear to better serve the regulating entity. But to invoke these forms of control is to move, and perhaps move decisively, away from the carefully constructed and contained space within which law acquires its character and legitimacy. Taken together, the possibilities offered by the techniques of monitoring and assessment to substitute for the traditional forms of command based regulation suggest that, just as there is a continuum from statute to regulation, so a similar continuum might exist between regulation and behavior controlling techniques that, though not in the form of law, function like it. This movement may be necessary both because of the nature of the object of regulation, and because regulation may sometimes extend beyond the state.[60]. More importantly, it provides an avenue for the privatization of the regulatory function by shifting its enforcement to private bodies, for example corporate boards of directors, accountants and lawyers (corporate gatekeepers) who then are tasked with the gap filling and ambiguity resolution functions traditionally exercised by courts.[61] But with the techniques of surveillance and monitoring, the function of control may well overwhelm the form, of law. It is to those issues that we turn to next.

IV. Problem

Regulations provide an important site for the interaction of several law systems in the United States.  It requires a sensitivity to the methodologies of common law judicial approaches to interpretation, an reference to statutes as the source of and the defining elements of constraints on regulatory power, and the regulations themselves for the management of the conduct described therein. The following problem is meant to suggest both the complexities and intermeshing necessary in the approach to the interpretation and application of regulations within the legal systems of the United States.

            One of the most difficult problems facing courts and individuals within the administrative state is the extent to which administrative regulations have the authority of law.  While formally approved regulations that conform to explicit statutory authority are easy to accept as law, there are a number of instances in which administrative agencies issue many distinct forms of decisions and rulings, whose legal status are more in doubt.  The issue is important because the determination of the authority of these administrative decisions or rulings may affect the rights of both administrative agencies and individuals seeking to conform their behavior to law.

Problem.  The Securities and Exchange Commission issues “No Action Letters.” According to the SEC:
An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a "no-action" letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual's or entity's request. The SEC staff sometimes responds in the form of an interpretive letter to requests for clarifications of certain rules and regulations.

The no-action relief is limited to the requester and the specific facts and circumstances set forth in the request. In addition, the SEC staff reserves the right to change the positions reflected in prior no-action letters.[62]

Your client wants to know the legal effect of no action letters.  Do the following cases help provide an answer?


Chevron U.S.A.
Natural Resources Defense Council. Inc.
Supreme Court of the United States
467 U.S. 837 (1984)
(footnotes omitted and renumbered)

JUSTICE STEVENS delivered the opinion of the Court.

In the Clean Air Act Amendments of 1977, Pub.L. 95-95, 91 Stat. 685, Congress enacted certain requirements applicable [p840] to States that had not achieved the national air quality standards established by the Environmental Protection Agency (EPA) pursuant to earlier legislation. The amended Clean Air Act required these "nonattainment" States to establish a permit program regulating "new or modified major stationary sources" of air pollution. Generally, a permit may not be issued for a new or modified major stationary source unless several stringent conditions are met.[63] The EPA regulation promulgated to implement this permit requirement allows a State to adopt a plant-wide definition of the term "stationary source."[64] Under this definition, an existing plant that contains several pollution-emitting devices may install or modify one piece of equipment without meeting the permit conditions if the alteration will not increase the total emissions from the plant. The question presented by these cases is whether EPA's decision to allow States to treat all of the pollution-emitting devices within the same industrial grouping as though they were encased within a single "bubble" is based on a reasonable construction of the statutory term "stationary source."


The EPA regulations containing the plantwide definition of the term stationary source were promulgated on October [p841] 14, 1981. 46 Fed.Reg. 50766. Respondents[65] filed a timely petition for review in the United States Court of Appeals for the District of Columbia Circuit pursuant to 42 U.S.C. § 7607(b)(1). The Court of Appeals set aside the regulations. Natural Resources Defense Council, Inc. v. Gorsuch, 222 U.S.App.D.C. 268, 685 F.2d 718 (1982).

The court observed that the relevant part of the amended Clean Air Act "does not explicitly define what Congress envisioned as a ‘stationary source, to which the permit program . . . should apply," and further stated that the precise issue was not "squarely addressed in the legislative history." Id. at 273, 685 F.2d at 723. In light of its conclusion that the legislative history bearing on the question was "at best contradictory," it reasoned that "the purposes of the nonattainment program should guide our decision here." Id. at 276, n. 39, 685 F.2d at 726, n. 39. Based on two of its precedents concerning the applicability of the bubble concept to certain Clean Air Act programs, the court stated that the bubble concept was "mandatory" in programs designed merely to maintain existing air quality, but held that it was "inappropriate" in programs enacted to improve air quality. Id. at 276, 685 F.2d at 726. Since the purpose of the permit [p842] program its "raison d'etre," in the court's view -- was to improve air quality, the court held that the bubble concept was inapplicable in these cases under its prior precedents. Ibid. It therefore set aside the regulations embodying the bubble concept as contrary to law. We granted certiorari to review that judgment, 461 U.S. 956 (1983), and we now reverse.

The basic legal error of the Court of Appeals was to adopt a static judicial definition of the term "stationary source" when it had decided that Congress itself had not commanded that definition. Respondents do not defend the legal reasoning of the Court of Appeals. Nevertheless, since this Court reviews judgments, not opinions, we must determine whether the Court of Appeals' legal error resulted in an erroneous judgment on the validity of the regulations.


When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, [p843] as well as the agency, must give effect to the unambiguously expressed intent of Congress.[66] If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. [67]

The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.

Morton v. Ruiz, 415 U.S. 199, 231 (1974). If Congress has explicitly left a gap for the agency to fill, there is an express delegation [p844] of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit, rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.

We have long recognized that considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer, and the principle of deference to administrative interpretations

has been consistently followed by this Court whenever decision as to the meaning or reach of a statute has involved reconciling conflicting policies, and a full understanding of the force of the statutory policy in the given situation has depended upon more than ordinary knowledge respecting the matters subjected to agency regulations. See, e.g., National Broadcasting Co. v. United States, 319 U.S. 190; Labor Board v. Hearst Publications, Inc., 322 U.S. 111; Republic Aviation Corp. v. [ 467 U.S. 845] Labor Board, 324 U.S. 793; Securities & Exchange Comm'n v. Chenery Corp., 332 U.S. 194; Labor Board v. Seven-Up Bottling Co., 344 U.S. 344.

. . . If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.

United States v. Shimer, 367 U.S. 374, 382, 383 (1961). Accord, Capital Cities Cable, Inc. v. Crisp, ante at 699-700.

In light of these well-settled principles, it is clear that the Court of Appeals misconceived the nature of its role in reviewing the regulations at issue. Once it determined, after its own examination of the legislation, that Congress did not actually have an intent regarding the applicability of the bubble concept to the permit program, the question before it was not whether, in its view, the concept is "inappropriate" in the general context of a program designed to improve air quality, but whether the Administrator's view that it is appropriate in the context of this particular program is a reasonable one. Based on the examination of the legislation and its history which follows, we agree with the Court of Appeals that Congress did not have a specific intention on the applicability of the bubble concept in these cases, and conclude that the EPA's use of that concept here is a reasonable policy choice for the agency to make.


In the 1950's and the 1960's, Congress enacted a series of statutes designed to encourage and to assist the States in curtailing air pollution. See generally Train v. Natural Resources Defense Council, Inc., 421 U.S. 60, 63-64 (1975). The Clean Air Amendments of 1970, Pub.L. 91-604, 84 Stat. 1676, "sharply increased federal authority and responsibility [p846] in the continuing effort to combat air pollution," 421 U.S. at 64, but continued to assign "primary responsibility for assuring air quality" to the several States, 84 Stat. 1678. Section 109 of the 1970 Amendments directed the EPA to promulgate National Ambient Air Quality Standards (NAAQS's)[68] and § 110 directed the States to develop plans (SIP's) to implement the standards within specified deadlines. In addition, § 111 provided that major new sources of pollution would be required to conform to technology-based performance standards; the EPA was directed to publish a list of categories of sources of pollution and to establish new source performance standards (NSPS) for each. Section 111(e) prohibited the operation of any new source in violation of a performance standard.

Section 111(a) defined the terms that are to be used in setting and enforcing standards of performance for new stationary sources. It provided:

For purposes of this section:
* * * *
(3) The term "stationary source" means any building, structure, facility, or installation which emits or may emit any air pollutant.

84 Stat. 1683. In the 1970 Amendments, that definition was not only applicable to the NSPS program required by § 111, but also was made applicable to a requirement of § 110 that each state implementation plan contain a procedure for reviewing the location of any proposed new source and preventing its construction if it would preclude the attainment or maintenance of national air quality standards.

In due course, the EPA promulgated NAAQS's, approved SIP's, and adopted detailed regulations governing NSPS's [p847] for various categories of equipment. In one of its programs, the EPA used a plantwide definition of the term "stationary source." In 1974, it issued NSPS's for the nonferrous smelting industry that provided that the standards would not apply to the modification of major smelting units if their increased emissions were offset by reductions in other portions of the same plant.


The 1970 legislation provided for the attainment of primary NAAQS's by 1975. In many areas of the country, particularly the most industrialized States, the statutory goals were not attained. In 1976, the 94th Congress was confronted with this fundamental problem, as well as many others respecting pollution control. As always in this area, the legislative struggle was basically between interests seeking strict schemes to reduce pollution rapidly to eliminate its social costs and interests advancing the economic concern that strict schemes would retard industrial development with attendant social costs. The 94th Congress, confronting these competing interests, was unable to agree on what response was in the public interest: legislative proposals to deal with nonattainment failed to command the necessary consensus.

In light of this situation, the EPA published an Emissions Offset Interpretative Ruling in December, 1976, see 41 Fed.Reg. 55524, to "fill the gap," as respondents put it, until Congress acted. The Ruling stated that it was intended to [p848] address

the issue of whether and to what extent national air quality standards established under the Clean Air Act may restrict or prohibit growth of major new or expanded stationary air pollution sources.

Id. at 55524-55525. In general, the Ruling provided that

a major new source may locate in an area with air quality worse than a national standard only if stringent conditions can be met.

Id. at 55525. The Ruling gave primary emphasis to the rapid attainment of the statute's environmental goals. [n20] Consistent with that emphasis, the construction of every new source in nonattainment areas had to meet the "lowest achievable emission rate" under the current state of the art for that type of facility. See Ibid. The 1976 Ruling did not, however, explicitly adopt or reject the "bubble concept."[69]


The Clean Air Act Amendments of 1977 are a lengthy, detailed, technical, complex, and comprehensive response to a major social issue. A small portion of the statute -- 91 Stat. 745-751 (Part D of Title I of the amended Act, 42 U.S.C. §§ 7501-7508) -- expressly deals with nonattainment areas. The focal point of this controversy is one phrase in that portion of the Amendments.[70]

Basically, the statute required each State in a nonattainment area to prepare and obtain approval of a new SIP by July 1, 1979. In the interim, those States were required to comply with the EPA's interpretative Ruling of December 21, 1976. 91 Stat. 745. The deadline for attainment of the primary NAAQS's was extended until December 31, 1982, and in some cases until December 31, 1987, but the SIP's were required to contain a number of provisions designed to achieve the goals as expeditiously as possible.

Most significantly for our purposes, the statute provided that each plan shall

(6) require permits for the construction and operation of new or modified major stationary sources in accordance with section 173. . . .

Id. at 747. Before issuing a permit, § 173 requires (1) the state agency to determine that there will be sufficient emissions reductions in the region to offset the emissions from the new source and also to allow for reasonable further progress toward attainment, or that the increased emissions will not exceed an allowance for growth established pursuant to § 172(b)(5); (2) the applicant to certify that his other sources in the State are in compliance with the SIP, (3) the agency to determine that the applicable SIP is otherwise being implemented, and (4) the proposed source to comply with the lowest achievable emission rate (LAER).

The 1977 Amendments contain no specific reference to the "bubble concept." Nor do they contain a specific definition of the term "stationary source," though they did not disturb the definition of "stationary source" contained in § 111(a)(3), applicable by the terms of the Act to the NSPS program. Section 302(j), however, defines the term "major stationary source" as follows:

(j) Except as otherwise expressly provided, the terms "major stationary source" and "major emitting facility" mean any stationary facility or source of air pollutants which directly emits, or has the potential to emit, one hundred tons per year or more of any air pollutant (including any major emitting facility or source of fugitive emissions of any such pollutant, as determined by rule by the Administrator).

91 Stat. 770.


The legislative history of the portion of the 1977 Amendments dealing with nonattainment areas does not contain any specific comment on the "bubble concept" or the question whether a plantwide definition of a stationary source is permissible under the permit program. It does, however, plainly disclose that in the permit program Congress sought to accommodate the conflict between the economic interest in permitting capital improvements to continue and the environmental interest in improving air quality.

* * * * * *


As previously noted, prior to the 1977 Amendments, the EPA had adhered to a plantwide definition of the term "source" under a NSPS program. After adoption of the 1977 Amendments, proposals for a plantwide definition were considered in at least three formal proceedings.

In January, 1979, the EPA considered the question whether the same restriction on new construction in nonattainment areas that had been included in its December, 1976, Ruling [p854] should be required in the revised SIP's that were scheduled to go into effect in July, 1979. After noting that the 1976 Ruling was ambiguous on the question "whether a plant with a number of different processes and emission points would be considered a single source," 44 Fed.Reg. 3276 (1979), the EPA, in effect, provided a bifurcated answer to that question. In those areas that did not have a revised SIP in effect by July, 1979, the EPA rejected the plantwide definition; on the other hand, it expressly concluded that the plantwide approach would be permissible in certain circumstances if authorized by an approved SIP. It stated:

Where a state implementation plan is revised and implemented to satisfy the requirements of Part D, including the reasonable further progress requirement, the plan requirements for major modifications may exempt modifications of existing facilities that are accompanied by intrasource offsets, so that there is no net increase in emissions. The agency endorses such exemptions, which would provide greater flexibility to sources to effectively manage their air emissions at least cost.


In April, and again in September, 1979, the EPA published additional comments in which it indicated that revised SIP's could adopt the plantwide definition of source in nonattainment areas in certain circumstances. See id. at 20372, 20379, 51924, 51951, 51958. On the latter occasion, the EPA made a formal rulemaking proposal that would have permitted the use of the "bubble concept" for new installations within a plant as well as for modifications of existing units.

* * * * *

The EPA's summary of its proposed Ruling discloses a flexible, rather than rigid, definition of the term "source" to implement various policies and programs:

In summary, EPA is proposing two different ways to define source for different kinds of NSR programs. . . .

* * * * * *

In August, 1980, however, the EPA adopted a regulation that, in essence, applied the basic reasoning of the Court of Appeals in these cases. The EPA took particular note of the two then-recent Court of Appeals decisions, which had created the bright-line rule that the "bubble concept" should be employed in a program designed to maintain air quality, but not in one designed to enhance air quality. Relying heavily on those cases, [n29] EPA adopted a dual definition of "source" for nonattainment areas that required a permit whenever a change in either the entire plant, or one of its components, would result in a significant increase in emissions even if the increase was completely offset by reductions elsewhere in the plant. The EPA expressed the opinion that this interpretation was "more consistent with congressional intent" than the plantwide definition because it "would bring in more sources or modifications for review," 45 Fed.Reg. 52697 (1980), but its primary legal analysis was predicated on the two Court of Appeals decisions.

In 1981, a new administration took office and initiated a "Government-wide reexamination of regulatory burdens and complexities." 46 Fed.Reg. 16281. In the context of that [p858] review, the EPA reevaluated the various arguments that had been advanced in connection with the proper definition of the term "source" and concluded that the term should be given the same definition in both nonattainment areas and PSD areas.

In explaining its conclusion, the EPA first noted that the definitional issue was not squarely addressed in either the statute or its legislative history, and therefore that the issue involved an agency "judgment as how to best carry out the Act." Ibid. It then set forth several reasons for concluding that the plantwide definition was more appropriate. It pointed out that the dual definition "can act as a disincentive to new investment and modernization by discouraging modifications to existing facilities" and

can actually retard progress in air pollution control by discouraging replacement of older, dirtier processes or pieces of equipment with new, cleaner ones.

Ibid. Moreover, the new definition

would simplify EPA's rules by using the same definition of "source" for PSD, nonattainment new source review, and the construction moratorium. This reduces confusion and inconsistency.

Ibid. Finally, the agency explained that additional requirements that remained in place would accomplish the fundamental purposes of achieving attainment with NAAQS's as expeditiously as possible. [n30] These conclusions were expressed [p859] in a proposed rulemaking in August, 1981, that was formally promulgated in October. See id. at 50766.


In this Court, respondents expressly reject the basic rationale of the Court of Appeals' decision. That court viewed the statutory definition of the term "source" as sufficiently flexible to cover either a plantwide definition, a narrower definition covering each unit within a plant, or a dual definition that could apply to both the entire "bubble" and its components. It interpreted the policies of the statute, however, to mandate the plantwide definition in programs designed to maintain clean air and to forbid it in programs designed to improve air quality. Respondents place a fundamentally different construction on the statute. They contend that the text of the Act requires the EPA to use a dual definition -- if either a component of a plant, or the plant as a whole, emits over 100 tons of pollutant, it is a major stationary source. They thus contend that the EPA rules adopted in 1980, insofar as they apply to the maintenance of the quality of clean air, as well as the 1981 rules which apply to nonattainment areas, violate the statute. [n31]

Statutory Language

The definition of the term "stationary source" in § 111(a)(3) refers to "any building, structure, facility, or installation" which emits air pollution. See supra at 846. This definition is applicable only to the NSPS program by the express terms of the statute; the text of the statute does not make this definition [p860] applicable to the permit program. Petitioners therefore maintain that there is no statutory language even relevant to ascertaining the meaning of stationary source in the permit program aside from § 302(j), which defines the term "major stationary source." See supra at 851. We disagree with petitioners on this point.

The definition in § 302(j) tells us what the word "major" means -- a source must emit at least 100 tons of pollution to qualify -- but it sheds virtually no light on the meaning of the term "stationary source." It does equate a source with a facility -- a "major emitting facility" and a "major stationary source" are synonymous under § 302(j). The ordinary meaning of the term "facility" is some collection of integrated elements which has been designed and constructed to achieve some purpose. Moreover, it is certainly no affront to common English usage to take a reference to a major facility or a major source to connote an entire plant, as opposed to its constituent parts. Basically, however, the language of § 302(j) simply does not compel any given interpretation of the term "source."

Respondents recognize that, and hence point to § 111(a)(3). Although the definition in that section is not literally applicable to the permit program, it sheds as much light on the meaning of the word "source" as anything in the statute. [n32] As respondents point out, use of the words "building, structure, facility, or installation," as the definition of source, could be read to impose the permit conditions on an individual building that is a part of a plant. [n33] A "word may have a character of its own not to be submerged by its association." Russell Motor Car Co. v. United States, 261 U.S. 514, 519 [p861] (1923). On the other hand, the meaning of a word must be ascertained in the context of achieving particular objectives, and the words associated with it may indicate that the true meaning of the series is to convey a common idea. The language may reasonably be interpreted to impose the requirement on any discrete, but integrated, operation which pollutes. This gives meaning to all of the terms -- a single building, not part of a larger operation, would be covered if it emits more than 100 tons of pollution, as would any facility, structure, or installation. Indeed, the language itself implies a "bubble concept" of sorts: each enumerated item would seem to be treated as if it were encased in a bubble. While respondents insist that each of these terms must be given a discrete meaning, they also argue that § 111(a)(3) defines "source" as that term is used in § 302(j). The latter section, however, equates a source with a facility, whereas the former defines "source" as a facility, among other items.

We are not persuaded that parsing of general terms in the text of the statute will reveal an actual intent of Congress. [n34] [p862] We know full well that this language is not dispositive; the terms are overlapping, and the language is not precisely directed to the question of the applicability of a given term in the context of a larger operation. To the extent any congressional "intent" can be discerned from this language, it would appear that the listing of overlapping, illustrative terms was intended to enlarge, rather than to confine, the scope of the agency's power to regulate particular sources in order to effectuate the policies of the Act.

Legislative History

In addition, respondents argue that the legislative history and policies of the Act foreclose the plantwide definition, and that the EPA's interpretation is not entitled to deference, because it represents a sharp break with prior interpretations of the Act.

Based on our examination of the legislative history, we agree with the Court of Appeals that it is unilluminating. The general remarks pointed to by respondents "were obviously not made with this narrow issue in mind, and they cannot be said to demonstrate a Congressional desire. . . ." Jewell Ridge Coal Corp. v. Mine Workers, 325 U.S. 161, 168-169 (1945). Respondents' argument based on the legislative history relies heavily on Senator Muskie's observation that a new source is subject to the LAER requirement. [n35] But the full statement is ambiguous, and, like the text of § 173 itself, this comment does not tell us what a new source is, much less that it is to have an inflexible definition. We find that the legislative history as a whole is silent on the precise issue before us. It is, however, consistent with the view that the EPA should have broad discretion in implementing the policies of the 1977 Amendments. [p863]

More importantly, that history plainly identifies the policy concerns that motivated the enactment; the plantwide definition is fully consistent with one of those concerns -- the allowance of reasonable economic growth -- and, whether or not we believe it most effectively implements the other, we must recognize that the EPA has advanced a reasonable explanation for its conclusion that the regulations serve the environmental objectives as well. See supra at 857-859, and n. 29; see also supra at 855, n. 27. Indeed, its reasoning is supported by the public record developed in the rulemaking process, [n36] as well as by certain private studies. [n37]

Our review of the EPA's varying interpretations of the word "source" -- both before and after the 1977 Amendments -- convinces us that the agency primarily responsible for administering this important legislation has consistently interpreted it flexibly -- not in a sterile textual vacuum, but in the context of implementing policy decisions in a technical and complex arena. The fact that the agency has from time to time changed its interpretation of the term "source" does not, as respondents argue, lead us to conclude that no deference should be accorded the agency's interpretation of the statute. An initial agency interpretation is not instantly carved in stone. On the contrary, the agency, to engage in informed rulemaking, must consider varying interpretations [p864] and the wisdom of its policy on a continuing basis. Moreover, the fact that the agency has adopted different definitions in different contexts adds force to the argument that the definition itself is flexible, particularly since Congress has never indicated any disapproval of a flexible reading of the statute.

Significantly, it was not the agency in 1980, but rather the Court of Appeals that read the statute inflexibly to command a plantwide definition for programs designed to maintain clean air and to forbid such a definition for programs designed to improve air quality. The distinction the court drew may well be a sensible one, but our labored review of the problem has surely disclosed that it is not a distinction that Congress ever articulated itself, or one that the EPA found in the statute before the courts began to review the legislative work product. We conclude that it was the Court of Appeals, rather than Congress or any of the decisionmakers who are authorized by Congress to administer this legislation, that was primarily responsible for the 1980 position taken by the agency.


The arguments over policy that are advanced in the parties' briefs create the impression that respondents are now waging in a judicial forum a specific policy battle which they ultimately lost in the agency and in the 32 jurisdictions opting for the "bubble concept," but one which was never waged in the Congress. Such policy arguments are more properly addressed to legislators or administrators, not to judges. [n38] [p865]

In these cases, the Administrator's interpretation represents a reasonable accommodation of manifestly competing interests, and is entitled to deference: the regulatory scheme is technical and complex, [n39] the agency considered the matter in a detailed and reasoned fashion, [n40] and the decision involves reconciling conflicting policies. [n41] Congress intended to accommodate both interests, but did not do so itself on the level of specificity presented by these cases. Perhaps that body consciously desired the Administrator to strike the balance at this level, thinking that those with great expertise and charged with responsibility for administering the provision would be in a better position to do so; perhaps it simply did not consider the question at this level; and perhaps Congress was unable to forge a coalition on either side of the question, and those on each side decided to take their chances with the scheme devised by the agency. For judicial purposes, it matters not which of these things occurred.

Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices -- resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the [p866] agency charged with the administration of the statute in light of everyday realities.

When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges -- who have no constituency -- have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: "Our Constitution vests such responsibilities in the political branches." TVA v. Hill, 437 U.S. 153, 195 (1978).

We hold that the EPA's definition of the term "source" is a permissible construction of the statute which seeks to accommodate progress in reducing air pollution with economic growth.

The Regulations which the Administrator has adopted provide what the agency could allowably view as . . . [an] effective reconciliation of these twofold ends. . . .

United States v. Shimer, 367 U.S. at 383.

The judgment of the Court of Appeals is reversed.

It is so ordered.

JUSTICE MARSHALL and JUSTICE REHNQUIST took no part in the consideration or decision of these cases.

JUSTICE O'CONNOR took no part in the decision of these cases.


Supreme Court of the United States
533 U.S. 218 (2001)
on writ of certiorari to the united states court of appeals for the federal circuit
(footnotes omitted and renumbered)

Justice Souter delivered the opinion of the Court.

The question is whether a tariff classification ruling by the United States Customs Service deserves judicial deference. The Federal Circuit rejected Customs’s invocation of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) , in support of such a ruling, to which it gave no deference. We agree that a tariff classification has no claim to judicial deference under Chevron, there being no indication that Congress intended such a ruling to carry the force of law, but we hold that under Skidmore v. Swift & Co., 323 U. S. 134 (1944), the ruling is eligible to claim respect according to its persuasiveness.



Imports are taxed under the Harmonized Tariff Schedule of the United States (HTSUS), 19 U. S. C. §1202. Title 19 U. S. C. §1500(b) provides that Customs “shall, under rules and regulations prescribed by the Secretary [of the Treasury] … fix the final classification and rate of duty applicable to … merchandise” under the HTSUS. Section 1502(a) provides that

“[t]he Secretary of the Treasury shall establish and promulgate such rules and regulations not inconsistent with the law (including regulations establishing procedures for the issuance of binding rulings prior to the entry of the merchandise concerned), and may disseminate such information as may be necessary to secure a just, impartial, and uniform appraisement of imported merchandise and the classification and assessment of duties thereon at the various ports of entry.”[71]

See also §1624 (general delegation to Secretary to issue rules and regulations for the admission of goods).

The Secretary provides for tariff rulings before the entry of goods by regulations authorizing “ruling letters” setting tariff classifications for particular imports. 19 CFR §177.8 (2000). A ruling letter

“represents the official position of the Customs Service with respect to the particular transaction or issue described therein and is binding on all Customs Service personnel in accordance with the provisions of this section until modified or revoked. In the absence of a change of practice or other modification or revocation which affects the principle of the ruling set forth in the ruling letter, that principle may be cited as authority in the disposition of transactions involving the same circumstances.” §177.9(a).

After the transaction that gives it birth, a ruling letter is to “be applied only with respect to transactions involving articles identical to the sample submitted with the ruling request or to articles whose description is identical to the description set forth in the ruling letter.” §177.9(b)(2). As a general matter, such a letter is “subject to modification or revocation without notice to any person, except the person to whom the letter was addressed,” §177.9(c), and the regulations consequently provide that “no other person should rely on the ruling letter or assume that the principles of that ruling will be applied in connection with any transaction other than the one described in the letter,” ibid . Since ruling letters respond to transactions of the moment, they are not subject to notice and comment before being issued, may be published but need only be made “available for public inspection,” 19 U. S. C. §1625(a), and, at the time this action arose, could be modified without notice and comment under most circumstances, 19 CFR §177.10(c) (2000).  A broader notice-and-comment requirement for modification of prior rulings was added by statute in 1993, Pub. L. 103–182 §623, 107Stat. 2186, codified at 19 U. S. C. §1625(c), and took effect after this case arose.[72]

Any of the 46 4 port-of-entry 5 Customs offices may issue ruling letters, and so may the Customs Headquarters Office, in providing “[a]dvice or guidance as to the interpretation or proper application of the Customs and related laws with respect to a specific Customs transaction [which] may be requested by Customs Service field offices … at any time, whether the transaction is prospective, current, or completed,” 19 CFR §177.11(a) (2000). Most ruling letters contain little or no reasoning, but simply describe goods and state the appropriate category and tariff. A few letters, like the Headquarters ruling at issue here, set out a rationale in some detail.


Respondent, the Mead Corporation, imports “day planners,” three-ring binders with pages having room for notes of daily schedules and phone numbers and addresses, together with a calendar and suchlike. The tariff schedule on point falls under the HTSUS heading for “[r]egisters, account books, notebooks, order books, receipt books, letter pads, memorandum pads, diaries and similar articles,” HTSUS subheading 4820.10, which comprises two subcategories. Items in the first, “[d]iaries, notebooks and address books, bound; memorandum pads, letter pads and similar articles,” were subject to a tariff of 4.0% at the time in controversy. 185 F. 3d 1304, 1305 (CA Fed. 1999) (citing subheading 4820.10.20); see also App. to Pet. for Cert. 46a. Objects in the second, covering “[o]ther” items, were free of duty. HTSUS subheading 4820.10.40; see also App. to Pet. for Cert. 46a.

Between 1989 and 1993, Customs repeatedly treated day planners under the “other” HTSUS subheading. In January 1993, however, Customs changed its position, and issued a Headquarters ruling letter classifying Mead’s day planners as “Diaries …, bound” subject to tariff under subheading 4820.10.20. That letter was short on explanation, App. to Brief in Opposition 4a–6a, but after Mead’s protest, Customs Headquarters issued a new letter, carefully reasoned but never published, reaching the same conclusion, App. to Pet. for Cert. 28a–47a. This letter considered two definitions of “diary” from the Oxford English Dictionary, the first covering a daily journal of the past day’s events, the second a book including “ ‘printed dates for daily memoranda and jottings; also … calendars … .’ ” Id., at 33a–34a (quoting Oxford English Dictionary 321 (Compact ed. 1982)). Customs concluded that “diary” was not confined to the first, in part because the broader definition reflects commercial usage and hence the “commercial identity of these items in the marketplace.” App. to Pet. for Cert. 34a. As for the definition of “bound,” Customs concluded that HTSUS was not referring to “bookbinding,” but to a less exact sort of fastening described in the Harmonized Commodity Description and Coding System Explanatory Notes to Heading 4820, which spoke of binding by “ ‘reinforcements or fittings of metal, plastics, etc.’ ” Id., at 45a.

Customs rejected Mead’s further protest of the second Headquarters ruling letter, and Mead filed suit in the Court of International Trade (CIT). The CIT granted the Government’s motion for summary judgment, adopting Customs’s reasoning without saying anything about deference. 17 F. Supp. 2d 1004 (1998).

Mead then went to the United States Court of Appeals for the Federal Circuit. While the case was pending there this Court decided United States v. Haggar Apparel Co., 526 U. S. 380 (1999) , holding that Customs regulations receive the deference described in Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) . The appeals court requested briefing on the impact of Haggar , and the Government argued that classification rulings, like Customs regulations, deserve Chevron deference.

The Federal Circuit, however, reversed the CIT and held that Customs classification rulings should not get Chevron deference, owing to differences from the regulations at issue in Haggar . Rulings are not preceded by notice and comment as under the Administrative Procedure Act (APA), 5 U. S. C. §553, they “do not carry the force of law and are not, like regulations, intended to clarify the rights and obligations of importers beyond the specific case under review.” 185 F. 3d, at 1307. The appeals court thought classification rulings had a weaker Chevron claim even than Internal Revenue Service interpretive rulings, to which that court gives no deference; unlike rulings by the IRS, Customs rulings issue from many locations and need not be published. 185 F. 3d, at 1307–1308.

The Court of Appeals accordingly gave no deference at all to the ruling classifying the Mead day planners and rejected the agency’s reasoning as to both “diary” and “bound.” It thought that planners were not diaries because they had no space for “relatively extensive notations about events, observations, feelings, or thoughts” in the past. Id., at 1310. And it concluded that diaries “bound” in subheading 4810.10.20 presupposed “unbound” diaries, such that treating ring-fastened diaries as “bound” would leave the “unbound diary” an empty category. Id., at 1311.

We granted certiorari, 530 U. S. 1202 (2000) , in order to consider the limits of Chevron deference owed to administrative practice in applying a statute. We hold that administrative implementation of a particular statutory provision qualifies for Chevron deference when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority. Delegation of such authority may be shown in a variety of ways, as by an agency’s power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent. The Customs ruling at issue here fails to qualify, although the possibility that it deserves some deference under Skidmore leads us to vacate and remand.



When Congress has “explicitly left a gap for an agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation,” Chevron , 467 U. S., at 843–844, and any ensuing regulation is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute. 6 See id ., at 844; United States v. Morton, 467 U. S. 822, 834 (1984) ; APA, 5 U. S. C. §§706(2)(A), (D). But whether or not they enjoy any express delegation of authority on a particular question, agencies charged with applying a statute necessarily make all sorts of interpretive choices, and while not all of those choices bind judges to follow them, they certainly may influence courts facing questions the agencies have already answered. “[T]he well-reasoned views of the agencies implementing a statute ‘constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance,’ ” Bragdon v. Abbott, 524 U. S. 624, 642 (1998) (quoting Skidmore, 323 U. S., at 139–140), and “[w]e have long recognized that considerable weight should be accorded to an executive department’s construction of a statutory scheme it is entrusted to administer … .” Chevron, supra, at 844 (footnote omitted); see also Ford Motor Credit Co. v. Milhollin, 444 U. S. 555, 565 (1980) ; Zenith Radio Corp. v. United States, 437 U. S. 443, 450 (1978) . The fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and courts have looked to the degree of the agency’s care,[73] its consistency,[74] formality,[75] and relative expertness,[76] and to the persuasiveness of the agency’s position, see Skidmore, supra , at 139–140. The approach has produced a spectrum of judicial responses, from great respect at one end, see, e.g., Aluminum Co. of America v. Central Lincoln Peoples’ Util. Dist., 467 U. S. 380, 389–390 (1984) (“ ‘substantial deference’ ” to administrative construction), to near indifference at the other, see, e.g., Bowen v. Georgetown Univ. Hospital, 488 U. S. 204, 212–213 (1988) (interpretation advanced for the first time in a litigation brief). Justice Jackson summed things up in Skidmore v. Swift & Co.:

“The weight [accorded to an administrative] judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” 323 U. S., at 140.

Since 1984, we have identified a category of interpretive choices distinguished by an additional reason for judicial deference. This Court in Chevron recognized that Congress not only engages in express delegation of specific interpretive authority, but that “[s]ometimes the legislative delegation to an agency on a particular question is implicit.” 467 U. S., at 844. Congress, that is, may not have expressly delegated authority or responsibility to implement a particular provision or fill a particular gap. Yet it can still be apparent from the agency’s generally conferred authority and other statutory circumstances that Congress would expect the agency to be able to speak with the force of law when it addresses ambiguity in the statute or fills a space in the enacted law, even one about which “Congress did not actually have an intent” as to a particular result. Id., at 845. When circumstances implying such an expectation exist, a reviewing court has no business rejecting an agency’s exercise of its generally conferred authority to resolve a particular statutory ambiguity simply because the agency’s chosen resolution seems unwise, see id., at 845–846, but is obliged to accept the agency’s position if Congress has not previously spoken to the point at issue and the agency’s interpretation is reasonable, see id., at 842–845; cf. 5 U. S. C. §706(2) (a reviewing court shall set aside agency action, findings, and conclusions found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”).

We have recognized a very good indicator of delegation meriting Chevron treatment in express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations or rulings for which deference is claimed. See, e.g., EEOC v. Arabian American Oil Co., 499 U. S. 244, 257 (1991) (no Chevron deference to agency guideline where congressional delegation did not include the power to “ ‘promulgate rules or regulations’ ” (quoting General Elec. Co. v. Gilbert, 429 U. S. 125) (1976)); see also Christensen v. Harris County, 529 U. S. 576, 596–597 (2000) (Breyer , J., dissenting) (where it is in doubt that Congress actually intended to delegate particular interpretive authority to an agency, Chevron is “inapplicable”). It is fair to assume generally that Congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure tending to foster the fairness and deliberation that should underlie a pronouncement of such force. 11 Cf. Smiley v. Citibank (South Dakota), N. A., 517 U. S. 735, 741 (1996) (APA notice and comment “designed to assure due deliberation”). Thus, the overwhelming number of our cases applying Chevron deference have reviewed the fruits of notice-and-comment rulemaking or formal adjudication. That said, and as significant as notice-and-comment is in pointing to Chevron authority, the want of that procedure here does not decide the case, for we have sometimes found reasons for Chevron deference even when no such administrative formality was required and none was afforded, see, e.g., NationsBank of N. C., N. A. v. Variable Annuity Life Ins. Co., 513 U. S. 251, 256–257, 263 (1995) . 13 The fact that the tariff classification here was not a product of such formal process does not alone, therefore, bar the application of Chevron.

There are, nonetheless, ample reasons to deny Chevron deference here. The authorization for classification rulings, and Customs’s practice in making them, present a case far removed not only from notice-and-comment process, but from any other circumstances reasonably suggesting that Congress ever thought of classification rulings as deserving the deference claimed for them here.


No matter which angle we choose for viewing the Customs ruling letter in this case, it fails to qualify under Chevron . On the face of the statute, to begin with, the terms of the congressional delegation give no indication that Congress meant to delegate authority to Customs to issue classification rulings with the force of law. We are not, of course, here making any global statement about Customs’s authority, for it is true that the general rulemaking power conferred on Customs, see 19 U. S. C. §1624, authorizes some regulation with the force of law, or “legal norms,” as we put it in Haggar, 526 U. S., at 391.[77] It is true as well that Congress had classification rulings in mind when it explicitly authorized, in a parenthetical, the issuance of “regulations establishing procedures for the issuance of binding rulings prior to the entry of the merchandise concerned,” 19 U. S. C. §1502(a).[78] 15 The reference to binding classifications does not, however, bespeak the legislative type of activity that would naturally bind more than the parties to the ruling, once the goods classified are admitted into this country. And though the statute’s direction to disseminate “information” necessary to “secure” uniformity, 19 U. S. C. §1502(a), seems to assume that a ruling may be precedent in later transactions, precedential value alone does not add up to Chevron entitlement; interpretive rules may sometimes function as precedents, see Strauss, The Rulemaking Continuum, 41 Duke L. J. 1463, 1472–1473 (1992), and they enjoy no Chevron status as a class. In any event, any precedential claim of a classification ruling is counterbalanced by the provision for independent review of Customs classifications by the CIT, see 28 U. S. C. §§2638–2640; the scheme for CIT review includes a provision that treats classification rulings on par with the Secretary’s rulings on “valuation, rate of duty, marking, restricted merchandise, entry requirements, drawbacks, vessel repairs, or similar matters,” §1581(h); see §2639(b). It is hard to imagine a congressional understanding more at odds with the Chevron regime.[79]

It is difficult, in fact, to see in the agency practice itself any indication that Customs ever set out with a lawmaking pretense in mind when it undertook to make classifications like these. Customs does not generally engage in notice-and-comment practice when issuing them, and their treatment by the agency makes it clear that a letter’s binding character as a ruling stops short of third parties; Customs has regarded a classification as conclusive only as between itself and the importer to whom it was issued, 19 CFR §177.9(c) (2000), and even then only until Customs has given advance notice of intended change, §§177.9(a), (c). Other importers are in fact warned against assuming any right of detrimental reliance. §177.9(c).

Indeed, to claim that classifications have legal force is to ignore the reality that 46 different Customs offices issue 10,000 to 15,000 of them each year, see Brief for Respondent 5; CITBA Brief 6 (citing Treasury Advisory Committee on the Commercial Operations of the United States Customs Service, Report of the COAC Subcommittee on OR&R, Exhibits 1, 3 (Jan. 26, 2000) (reprinted in App. to CITBA Brief 20a–21a)). Any suggestion that rulings intended to have the force of law are being churned out at a rate of 10,000 a year at an agency’s 46 scattered offices is simply self-refuting. Although the circumstances are less startling here, with a Headquarters letter in issue, none of the relevant statutes recognizes this category of rulings as separate or different from others; there is thus no indication that a more potent delegation might have been understood as going to Headquarters even when Headquarters provides developed reasoning, as it did in this instance.

Nor do the amendments to the statute made effective after this case arose disturb our conclusion. The new law requires Customs to provide notice-and-comment procedures only when modifying or revoking a prior classification ruling or modifying the treatment accorded to substantially identical transactions, 19 U. S. C. §1625(c); and under its regulations, Customs sees itself obliged to provide notice-and-comment procedures only when “changing a practice” so as to produce a tariff increase, or in the imposition of a restriction or prohibition, or when Customs Headquarters determines that “the matter is of sufficient importance to involve the interests of domestic industry,” 19 CFR §§177.10(c)(1)(2) (2000). The statutory changes reveal no new congressional objective of treating classification decisions generally as rulemaking with force of law, nor do they suggest any intent to create a Chevron patchwork of classification rulings, some with force of law, some without.

In sum, classification rulings are best treated like “interpretations contained in policy statements, agency manuals, and enforcement guidelines.” Christensen, 529 U. S., at 587. They are beyond the Chevron pale.


To agree with the Court of Appeals that Customs ruling letters do not fall within Chevron is not, however, to place them outside the pale of any deference whatever. 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, 323 U. S., at 139, and given the value of uniformity in its administrative and judicial understandings of what a national law requires, id., at 140. See generally Metropolitan Stevedore Co. v. Rambo, 521 U. S., 121, 136 (1997) (reasonable agency interpretations carry “at least some added persuasive force” where Chevron is inapplicable); Reno v. Koray, 515 U. S. 50, 61 (1995) (according “some deference” to an interpretive rule that “do[es] not require notice and comment”); Martin v. Occupational Safety and Health Review Comm’n, 499 U. S. 144, 157 (1991) (“some weight” is due to informal interpretations though not “the same deference as norms that derive from the exercise of … delegated lawmaking powers”).

There is room at least to raise a Skidmore claim here, where the regulatory scheme is highly detailed, and Customs can bring the benefit of specialized experience to bear on the subtle questions in this case: whether the daily planner with room for brief daily entries falls under “diaries,” when diaries are grouped with “notebooks and address books, bound; memorandum pads, letter pads and similar articles,” HTSUS subheading 4820.10.20; and whether a planner with a ring binding should qualify as “bound,” when a binding may be typified by a book, but also may have “reinforcements or fittings of metal, plastics, etc.,” Harmonized Commodity Description and Coding System Explanatory Notes to Heading 4820, p. 687 (cited in Customs Headquarters letter, App. to Pet. for Cert. 45a. A classification ruling in this situation may therefore at least seek a respect proportional to its “power to persuade,” Skidmore, supra, at 140; see also Christensen, 529 U. S., at 587; id., at 595 ( Stevens, J., dissenting); id., at 596–597 ( Breyer, J., dissenting). Such a ruling may surely claim the merit of its writer’s thoroughness, logic and expertness, its fit with prior interpretations, and any other sources of weight.


Underlying the position we take here, like the position expressed by Justice Scalia in dissent, is a choice about the best way to deal with an inescapable feature of the body of congressional legislation authorizing administrative action. That feature is the great variety of ways in which the laws invest the Government’s administrative arms with discretion, and with procedures for exercising it, in giving meaning to Acts of Congress. Implementation of a statute may occur in formal adjudication or the choice to defend against judicial challenge; it may occur in a central board or office or in dozens of enforcement agencies dotted across the country; its institutional lawmaking may be confined to the resolution of minute detail or extend to legislative rulemaking on matters intentionally left by Congress to be worked out at the agency level.

Although we all accept the position that the Judiciary should defer to at least some of this multifarious administrative action, we have to decide how to take account of the great range of its variety. If the primary objective is to simplify the judicial process of giving or withholding deference, then the diversity of statutes authorizing discretionary administrative action must be declared irrelevant or minimized. If, on the other hand, it is simply implausible that Congress intended such a broad range of statutory authority to produce only two varieties of administrative action, demanding either Chevron deference or none at all, then the breadth of the spectrum of possible agency action must be taken into account. Justice Scalia ’s first priority over the years has been to limit and simplify. The Court’s choice has been to tailor deference to variety. This acceptance of the range of statutory variation has led the Court to recognize more than one variety of judicial deference, just as the Court has recognized a variety of indicators that Congress would expect Chevron deference.[80]

Our respective choices are repeated today. Justice Scalia would pose the question of deference as an either-or choice. On his view that Chevron rendered Skidmore anachronistic, when courts owe any deference it is Chevron deference that they owe, post, at 9–10. Whether courts do owe deference in a given case turns, for him, on whether the agency action (if reasonable) is “authoritative,” post, at 17. The character of the authoritative derives, in turn, not from breadth of delegation or the agency’s procedure in implementing it, but is defined as the “official” position of an agency, ibid., and may ultimately be a function of administrative persistence alone, ibid .

The Court, on the other hand, said nothing in Chevron to eliminate Skidmore’ s recognition of various justifications for deference depending on statutory circumstances and agency action; Chevron was simply a case recognizing that even without express authority to fill a specific statutory gap, circumstances pointing to implicit congressional delegation present a particularly insistent call for deference. Indeed, in holding here that Chevron left Skidmore intact and applicable where statutory circumstances indicate no intent to delegate general authority to make rules with force of law, or where such authority was not invoked, we hold nothing more than we said last Term in response to the particular statutory circumstances in Christensen , to which Justice Scalia then took exception, see 529 U. S., at 589, just as he does again today.

We think, in sum, that Justice Scalia ’s efforts to simplify ultimately run afoul of Congress’s indications that different statutes present different reasons for considering respect for the exercise of administrative authority or deference to it. Without being at odds with congressional intent much of the time, we believe that judicial responses to administrative action must continue to differentiate between Chevron and Skidmore, and that continued recognition of Skidmore is necessary for just the reasons Justice Jackson gave when that case was decided.[81]

* * *

Since the Skidmore assessment called for here ought to be made in the first instance by the Court of Appeals for the Federal Circuit or the Court of International Trade, we go no further than to vacate the judgment and remand the case for further proceedings consistent with this opinion.

It is so ordered.


Notes and Questions.

1. At the heart of these cases lies the core issue of the nature and character of regulatory systems tied to the establishment of organizations for the management of those systems:  to what extent are these established regulatory organizations autonomous of the legislatures that established them and the executive who often oversee them.  One possibility is that regulatory agencies have no autonomy, they are merely charged with the ministerial role of adding regulatory supplements to legislative commands exercised through statutes.  At the other end, one can view regulatory organizations as autonomous of the legislatures that established them and the executive that has some oversight power.  With respect to regulation that has important consequences.  An autonomous regulatory agency is free to reference itself and its constitution (the statutes creating the agency and its charge) to the ends of creating regulation that furthers the statutory objectives within the jurisdictional limits of the agency.  The agency is free to gap fill and to add regulation that responds to changing circumstances without the need to seek permission.  Agencies that are understood as ministerial would have little room to legislate beyond what is specified in the constituting statute.  And it would be for Congress to fill in gaps etc. Which model did the court embrace in the cases you have read?  Why?

2. Can you explain the differences in result I Chevron and Mead?  Was the difference based on the form of regulation or on something else.  How do you determine what the rule of deference is after Mead?

3. How does the Chevron Court explain the democratic deficit at the heart of the administrative state—the problem that administrative agencies make law but are not directly accountable to the people?  Are you satisfied with the Court’s rationale?  How was that rationale applied in Mead?

4. If agencies are autonomous law makers within the constraints of their constituting documents, to what extent are there checks and balances built into their process of enacting regulation? One check in the United States is illustrated by the Administrative Procedure Act. 5 U.S. Code §§ 511-599.  “The Administrative Procedure Act (APA) is the law under which some 55 U.S. government federal regulatory agencies like the FDA and EPA create the rules and regulations necessary to implement and enforce major legislative acts such as the Food Drug and Cosmetic Act, Clean Air Act or Occupational Health and Safety Act.”[82]


Attorney General’s Manual on the Administrative Procedure Act
Prepared by the United States Department of Justice Tom C. Clark,
Attorney General, 1947.
(pages 9-10; 12-16; 26-35)


a. Basic Purposes of the Administrative Procedure Act

The Administrative Procedure Act may be said to have four basic purposes:

1. To require agencies to keep the public currently informed of their organization, procedures and rules (sec. 3).

2. To provide for public participation in the rule making process (sec. 4).

3. To prescribe uniform standards for the conduct of formal rule making (sec. 4 (b)) and adjudicatory proceedings (sec. 5), i.e., proceedings which are required by statute to be made on the record after opportunity for an agency hearing (secs. 7 and 8).

4. To restate the law of judicial review (sec. 10).

b. Coverage of the Administrative Procedure Act

The Administrative Procedure Act applies, with certain exceptions to be discussed, to every agency and authority of the Government. Section 2 (a) of the Act reads, in part, as follows:
"Agency" means each authority (whether or not within or subject to review by another agency) of the Government of the United States other than Congress, the courts, or the governments of the possessions, Territories, or the District of Columbia. Nothing in this Act shall be construed to repeal delegations of authority as provided by law.

It will be seen from the above that agency is defined as each authority of the Government of the United States, whether or not within or subject to review by another agency. This definition was adopted in recognition of the fact that the Government is divided not only into departments, commissions, and offices, but that these agencies, in turn, are further subdivided into constituent units which may have all the attributes of an agency insofar as rule making and adjudication are concerned."(1)

For example, the Federal Security Agency is composed of many authorities which, while subject to the overall supervision of that agency, are generally independent in the exercise of their functions. Thus, the Social Security Administration within the Federal Security Agency is in complete charge of the Unemployment Compensation provisions of the Social Security Act. By virtue of the definition contained in section 2 (a) of the Administrative Procedure Act, the Social Security Administration is an agency, as is its parent organization, the Federal Security Agency.
The Administrative Procedure Act applies to every authority of the Government of the United States other than Congress, the courts, the governments of the possessions, Territories, and the District of Columbia (see. 2 (a)). The term "courts" is not limited to constitutional courts, but includes the Tax Court, the Court of Customs and Patent Appeals, the Court of Claims, and similar courts. Sen. Rep. p. 38 (Sen. Doc. p. 408).

While the Administrative Procedure Act covers generally all agencies of the United States, certain agencies and certain functions are specifically exempted from all the requirements of the Act with the exception of the public information requirements of section 3.

* * * * * *

c. --Distinction Between Rule Making and Adjudication

The Administrative Procedure Act prescribes radically different procedures for rule making and adjudication. Accordingly, the proper classification of agency proceedings as rule making or adjudication is of fundamental importance.

"Rule" and "rule making", and "order" and "adjudication" are defined in section 2 as follows:

(c) Rule and rule making. "Rule" means the whole or any part of any agency statement of general
or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the organization, procedure, or practice requirements of any agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, cost, or accounting, or practices bearing upon any of the foregoing. "Rule making" means agency process for the formulation, amendment, or repeal of a rule.

(d) Order and adjudication. "Order" means the whole or any part of the final disposition (whether affirmative, negative, injunctive, or declaratory in form) of any agency in any matter other than rule making but including licensing. "Adjudication" means agency process for the formulation of an order.

(e) License and licensing. "License" includes the whole or part of any agency permit, certificate, approval, registration, charter, membership, statutory exemption or other form of permission. "Licensing" includes agency process respecting the grant, renewal, denial, revocation, suspension, annulment, withdrawal, limitation, amendment, modification, or conditioning of a license.
Since the definition of adjudication is largely a residual one, i.e., "other than rule making but including licensing", it is logical to determine first the scope of rule making. The definition of rule is not limited to substantive rules, but embraces interpretative, organizational and procedural rules as well.(5)

Of particular importance is the fact that "rule" includes agency statements not only of general applicability but also those of particular applicability applying either to a class or to a single person. In either case, they must be of future effect, implementing or prescribing future law. Accordingly, the approval of a corporate reorganization by the Securities and Exchange Commission, the prescription of future rates for a single named utility by the Federal Power Commission, and similar agency actions, although applicable only to named persons, constitute rule making. H.R. Rep. p. 49, fn. 1 (Sen. Doc. p. 283).

As applied to the various proceedings of Federal agencies, the definitions of "rule" and "rule making", and "order" and "adjudication" leave many questions as to whether particular proceedings are rule making or adjudication. For example, the question arises whether agency action on certain types of applications is to be deemed rule making or licensing (adjudication), in view of the fact that there is apparent overlapping between the defini-[14]tion of "rule" in section 2 (c) and of "license" in section 2 (e). Thus, "rule" includes the "approval * * * for the future * * *", and "license" is defined to include "any agency permit, certificate, approval * * * or other form of permission."

An obvious principle of construction is that agency proceedings which fall within one of the specific categories of section 2 (c), e.g., determining rates for the future, must be regarded as rule making, rather than as coming under the general and residual definition of adjudication. Furthermore, the listing of specific subjects in section 2 (c) as rule making is not intended to be exclusive. It is illustrative only. H.R. Rep. 20 (Sen. Doc. p. 254). Thus, in determining whether agency action on a particular type of application is "rule making", the purposes of the statute involved and the considerations which the agency is required to weigh in granting or withholding its approval will be relevant; if the factors governing such approval are the same, for example, as the agency would be required to apply in approving a recapitalization or reorganization (clearly rule making), this circumstance would tend to support the conclusion that agency action on such an application is rule making.

More broadly, the entire Act is based upon a dichotomy between rule making and adjudication. Examination of the legislative history of the definitions and of the differences in the required procedures for rule making and for adjudication discloses highly practical concepts of rule making and adjudication. Rule making is agency action which regulates the future conduct of either groups of persons or a single person; it is essentially legislative in nature, not only because it operates in the future but also because it is primarily concerned with policy considerations. The object of the rule making proceeding is the implementation or prescription of law or policy for the future, rather than the evaluation of a respondent's past conduct. Typically, the issues relate not to the evidentiary facts, as to which the veracity and demeanor of witnesses would often be important, but rather to the policy-making conclusions to be drawn from the facts. Senate Hearings (1941) pp. 657, 1298, 1451. Conversely, adjudication is concerned with the determination of past and present rights and liabilities. Normally, there is involved a decision as to whether past conduct was unlawful, so that the proceeding is characterized by an accusatory flavor and may result in disciplinary action. Or, it may involve the determination of a person's right to benefits under existing law so that the issues relate to whether he is within the established category of persons entitled to such benefits. In such proceedings, the issues of fact are often sharply controverted. Sen. Rep. p. 39 (Sen. Doc. p. 225); 92 Cong. Rec. 5648 (Sen. Doc. p. 353).

Not only were the draftsmen and proponents of the bill aware of this realistic distinction between rule making and adjudication, but they shaped the entire Act around it. Even in formal rule making proceedings subject to sections 7 and 8, the Act leaves the hearing officer entirely free to consult with any other member of the agency's staff. In fact, the intermediate decision may be made by the agency itself or by a responsible officer other than the hearing officer. This reflects the fact that the purpose of the rule making proceeding is to determine policy. Policy is not made in Federal agencies by individual hearing examiners; rather it is formulated by the agency heads relying heavily upon the expert staffs which have been hired for that purpose. And so the Act recognizes that in rule making the intermediate decisions will be more useful to the parties in advising them of the real issues in the case if such decisions reflect the views of the agency heads or of their responsible officers who assist them in determining policy. In sharp contrast is the procedure required in cases of adjudication subject to section 5 (c). There the hearing officer who presides at the hearing and observes the witnesses must personally prepare the initial or recommended decision required by section 8. Also, in such adjudicatory cases, the agency officers who performed investigative or prosecuting functions in that or a factually related case may not participate in the making of decisions. These requirements reflect the characteristics of adjudication discussed above.

The foregoing discussion indicates that the residual definition of "adjudication" in section 2 (d) was intended to include such proceedings as the following:

1. Proceedings instituted by the Federal Trade Commission and the National Labor Relations Board leading to the issuance of orders to cease and desist from unfair methods of competition or unfair labor practices, respectively.

2. The determination of claims for money, such as compensation claims under the Longshoremen's and Harbor Workers' Compensation Act, and claims under Title II (Old Age and Survivors' Insurance) of the Social Security Act.

3. Reparation proceedings in which the agency determines whether a ship per or other consumer is entitled to damages arising out of the alleged past unreasonableness of rates.

4. The determination of individual claims for benefits, such as grants-in-aid and subsidies.

5. Licensing proceedings, including the grant, denial, renewal, revocation, suspension, etc. of, for example, radio broadcasting licenses, certificates of public convenience and necessity, airman certificates, and the like.

1. The legislative history of section 2 (a) illustrates clearly the broad Scope of the term "agency." In the Senate Comparative Print of June 1945, the term agency was explained as follows (p. 2): "It is necessary to define agency as "authority" rather than by name or form, because of the present system of including one agency within another or of authorizing internal boards or "divisions" to have final authority. 'Authority' means any officer or board, whether within another agency or not, which by law has authority to take final and binding action with or without appeal to some superior administrative authority. Thus, 'divisions' of the Interstate Commerce Commission and the judicial officers of the Department of Agriculture would be 'agencies' within this definition." (Sen. Doc. p. 13). And in the Senate Report the following appears at page 10: "The word 'authority' is advisedly used as meaning whatever persons are vested with powers to act (rather than the mere form of agency organization such as department commission, board, or bureau) because the real authorities may be some subordinate or semidependent person or persons within such form of organization." (Sen. Doc. p. 196).

* * * * *

In general, the purpose of section 4 is to guarantee to the public an opportunity to participate in the rule making process. With stated exceptions, each agency will be required under this section to give public notice of substantive rules which it proposes to adopt, and to grant interested persons an opportunity to present their views to it. Where rules are required by statute to be made on the record after opportunity for an agency hearing, the provisions of sections 7 and 8 as to hearing and decision will apply in place of the less formal procedures contemplated by section 4 (b). With certain exceptions, no substantive rule may be made effective until at least thirty days after its publication in the Federal Register. Section 4 also grants to interested persons the right to petition an agency for the issuance, amendment or repeal of a rule.
In addition to the agencies and functions exempted by section 2 (a), section 4 itself contains two broad exceptions to its requirements.
" (1) any military, naval, or foreign affairs function of the United States". The exemption for military and naval functions is not limited to activities of the War and Navy Departments but covers all military and naval functions exercised by any agency. Thus, the exemption applies to the defense functions of the Coast Guard and to the function of the Federal Power Commission under section 202 (c) of the Federal Power Act (16 U.S.C. 824a (c)). Sen. Rep. p. 39 (Sen. Doc. p. 225); Senate Hearings (1941) p. 502.
As to the meaning of "foreign affairs function", both the Senate and House reports state: "The phrase 'foreign affairs functions,' used here and in some other provisions of the bill, is not to be loosely interpreted to mean any function extending beyond the borders of the United States but only those 'affairs' which so affect relations with other governments that, for example, public rule making provisions would clearly provoke definitely undesirable international consequences." Sen. Rep. p. 13; H.R. Rep. p. 23 (Sen. Doc. pp. 199, 257). See also Representative Walter's statement to the House, 92 Cong. Rec. 5650 (Sen. [27] Doc. p. 358). It is equally clear that the exemption is not limited to strictly diplomatic functions, because the phrase "diplomatic function" was employed in the January 6, 1945 draft of S. 7 (Senate Comparative Print of June 1945, p. 6; Sen. Doc. p.157) and was discarded in favor of the broader and more generic phrase "foreign affairs function". In the light of this legislative history, it would seem clear that the exception must be construed as applicable to most functions of the State Department and to the foreign affairs functions of any other agency.
"(2) any matter relating to agency management or personnel or to public property, loans, grants, benefits, or contracts". The exemption for matters relating to "agency management or personnel" is self-explanatory and has been considered in the discussion of "internal management" under section 3. The exemption of "any matter relating * * * to public property, loans, grants, benefits, or contracts" is intended generally to cover the "proprietary" functions of the Federal Government. 92 Cong. Rec. 5650 (Sen. Doc. p. 358). It will be helpful to consider the implication of each of these phrases separately.
Public Property. This embraces rules issued by any agency with respect to real or personal property owned by the United States or by any agency of the United States. Thus, the making of rules relating to the public domain, i.e., the sale or lease of public lands or of mineral, timber or grazing rights in such lands, is exempt from the requirements of section 4. The exemption extends, for example, to rules issued by the Tennessee Valley Authority in relation to the management of its properties, and by the Maritime Commission with respect to ships owned by the United States. The term "public property" includes property held by the United States in trust or as guardian; e.g., Indian property. H.R. Rep. p. 23 (Sen. Doc. p. 257).
Loans. This exempts rules issued with respect to loans by such agencies as the Reconstruction Finance Corporation, the Commodity Credit Corporation, and the Farm Credit Administration. It also exempts rules relating to guarantees of loans, such as are made by the Federal Housing Authority and the Veterans Administration, since they are matters relating to public loans.
Grants. Rule making with respect to subsidy programs is exempted from section 4. "Grants" also include grant-in-aid programs under which the Federal Government makes payments to state and local governments with respect to highways, airports, [28] unemployment compensation, etc.
Benefits. This refers to such programs as veterans' pensions and old-age insurance payments.
Contracts. All rules relating to public contracts are exempt from section 4. The exemption extends to wage determinations made by the Labor Department under the Davis Bacon Act (40 U.S.C. 276a et seq.) and the Walsh Healey Act (41 U.S.C. 35-45), as conditions to construction and procurement contracts entered into by the Federal Government. See Perkins v. Lukens Steel Co., 310 U. S. 113 (1940).
Subsections (a) and (b) of section 4 must be read together because the procedural requirements of subsection (b) apply only where notice is required by subsection (a). It is clear that the requirements of "general notice of proposed rule making" apply only to rule making proposed or initiated by an agency; the filing of a petition under section 4 (d) does not require an agency to undertake rule making proceedings in accordance with subsections (a) and (b). H.R. Rep. p. 26 (Sen. Doc. p. 260).
An agency contemplating the issuance of a rule subject to section 4 (a) must publish in the Federal Register a notice of the proposed rule making, "unless all persons subject thereto are named and either personally served or otherwise have actual notice thereof in accordance with law". The reason for the quoted exception is to avoid burdening the Federal Register with notices addressed to particular parties who have been personally served or otherwise have notice. H.R. Rep. p. 51, fn. 8 (Sen. Doc. p. 285). For example, where a proceeding is commenced to establish rates for named carriers or utilities, if a notice complying with section 4 (a) is personally served upon such persons, publication in the Federal Register is not required by the subsection.

Contents of notice. In both formal(1) and informal rule making, the required notice, whether published in the Federal Register or personally served, must include the following information:
1. "A statement of the time, place, and nature of public rule making proceedings". While section 4 (a) does not specify how much notice must be given by an agency before it may conduct public rule making proceedings, it is presumed that each agency [29] will give reasonable notice.(2)
In this connection, each agency should take into account the fact that section 4 (c) provides that thirty days must ordinarily elapse prior to a rule becoming effective. Accordingly, each agency should schedule its rule making in such fashion that there will be sufficient time for affording interested persons an opportunity to participate in the rule making as well as for insuring final publication of the rule at least thirty days prior to the desired effective date.
The nature of public rule making may vary considerably from case to case. Under section 4 (b) each agency, as this memorandum will indicate infra, may conduct its rule making by affording interested persons opportunity to submit written data only, or by receiving a combination of written and oral evidence, or by adopting any other method it finds most appropriate for public participation in the rule making process. However, where an agency is required by statute to conduct a hearing and to reach a decision upon the basis of the record made at such hearing, the formal procedures prescribed by sections 7 and 8 must be pursued. Therefore, the notice, required by section 4 (a) should specify the procedure to be employed, that is, formal or informal hearings, submission of written statements with or without opportunity for oral argument, etc.
2. "Reference to the authority under which the rule is proposed". The reference must be sufficiently precise to apprise interested persons of the agency's legal authority to issue the proposed rule.
3. "Either the terms or substance of the proposed rule or a description of the subjects and issues involved". Where able to do so, an agency may state the proposed rule itself or the substance of the rule in the notice required by section 4 (a). On the other hand, the agency, if it desires, may issue a more general "description of the subjects and issues involved". It is suggested that each agency consider the desirability of using the latter method if publication of a proposed rule in full would unduly burden the Federal Register or would in fact be less informative to the public. In such a case, the agency may inform interested persons that copies of the proposed rule may be obtained from the agency upon request--this, of course, in addition to the "description of the subjects and issues involved" in the Federal Register. Where there is a "description of the subjects and issues [30] involved", the notice should be sufficiently informative to assure interested persons an opportunity to participate intelligently in the rule making process. Final Report, p. 108.
Section 4 (a) and (b) applicable only to substantive rules. The last sentence of section 4 (a) exempts from the requirements of section 4 (a) and (b), unless otherwise required by statute, "interpretative rules, general statements of policy, rules of agency organization, procedure, or practice". Thus, the rules of organization and procedure which an agency must publish pursuant, to section 3 (a) (1) and (2) are not ordinarily subject to the requirements of section 4 (a) and (b). The further exemption of "interpretative rules" and "general statements of policy" restricts the application of section 4 (a) and (b) to substantive rules issued pursuant to statutory authority.(3)
* * * * *
Omission of notice and public procedure for good cause. The last sentence of section 4 (a) authorizes any agency to omit the notice required by that subsection (and the procedure specified by section 4 (b)) "in any situation in which the agency for good cause finds ... that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest". It should be noted that the reasons for which an agency may dispense with notice under section 4 (a) are written in the alternative so that if it is "impracticable" or "unnecessary" or "contrary to the public interest" the agency may dispense with notice. Should this be done, the agency must incorporate in the rule issued its finding of "good cause" and "a brief statement of the reasons therefor". In general, it may be said that a situation is "impracticable" when an agency finds that due and timely execution of its functions would be impeded by the notice otherwise required in section 4 (a). For example, the Civil Aeronautics Board may learn, from an accident investigation, that certain rules as to air safety should be issued or amended without delay; with the safety of the traveling public at stake, the Board could find that notice [31] and public rule making procedures would be "impracticable", and issue its rules immediately. "Unnecessary" refers to the issuance of a minor rule or amendment in which the public is not particularly interested. Senate Hearings (1941) p. 828. "Public interest" connotes a situation in which the interest of the public would be defeated by any requirement of advance notice. For example, an agency may contemplate the issuance of financial controls under such circumstances that advance notice of such rules would tend to defeat their purpose; in such circumstances, the "public interest" might well justify the omission of notice and public rule making proceedings. Senate Hearings (1941) p. 812.
Informal rule making. In every case of proposed informal rule making subject to the notice requirements of section 4 (a), section 4 (b) provides that "the agency shall afford interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity to present the same orally in any manner." The quoted language confers discretion upon the agency, except where statutes require "formal" rule making subject to sections 7 and 8, to designate in each case the procedure for public participation in rule making. Such informal rule making procedure may take a variety of forms: informal hearings (with or without a stenographic transcript), conferences, consultation with industry committees, submission of written views, or any combination of these. These informal procedures have already been extensively employed by Federal agencies. Final Report, pp. 103-105. In each case, the selection of the procedure to be followed will depend largely upon the nature of the rules involved. The objective should be to assure informed administrative action and adequate protection to private interests.
Each agency is affirmatively required to consider "all relevant matter presented" in the proceeding; it is recommended that all rules issued after such informal proceedings be accompanied by an express recital that such material has been considered. It is entirely clear, however, that section 4 (b) does not require the formulation of rules upon the exclusive basis of any "record" made in informal rule making proceedings. Senate Hearings (1941) p. 444. Accordingly, except in formal rule making governed by sections 7 and 8, an agency is free to formulate rules upon the basis of [32] materials in its files and the knowledge and experience of the agency, in addition to the materials adduced in public rule making proceedings.
Section 4 (b) provides that upon the completion of public rule making proceedings "after consideration of all relevant matter presented, the agency shall incorporate in any rules adopted a concise general statement of their basis and purpose". The required statement will be important in that the courts and the public may be expected to use such statements in the interpretation of the agency's rules. The statement is to be "concise" and "general". Except as required by statutes providing for "formal" rule making procedure, findings of fact and conclusions of law are not necessary. Nor is there required an elaborate analysis of the rules or of the considerations upon which the rules were issued. Rather, the statement is intended to advise the public of the general basis and purpose of the rules.
Formal rule making. Section 4 (b) provides that "Where rules are required by statute to be made on the record after opportunity [33] for an agency hearing, the requirements of sections 7 and 8 shall apply in place of the provisions of this subsection." Thus, where a rule is required by some other statute to be issued on the basis of a record after opportunity for an agency hearing, the public rule making proceedings must consist of hearing and decision in accordance with sections 7 and 8. The provisions of section 5 are in no way applicable to rule making. It should be noted that sections 7 and 8 did not become effective until December 11, 1946, and, pursuant to section 12, do not apply to any public rule making proceedings initiated prior to that date.
Statutes rarely require hearings prior to the issuance of rules of general applicability. Such requirements, where they exist, appear in radically different contexts. The Federal Food, Drug and Cosmetic Act (21 U.S.C. 301) is almost unique in that it specifically provides that agency action issuing, amending or repealing specified classes of substantive rules may be taken only after notice and hearing, and that "The Administrator shall base his order only on substantial evidence of record at the hearing and shall set forth as part of the order detailed findings of fact on which the order is based." Upon review in a circuit court of appeals, a transcript of the record is filed, and "the findings of the Administrator as to the facts, if supported by substantial evidence, shall be conclusive" (21 U.S.C. 371). It is clear that such rules are "required by statute to be made on the record after opportunity for an agency hearing". Accordingly, the rule making hearings required by the Federal Food, Drug and Cosmetic Act, initiated on and after December 11, 1946, must be conducted in accordance with sections 7 and 8 of the Administrative Procedure Act.
Statutes authorizing agencies to prescribe future rates (i.e., rules of either general or particular applicability) for public utilities and common carriers typically require that such rates be established only after all opportunity for a hearing before the agency. Such statutes rarely specify in terms that the agency action musts be taken on the basis of the "record" developed in the hearing. However, where rates or prices are established by an agency after a hearing required by statute, the agencies themselves and the courts have long assumed that the agency's action must be based upon the evidence adduced at the hearing. Sometimes the requirement of decision on the record is readily inferred from other statutory provisions defining judicial review. For example, rate orders issued by the Federal Power Commission pursuant to the Natural Gas Act (15 U.S.C. 717) may be made only after hearing; upon review in a circuit court of appeals or the Court of Appeals for the District of Columbia, the Commission certifies and files with the court "a transcript of the record upon which the order complained of was entered", and the Commission's findings of fact "if supported by substantial evidence, shall be conclusive". It seems clear that these provisions of the Natural Gas Act must be construed as requiring the Commission to determine rates "on the record after opportunity for an agency hearing". See H.R. Rep. p. 51, fn. 9 (Sen. Doc. p. 285). The same conclusion would be reached with respect to the determination of minimum wages under the Fair Labor Standards Act (29 U.S.C. 201), which contains substantially the same provisions for hearing and judicial review.
The Interstate Commerce Commission and the Secretary of Agriculture may, after hearing, prescribe rates for carriers and stockyard agencies, respectively. Both types of rate orders are reviewable under the Urgent Deficiencies Act of 1913 (28 U.S.C. 47). Nothing in the Interstate Commerce Act, the Packers and Stockyards Act, or the Urgent Deficiencies Act requires in terms [34] that such rate orders be "made on the record", or provides for the filing of a transcript of the administrative record with the reviewing court, or defines the scope of judicial review. However, both of these agencies and the courts have long assumed that such rate orders must be based upon the record made in the hearing; furthermore, it has long been the practice under the Urgent Deficiencies Act to review such orders on the basis of the administrative record which is submitted to the reviewing court. United States v. Abilene & Southern Ry. Co., 265 U.S. 274 (1924); Mississippi Valley Barge Line Co. v. United States, 292 U.S. 282 (1934); Acker v. United States, 298 U.S. 426 (1936). It appears, therefore, that rules (as defined in section 2 (c)) which are issued after a hearing required by statute, and which are reviewable under the Urgent Deficiencies Act on the basis of the evidence adduced at the agency hearing, must be regarded as "required by statute to be made on the record after opportunity for an agency hearing".
With respect to the types of rule making discussed above, the statutes not only specifically require the agencies to hold hearings but also, specifically, or by clear implication, or by established administrative and judicial construction, require such rules to be formulated upon the basis of the evidentiary record made in the hearing. In these situations, the public rule making procedures required by section 4 (b) will consist of a hearing conducted in accordance with sections 7 and 8.
There are other statutes which require agencies to hold hearings before issuing rules, but contain no language from which the further requirement of decision "on the record" can be inferred, nor any provision for judicial review on the record (as does the Natural Gas Act, supra). For example, the Federal Seed Act (7 U.S.C. 1561) simply provides that "prior to the promulgation of any rule or regulation under this chapter, due notice shall be given by publication in the Federal Register of intention to promulgate and the time and place of a public hearing to be held with reference thereto, and no rule or regulation may be promulgated until after such hearing". See also the so-called Dangerous Cargoes Act (46 U.S.C. 170(9)) and the Tanker Act (46 U.S.C. 391a (3)) discussed in Senate Hearings (1941) p. 589. In this type of statute, there is no requirement, express or implied, that rules be formulated "on the record".
There is persuasive legislative history to the effect that the Congress did not intend sections 7 and 8 to apply to rule making where the substantive statute merely required a hearing. In 1941, a subcommittee of the Senate Committee on the Judiciary held hearings on S. 674 (77th Cong., 1st sess.) and other administrative procedure bills. Section 209 (d) of S. 674 provided with [35] respect to rule making that "where legislation specifically requires the holding of hearings prior to the making of rules, formal rule making hearings shall be held". Mr. Ashley Sellers, testifying on behalf of the Department of Agriculture, called the subcommittee's attention to the fact that in various statutes, such as the Federal Seed Act, in which the Congress had required hearings to be held prior to the issuance of rules, the obvious purpose "was simply to require that the persons interested in the proposed rule should be permitted to express their views". Mr. Sellers drew a sharp distinction between such hearing requirements and the formal rule making requirements of the Federal Food, Drug and Cosmetic Act. Senate Hearings (1941) pp. 78-81, 1515, 1520.(4) Since this situation was thus specifically called to the subcommittee's attention, it is a legitimate inference that with respect to rule making the present dual requirement, i.e., "after opportunity for an agency hearing" and "on the record", was intended to avoid the application of formal procedural requirements in cases where the Congress intended only to provide an opportunity for the expression of views. See Mr. Carl McFarland's statement in Senate Hearings (1941) pp. 1343, 1386. See also Pacific States Box & Basket Co. v. White, 296 U.S. 176, 186 (1935).
Publication of procedures. Each agency which will be affected by section 4 should publish under section 3 (a) (2) the procedures, formal and informal, pursuant to which the public may participate in the formulation of its rules. The statement of informal rule making procedures may be couched in either specific or general terms, depending on whether the agency has adopted a fixed procedure for all its rule making or varies it according to the type of rule to be promulgated. In the latter instance, it would be sufficient to state that proposed substantive rules will be adopted after allowing the public to participate in the rule making process either through submission of written data, oral testimony, etc., the method of participation in each case to be specified in the published notice in the Federal Register. H.R. Rep. p. 25 (Sen. Doc. p. 259).
* * * * *
Section 4 (d) provides that "Every agency shall accord any interested person the right to petition for the issuance, amendment, or repeal of a rule." Section 4 (d) applies not only to substantive rules but also to interpretations and statements of general policy, and to organizational and procedural rules. It is applicable both to existing rules and to proposed or tentative rules.
The right to petition under section 4 (d) must be accorded to any "interested person". It will be proper for an agency to limit this right to persons whose interests are or will be affected by the issuance, amendment or repeal of a rule.
Every agency with rule making powers subject to section 4 should establish, and publish under section 3 (a) (2), procedural rules governing the receipt, consideration and disposition of petitions filed pursuant to section 4 (d). These procedural rules may call, for example, for a statement of the rule making action which the petitioner seeks, together with any data available in support of his petition, a declaration of the petitioner's interest in the proposed action, and compliance with reasonable formal requirements.
If the agency is inclined to grant the petition, the nature of the proposed rule would determine whether public rule making proceedings under section 4 (a) and (b) are required. However, the mere filing of a petition does not require the agency to grant it or to hold a hearing or to engage in any other public rule making proceedings. For example, under section 701(e) of the [39] Federal Food, Drug and Cosmetic Act (21 U.S.C. 371 (e)), the Federal Security Administrator must provide a hearing on a proposed rule only where an application, stating reasonable grounds, is made by an interested industry or a substantial portion of the industry. Section 4 (d) was not intended to modify that statute so as to require the Federal Security Administrator to hold a hearing on the petition of a single individual.
The agency need act on the petition only in accordance with its procedures as published in compliance with section 3 (a) (2). The denial of a petition is governed by section 6 (d). Sen. Rep. p. 15; H.R. Rep. p. 26 (Sen. Doc. pp. 201, 260). Accordingly, prompt notice of such denial should be given to the petitioner, together with a simple statement of the procedural or other grounds therefor.

Neither the denial of a petition under section 4 (d), nor an agency's refusal to hold public rule making proceedings thereon, is subject to judicial review. Sen. Rep. p. 44 (Sen. Doc. p. 230).
This subsection (as in the case of the preceding portions of section 4) does not apply to rules relating to the functions and matters enumerated in the first sentence of section 4. The reports of the Senate and House Committees on the Judiciary state that "The introductory clause exempts from all of the requirements of section 4 any rule making so far as there are involved (1) military, naval, or foreign affairs functions or (2) matters relating to agency management or personnel or to public property, loans, grants, benefits, or contracts." (Underscoring supplied). Sen. Rep. p. 13; H.R. Rep. p. 23 (Sen. Doc. pp. 199, 257). The petition procedure of section 4 (d) is not applicable, for example, to the rules which an agency has issued or is empowered to issue with respect to loans or pensions.
 1. As used here, "formal" rule making means those public rule making proceedings which must be conducted in accordance with sections 7 and 8.
 2. See section 8 of the Federal Register Act (44 U.S.C. 308) for a general statutory standard of reasonable notice.
 3. In this connection, the following working definitions are offered: Substantive rules--rules, other than organizational or procedural under section 3 (a) (1) and (2), issued by an agency pursuant to statutory authority and which implement the statute, as, for example, the proxy rules issued by the Securities and Exchange Commission pursuant to section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78 n). Such rules have the force and effect of law.
Interpretative rule--rules or statements issued by an agency to advise the public of the agency's construction of the statutes and rules which it administers. See Final Report. p. 27; Senate Comparative Print of June 1945, p. 6 (Sen. Doc. p. 18); Senate Hearings (1941) p. 330.
General statements of policy--statements issued by an agency to advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power.
 4. See, also, the statement of Acting Attorney General Biddle citing examples of "statutes which require hearings as a part of the rule making procedure without imposing a requirement of formal adversary judicial methods". Senate Hearings (1941) p. 1468.

[1] http://scholar.harvard.edu/glaeser/publications/rise-regulatory-state
[3] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081242
[7] http://www.sec.gov/images/secorg.pdf
[8] http://www.sec.gov/about/orgtext.htm
[9] http://www.sec.gov/contact/addresses.htm
[10] http://www.sec.gov/divisions/corpfin.shtml
[11] http://www.sec.gov/divisions/marketreg.shtml
[12] http://www.sec.gov/divisions/investment.shtml
[13] http://www.sec.gov/divisions/enforce.shtml
[14] http://www.sec.gov/litigation/admin.shtml
[15] http://www.sec.gov/litigation/aljdec.shtml
[16] http://www.sec.gov/about/offices/ogc.htm
[17] http://www.sec.gov/about/offices/oca.htm
[18] http://www.sec.gov/about/offices/ocie.shtml
[19] http://www.sec.gov/about/offices/oia.shtml
[20] http://www.sec.gov/about/offices/oia.shtml
[21] http://www.sec.gov/investor.shtml
[22] http://www.sec.gov/complaint/selectconduct.shtml
[23] http://www.sec.gov/investor/pubs.shtml
[24] http://www.sec.gov/about/offices/ocoo.htm
[25] http://www.sec.gov/about/offices/ofm.htm
[26] http://www.sec.gov/about/offices/oso.htm
[27] http://www.sec.gov/about/offices/ohr.htm
[28] http://www.sec.gov/about/offices/oit.htm
[29] http://www.sec.gov/edgar.shtml
[30] http://www.sec.gov/about/offices/olia.htm
[31] http://www.sec.gov/about/offices/opa.htm
[32] http://www.sec.gov/os
[33] http://www.sec.gov/rules.shtml
[34] http://www.sec.gov/divisions/enforce.shtml
[35] http://www.sec.gov/litigation.shtml
[36] http://www.sec.gov/rules/sro.shtml
[37] http://www.sec.gov/eeoinfo.shtml
[38] http://www.sec-oig.gov/
[39] http://www.sec.gov/about/offices/oalj.htm
[40] http://www.sec.gov/litigation/aljdec.shtml
[41] http://www.sec.gov/edgar.shtml
[42] http://uscode.house.gov/classification/tables.shtml
[43] http://uscode.house.gov/about/info.shtml
[44] http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
[45] http://www.sec.gov/spotlight/jobs-act.shtml
[46] http://www.gutenberg.org/ebooks/5983?msg=welcome_stranger
[48] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081242
[49] Glaeser and Shleifer, supra., 401.
[50] Ibid., 401.
[51] Ibid., 402
[52] Ibid., 403.
[53] Ibid.
[54] E.g., Thayer Watkins, Political Bosses and Machines in the U.S. Available http://www.sjsu.edu/faculty/watkins/bosses.htm.
[56] https://www.federalregister.gov/
[57] http://www.gpo.gov/fdsys/browse/collectionCfr.action?collectionCode=CFR
[58] http://www.gpo.gov/fdsys/pkg/CFR-2013-title17-vol3/xml/CFR-2013-title17-vol3-sec240-10b-5.xml
[59] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081242
[60] See, e.g., Backer, Larry Catá, Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator University of Connecticut Law Review 39(4): (2007); http://papers.ssrn.com/sol3/papers.cfm?abstract_id=953216
[61] See, e.g., Backer, Larry Catá, The Sarbanes-Oxley Act: Federalizing Norms for Officer, Lawyer and Accountant Behavior, St. Johns Law Review, Vol. 76, pp. 897-952, 2002,    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=347241; Backer, Larry Catá, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring after Sarbanes-Oxley(August 25, 2010). Law Review of Michigan State University-Detroit College of Law, 2004).    , http://papers.ssrn.com/sol3/papers.cfm?abstract_id=508802.
[62] U.S: Securities and Exchange Commission, No Action Letters, http://www.sec.gov/answers/noaction.htm
[63] Section 172(b)(6), 42 U.S.C. § 7502(b)(6), provides:
The plan provisions required by subsection (a) shall --
* * * *
(6) require permits for the construction and operation of new or modified major stationary sources in accordance with section 173 (relating to permit requirements).
91 Stat. 747.

[64] i) "Stationary source" means any building, structure, facility, or installation which emits or may emit any air pollutant subject to regulation under the Act. (ii) "Building, structure, facility, or installation" means all of the pollutant-emitting activities which belong to the same industrial grouping, are located on one or more contiguous or adjacent properties, and are under the control of the same person (or persons under common control) except the activities of any vessel. 40 CFR §§ 51.18(j)(1)(i) and (ii) (1983).
[65] National Resources Defense Council, Inc., Citizens for a Better Environment, Inc., and North Western Ohio Lung Association, Inc.
[66] The judiciary is the final authority on issues of statutory construction, and must reject administrative constructions which are contrary to clear congressional intent. See, e.g., FEC v. Democratic Senatorial Campaign Committee, 454 U.S. 27, 32 (1981). . . . .
[67] The court need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding. . . .
[68] Primary standards were defined as those whose attainment and maintenance were necessary to protect the public health, and secondary standards were intended to specify a level of air quality that would protect the public welfare.
[69] In January, 1979, the EPA noted that the 1976 Ruling was ambiguous concerning this issue. . . .
[70] Specifically, the controversy in these cases involves the meaning of the term "major stationary sources" in § 172(b)(6) of the Act, 42 U.S.C. § 752(b)(6). The meaning of the term "proposed source" in § 173(2) of the Act, 42 U.S.C. § 7503(2), is not at issue.
[71] The statutory term “ruling” is defined by regulation as “a written statement … that interprets and applies the provisions of the Customs and related laws to a specific set of facts.” 19 CFR §177.1(d)(1) (2000).
[72] As amended by legislation effective after Customs modified its classification ruling in this case, 19 U. S. C. §1625(c) provides that a ruling or decision that would “modify … or revoke a prior interpretive ruling or decision which has been in effect for at least 60 days” or would “have the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions” shall be “published in the Customs Bulletin. The Secretary shall give interested parties an opportunity to submit, during not less than the 30-day period after the date of such publication, comments on the correctness of the proposed ruling or decision. After consideration of any comments received, the Secretary shall publish a final ruling or decision in the Customs Bulletin within 30 days after the closing of the comment period. The final ruling or decision shall become effective 60 days after the date of its publication.”
[73] See, e.g., General Elec. Co. v. Gilbert, 429 U. S. 125, 142 (1976) (courts consider the “ ‘thoroughness evident in [the agency’s] consideration’ ” (quoting Skidmore v. Swift & Co., 323 U. S. 134, 140 (1944) )).
[74] See, e.g., Good Samaritan Hospital v. Shalala, 508 U. S. 402, 417 (1993) (“[T]he consistency of an agency's position is a factor in assessing the weight that position is due”).
[75] See, e.g., Reno v. Koray, 515 U. S. 50, 61 (1995) (internal agency guideline that is not “subject to the rigors of the [APA], including public notice and comment,” is entitled only to “some deference” (internal quotation marks omitted)).
[76] See, e.g., Aluminum Co. of America v. Central Lincoln Peoples’ Util. Dist., 467 U. S. 380, 390 (1984).
[77] Cf. Adams Fruit Co. v. Barrett, 494 U. S. 638, 649–650 (1990) (although Congress required the Secretary of Labor to promulgate standards implementing certain provisions of the Migrant and Seasonal Agricultural Worker Protection Act, and “agency determinations within the scope of delegated authority are entitled to deference,” the Secretary’s interpretation of the Act’s enforcement provisions is not entitled to Chevron deference because “[n]o such delegation regarding [those] provisions is evident in the statute”).
[78] The ruling in question here, however, does not fall within that category.
[79] Although Customs’s decision “is presumed to be correct” on review, 28 U. S. C. §2639(a)(1), the CIT “may consider any new ground” even if not raised below, §2638, and “shall make its determinations upon the basis of the record made before the court,” rather than that developed by Customs, §2640(a); see generally Haggar Apparel, 526 U. S., at 391.
[80] It is, of course, true that the limit of Chevron deference is not marked by a hard-edged rule. But Chevron itself is a good example showing when Chevron deference is warranted, while this is a good case showing when it is not. Judges in other, perhaps harder, cases will make reasoned choices between the two examples, the way courts have always done.
[81] Surely Justice Jackson’s practical criteria, along with Chevron’s concern with congressional understanding, provide more reliable guideposts than conclusory references to the “authoritative” or “official.” Even if those terms provided a true criterion, there would have to be something wrong with a standard that accorded the status of substantive law to every one of 10,000 “official” customs classifications rulings turned out each year from over 46 offices placed around the country at the Nation’s entryways. Justice Scalia tries to avoid that result by limiting what is “authoritative” or “official” to a pronouncement that expresses the “judgment of central agency management, approved at the highest level,” as distinct from the pronouncements of “underlings,” post, at 22, n. 5. But that analysis would not entitle a Headquarters ruling to Chevron deference; the “highest level” at Customs is the source of the regulation at issue in Haggar, the Commissioner of Customs with the approval of the Secretary of the Treasury. 526 U. S., at 386. The Commissioner did not issue the Headquarters ruling. What Justice Scalia has in mind here is that because the Secretary approved the Government’s position in its brief to this Court, Chevron deference is due. But if that is so, Chevron deference was not called for until sometime after the litigation began, when central management at the highest level decided to defend the ruling, and the deference is not to the classification ruling as such but to the brief. This explains why the Court has not accepted Justice Scalia’s position.
[82] Administrative Procedure Act, About.com U.S. Gov’t http://usgovinfo.about.com/library/bills/blapa.htm.

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