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Parties Involved:
Fund Democracy, LLC
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Decided February 1, 2002

No. 01-1367

Fund Democracy, LLC,

Petitioner

v.

Securities and Exchange Commission,

Respondent

On Petition for Review of an Order of the

Securities and Exchange Commission

Before: Edwards, Sentelle, and Henderson, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Opinion concurring in part and dissenting in part filed by

Circuit Judge Edwards.

Sentelle, Circuit Judge: Fund Democracy ("petitioner")

petitions for review of an order of the Securities and Exchange Commission ("SEC" or "the Commission") denying

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petitioner's request for a hearing and granting to an investment company and its investment advisors an exemption from

certain provisions of the Investment Company Act of 1940, 15

U.S.C. s 80a-1 et seq. The SEC moves to dismiss the

petition for review, arguing that Fund Democracy has no

standing to bring this petition. We agree.

Background

The underlying proceeding before the Commission arose

from the application of Hillview Investment Trust II and its

investment advisor Hillview Capital Advisors, LLC (collectively, "Hillview") seeking exemption from 15 U.S.C.

s 80a-15(a) which provides that no person may serve as an

investment advisor of a registered investment company "except pursuant to a written contract [which] has been approved by the vote of a majority of the outstanding voting

securities" of the company. 15 U.S.C. s 80a-39(a) requires

the Commission, before issuing orders, to provide notice to

"interested persons." 17 C.F.R. s 270.0-5 provides that after

the issuance of such notice the Commission needs to order a

hearing on the matter, inter alia, "upon the request of an

interested person."1 Fund Democracy requested such a

__________

1 "Interested person" is defined in the governing statute, 15

U.S.C. s 80a-2(a)(19):

(19) "Interested person" of another person means--

(A) when used with respect to an investment company--

(i) any affiliated person of such company,

(ii) any member of the immediate family of any natural

pe rson who is an affiliated person of such company,

(iii) any interested person of any investment adviser of

or principal underwriter for such company,

(iv) any person or partner or employee of any person

who at any time since the beginning of the last two

completed fiscal years of such company has acted as

legal counsel for such company,

(v) any person or any affiliated person of a person

(other than a registered investment company) that, at

any time during the 6-month period preceding the date

of the determination of whether that person or affiliated

person is an interested person, has executed any portfolio transactions for, engaged in any principal transactions with, or distributed shares for--

(I) the investment company;

(II) any other investment company having the same

investment adviser as such investment company or

holding itself out to investors as a related company for

purposes of investment or investor services; or

(III) any account over which the investment company's investment adviser has brokerage placement discretion,

(vi) any person or any affiliated person of a person

(other than a registered investment company) that, at

any time during the 6-month period preceding the date

of the determination of whether that person or affiliated

person is an interested person, has loaned money or

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other property to--

(I) the investment company;

(II) any other investment company having the same

investment adviser as such investment company or

holding itself out to investors as a related company for

purposes of investment or investor services; or

(III) any account for which the investment company's

Investment adviser has borrowing authority,

(vii) any natural person whom the Commission by order

shall have determined to be an interested person by

reason of having had, at any time since the beginning of

the last two completed fiscal years of such company, a

material business or professional relationship with such

company or with the principal executive officer of such

company or with any other investment company having

the same investment adviser or principal underwriter or

with the principal executive officer of such other investment company:

Provided, That no person shall be deemed to be an interested

person of an investment company solely by reason of (aa) his

being a member of its board of directors or advisory board or

an owner of its securities, or (bb) his membership in the

immediate family of any person specified in clause (aa) of this

proviso; and

(B) when used with respect to an investment adviser of or

principal underwriter for any investment company--

(i)any affiliated person of such investment adviser or

principal underwriter,

hearing, explaining that it "serves as an advocate and information resource for mutual fund shareholders through a

multi-faceted advocacy and educational program." The SEC

rejected the request for a hearing and granted the exemption.

Analysis

Before us the Commission moved for dismissal on the

__________

(ii) any member of the immediate family of any natural

person who is an affiliated person of such investment

adviser or principal underwriter,

(iii) any person who knowingly has any direct or indirect

beneficial interest in, or who is designated as trustee,

executor, or guardian of any legal interest in, any security issued either by such investment adviser or principal

underwriter or by a controlling person of such investment adviser or principal underwriter,

(iv) any person or partner or employee of any person

who at any time since the beginning of the last two

completed fiscal years of such investment company has

acted as legal counsel for such investment adviser or

principal underwriter,

(v) any person or any affiliated person of a person

(other than a registered investment company) that, at

any time during the 6-month period preceding the date

of the determination of whether that person or affiliated

person is an interested person, has executed any portfolio transactions for, engaged in any principal transactions with, or distributed shares for--

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(I) any investment company for which the investment

adviser or principal underwriter serves as such;

(II) any investment company holding itself out to

investors, for purposes of investment or investor services, as a company related to any investment company for which the investment adviser or principal underwriter serves as such; or

(III) any account for which the investment adviser

has borrowing authority,

(vii) any natural person whom the Commission by order

shall have determined to be an interested person by

reason of having had at any time since the beginning of

the last two completed fiscal years of such investment

company a material business or professional relationship

with such investment adviser or principal underwriter.

grounds that Fund Democracy has no standing under Article

III of the Constitution to bring this petition. Under Article

III, federal courts only have jurisdiction to resolve cases and

controversies. See, e.g., Chicago and Grand Trunk Ry. Co. v.

Wellman, 143 U.S. 339 (1892). Therefore, in order to bring

an action within our jurisdiction, the party must demonstrate

that it has standing to bring that action. See Lujan v.

Defenders of Wildlife, 504 U.S. 555, 560 (1992). To satisfy

this requirement a plaintiff or petitioner must, at an "irreducible constitutional minimum ... demonstrate that it has

suffered a concrete and particularized injury that is: (1)

actual or imminent, (2) caused by or fairly traceable to an act

that the litigant challenges in the instant litigation, and (3)

redressable by the court." Florida Audubon Soc'y v. Bentsen, 94 F.3d 658, 663 (D.C. Cir. 1996) (en banc) (internal

quotation marks and citations omitted). Fund Democracy

does not meet this standard.

Associational Standing

Petitioner argues that it has associational standing to bring

this action. That theory fails. An association only has

standing to bring suit on behalf of its members when its

members would otherwise have standing to sue in their own

right, the interests it seeks to protect are germane to the

organization's purpose, and neither the claim asserted nor the

relief requested requires the participation of individual members in the lawsuit. See Friends of the Earth, Inc. v.

Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 181 (2000).

Fund Democracy stumbles on the first step. It does not

appear that Fund Democracy actually has any members. In

any event, Fund Democracy has not shown that any of the

individual mutual fund investors it claims as "members" have

standing to sue in their own right.

First, it is not clear that Fund Democracy has either

members or any equivalent affiliates. Fund Democracy admitted in another pleading that it is a one-person business,

run by its CEO Mercer E. Bullard, who is also the attorney

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representing Fund Democracy in this court. Bullard does

not argue that he personally has standing. Instead, he

argues that Fund Democracy "represents" an "informal consortium" of various groups whose members are individual

mutual fund investors and are threatened with injury by the

SEC order. Fund Democracy describes in detail several

examples of how it has worked closely in the past with other

groups to conduct various "advocacy initiatives" such as challenging applications for exemptions, petitioning the SEC to

adopt rules, and lobbying against proposed legislation.

Fund Democracy's past work with various groups of individual investors does not render these groups the equivalent

of members of Fund Democracy. In determining whether an

organization that has no members in the traditional sense

may nonetheless assert associational standing, the question is

whether the organization is the functional equivalent of a

traditional membership organization. See Hunt v. Washington State Apple Adver. Comm'n, 432 U.S. 333, 342-45 (1977);

American Legal Found. v. FCC, 808 F.2d 84, 89-90 (D.C. Cir.

1987) ("ALF"). In Hunt, the Court held that a state commission had standing to assert the claims of apple growers and

dealers. The Court identified three reasons for treating the

state commission like a traditional membership organization.

First, the commission "serve[d] a specialized segment of the

State's economic community which is the primary beneficiary

of its activities, including the prosecution of this kind of

litigation." 432 U.S. at 344. Second, the apple growers and

dealers possessed "all of the indicia of membership in an

organization." Id. For example, the growers and dealers

elected the members of the state commission, they alone

could serve on the commission, and they alone financed the

commission's activities, albeit through mandatory assessments rather than voluntary contributions. See id. at 344-45.

Third, the fortunes of the commission were closely tied to

those of its constituency. See id. at 345.

In ALF we held that a media watchdog group lacked

standing to assert claims on behalf of members of the public

who regularly watch the news. Fund Democracy's case falls

much closer to ALF than to Hunt. In ALF, we noted that

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ALF did not serve a "discrete, stable group of persons with a

definable set of common interests." 808 F.2d at 90. Indeed,

ALF could purport to serve all who read newspapers, watch

television, or listen to the radio. See id. Similarly, Fund

Democracy purports to represent "tens of millions of individual investors." Moreover, ALF did not show that its "supporters" played any role in selecting its leadership, guiding

its activities, or financing those activities. See id. Similarly,

because Fund Democracy's course is steered entirely by

Bullard, and Fund Democracy does not claim to receive

funding from its purported members, it may have reasons for

instituting suit other than to assert the rights of these alleged

supporters. See id. Indeed, Fund Democracy's assertion of

standing appears even weaker than ALF's. ALF specifically

identified certain "supporters" who swore that ALF represented their views and that they approved of the ALF's

activities. See id. at 88. Fund Democracy has not identified

a single individual investor who fills such a role.

In any event, Fund Democracy lacks associational standing.

Petitioner attempts to fill this gap by alleging that it has

"worked closely" with Institutional Shareholder Services

("ISS"), an entity which does have identifiable clients and

which also objected to the Commission's action though it did

not join the present petition. Even assuming that the mutual

fund investors who are clients of ISS or members of the other

groups with whom Fund Democracy has "worked" are properly considered "members" of Fund Democracy, petitioner

still cannot qualify for associational standing. Fund Democracy has not sufficiently established that any of these individuals would have standing to sue in his own right. The harm

alleged by Fund Democracy is that investors or prospective

investors will be misled about the true single-manager nature

of the Hillview fund and will suffer a diminution of voting

rights as a result of the SEC order granting an exemption.

Therefore, it appears that the only people who will be directly

affected by the SEC's order granting Hillview's request for

an exemption are those who have purchased shares in Hillview or are at least considering doing so. Yet Fund Democracy presents no evidence that any of these "members" own,

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intend to purchase, or are even considering purchasing shares

in Hillview. See Lujan, 504 U.S. at 563 (organization must

submit evidence that one or more of its members would be

directly affected apart from their special interest in the

subject).

In a similar case in the Second Circuit, an association

sought to challenge the grant of exemptions under the Act to

certain investment companies. See Independent Investor

Protective League v. SEC, 495 F.2d 311 (2d Cir. 1974). The

court held that petitioner failed to demonstrate standing by

merely alleging that "it is quite conceivable that, in the

future," its members will be investors in the companies at

issue. Id. at 312. Similarly, Fund Democracy asserts in

cursory fashion that "current and prospective ISS clients who

are current or prospective clients of the Hillview Funds," are

at risk of harm. Fund Democracy also alleges that "investors

who are not shareholders of the Hillview Funds, including

ISS clients, may be misled by the Funds' names." Notably,

Fund Democracy does not identify a single affiliate who has

invested or is considering investing in Hillview Funds. Nor

has Fund Democracy even alleged that it is likely that any

ISS clients will consider investing in Hillview. For these

reasons, Fund Democracy lacks Article III standing to challenge the SEC's decision to grant Hillview's application.

Procedural Interest

Similarly, Fund Democracy lacks Article III standing to

challenge the SEC's refusal to hold a hearing on Hillview's

application. The mere violation of a procedural requirement

does not authorize all persons to sue to enforce the requirement. See Lujan, 504 U.S. at 571-78; Florida Audubon

Soc'y, 94 F.3d at 664. A party has standing to challenge an

agency's failure to abide by a procedural requirement only if

the government act performed without the procedure in

question will cause a distinct risk to a particularized interest

of the plaintiff. See Florida Audubon Soc'y, 94 F.3d at 664.

Because Fund Democracy has no actual members, and has

not even shown that any of its purported members will be

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affected by the grant of Hillview's application, Fund Democracy has not shown a distinct risk to its particularized interest.

Standing as an "Interested Person"

Fund Democracy argues that it has standing because it is

an "interested person" for purposes of Rule 270.0-5, which

allows "interested persons" to request a hearing on an application. That petitioner is an "interested person" is a most

tenuous proposition. See footnote 1, supra. But, even assuming that Fund Democracy is an "interested person" under

the rule and therefore eligible to participate in the SEC

proceedings, this does not mean that Fund Democracy has

Article III standing. Participation in agency proceedings is

alone insufficient to satisfy judicial standing requirements.

See ALF, 808 F.2d at 89. Because agencies are not constrained by Article III, they may permit persons to intervene

in the agency proceedings who would not have standing to

seek judicial review of the agency action. See Envirocare of

Utah, Inc. v. NRC, 194 F.3d 72, 74 (D.C. Cir. 1999). For this

reason, we agree with the Second Circuit which has expressly

rejected the argument that an individual's status as an "interested person" is sufficient to confer standing to petition for

review of an SEC order under the Act. See Option Advisory

Serv., Inc. v. SEC, 668 F.2d 120, 122 (2d Cir. 1981); Independent Investor Protective League, 495 F.2d at 313.

Fund Democracy suggests that Congress specifically intended to grant to all "interested persons" a right to a

hearing before the SEC and that the denial of this right

therefore confers standing. See generally Warth v. Seldin,

422 U.S. 490, 500 (1975) (the injury required by Article III

may exist solely by virtue of statutes creating legal rights, the

invasion of which creates standing). Even assuming Congress intended to grant a right to a hearing to all interested

persons and that Fund Democracy is among those persons,

the deprivation of that right does not alone confer Article III

standing. The grant of a procedural right cannot serve as

the basis for Article III standing unless "the procedures in

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question are designed to protect some threatened concrete

interest of [petitioner's] that is the ultimate basis of his

standing." Lujan, 504 U.S. at 573 n.8; see also Florida

Audubon Soc'y, 94 F.3d at 664. As already noted, Fund

Democracy has not shown any such concrete interest apart

from the procedural injury.

Because Fund Democracy has no standing to bring this

petition for review of the Securities and Exchange Commission's order, we grant the Commission's motion to dismiss.

So ordered.

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Edwards, Circuit Judge, concurring in part and dissenting

in part: I concur in the result reached by the court. Under

the applicable agency regulations, any "interested person"

may request a hearing on an application. 17 C.F.R.

s 270.0-5. However, the SEC is required to hold such a

hearing only if it is determined to be "necessary or appropriate in the public interest or for the protection of investors."

In this case, the SEC denied petitioner's request for a

hearing, because it had already considered and reasonably

disposed of the issues presented in 1995 when it initially

approved another investment company's application for a

manager of managers exemption. The SEC was thus fully

justified in denying petitioner's request for a hearing. I

therefore agree that the agency's action should be summarily

affirmed.

I also agree that petitioner has no standing to seek judicial

review of the merits of the SEC's order. It is clear that

petitioner has not satisfied Article III standing requirements

on this score. I do not agree, however, that petitioner lacks

standing to seek review of the agency's denial of the requested hearing.

It is true that our cases require plaintiffs to demonstrate

that the denial of a procedural right will jeopardize interests

particular to them, but they do not go so far as to deny

standing in cases where a statute or regulation affords a

party such a particularized procedural right. In Florida

Audubon Society v. Bentsen, 94 F.3d 658, 664 (D.C. Cir. 1996)

(en banc), we reiterated the principle that, when the government fails to comply with generalized procedural requirements (in that case, of the National Environmental Policy

Act), a plaintiff seeking to challenge the alleged violation of

the procedural rule must demonstrate that the government's

failure to comply will cause a distinct risk to a particularized

interest of the plaintiff. We held that "the mere violation of a

procedural requirement thus does not permit any and all

persons to sue to enforce the requirement." Id. Similarly, in

City of Orrville, Ohio v. FERC, 147 F.3d 979, 985 (D.C. Cir.

1998), we held that a party does not acquire "a direct stake in

a litigation" for purposes of standing simply by participating

in the administrative proceedings giving rise to the litigation

(internal citation omitted). These cases are inapposite, for

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they do not address the issue that we face in the instant

matter.

Where a statute or a regulation affords a particular party

an undisputed right to seek an administrative hearing, Florida Audubon Society does not compel the conclusion that the

party lacks standing to challenge an agency's refusal to grant

the required hearing. In this case, the governing regulation

permits an "interested person" to submit relevant written

facts and request a hearing. See 17 C.F.R. s 270.0-5. The

Commission must order such a hearing if it appears to be

necessary or appropriate in the public interest or for the

protection of investors. Id. In my view, petitioner, as an

"interested person," has standing to challenge as arbitrary

the Commission's denial of its request for a hearing.

It is immaterial that petitioner cannot seek review of the

merits of the SEC order. The particularized interest here is

petitioner's right to seek a hearing and to have one granted

when it is "necessary or appropriate in the public interest or

for the protection of investors." To hold otherwise is to

suggest that the agency could deny with impunity the right of

any "interested person" even to receive notice or appear

before the agency pursuant to 15 U.S.C. s 80a-39(a) with no

threat of judicial review. Standing law does not condone such

a result.

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