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604 F2d 704 Ludlow Corporation v. Securities and Exchange Commission | OpenJurist
604 F. 2d 704 - Ludlow Corporation v. Securities and Exchange Commission
604 F2d 704 Ludlow Corporation v. Securities and Exchange Commission
604 F.2d 704
196 U.S.App.D.C. 40, Fed. Sec. L. Rep. P 96,946
Boston Stock Exchange, Intervenor.
As Amended Aug. 10, 1979.
This is a petition for review of a Securities and Exchange Commission order approving the application of the Boston Stock Exchange (BSE) for unlisted trading privileges in petitioner's common stock. The Commission held, based on facts developed in a hearing before an Administrative Law Judge (ALJ), that approval of the application would be "consistent with the maintenance of fair and orderly markets and the protection of investors." Section 12(f)(2) of the Securities Exchange Act of 1934, As amended (the Act), 15 U.S.C. § 78L (f)(2) (1976). We affirm.I
We hold, as a threshold matter, that Ludlow is properly before this court under section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976),3 notwithstanding several jurisdictional arguments advanced by the Commission.
We find first that Ludlow has standing to seek review of the Commission's section 12(f)(2) order.
The Commission argues, nevertheless, that Ludlow lacks standing because it is not within the "zone of interests" protected by section 12(f)(2).5 The Commission correctly points out that section 12(f)(2) does not explicitly mention that the issuer is entitled to judicial review. See note 2 Supra. We do not believe that this excludes issuers from the zone of interests of section 12(f)(2).6 We find it significant that under section 12(f)(5), 15 U.S.C. § 78L (f)(5) (1976), the issuer must be given notice of, and an opportunity to be heard on, a section 12(f)(2) application.7 Section 12(f)(5) explicitly recognizes that "the issuer . . . ha(s) a bona fide interest" in the decision to grant unlisted trading privileges. This provision recognizes that unlisted trading might destabilize the market, See also S.Rep.No.75, 94th Cong., 1st Sess. 18-19 (1975), and that this would harm the issuer. Ludlow therefore falls within the "zone of interests" protected by section 12(f)(2).
We find also that Ludlow has exhausted its requisite administrative remedies and that its claim is ripe for judicial review. Under these general headings, the Commission makes alternative, but related, assertions: first, that Congress specifically forbade review of a section 12(f)(2) order; and, second, that as a matter of discretion we should decline review at this time.
Each argument depends heavily on the existence of section 12(f)(4) of the Act, 15 U.S.C. § 78L (f)(4) (1976),8 which provides a procedure for petitioning the Commission to suspend or terminate unlisted trading in a security after the Commission in a 12(f)(2) proceeding has authorized such trading. The issuer of a security (among others) is explicitly granted the right to petition for such review. Judicial review exists, we are told, only when the Commission denies a 12(f)(4) petition; the decision initially to authorize unlisted trading under section 12(f)(2) is said to be an interim, nonfinal, order.
We disagree. The granting of a section 12(f)(2) application does not become a provisional or tentative agency action merely because a Related inquiry may occur in a section 12(f)(4) proceeding once unlisted trading begins. A 12(f) (2) proceeding is independent of a 12(f)(4) proceeding because a different inquiry is made in each. In the 12(f)(2) hearing, the burden of proof is on the applicant for unlisted trading privileges to show that such privileges are "Consistent with the maintenance of fair and orderly markets and the protection of investors" (emphasis added). In a 12(f)(4) proceeding, on the other hand, the person objecting to unlisted trading has the burden of proving that terminating or suspending unlisted trading is "Necessary or appropriate in the public interest or for the protection of investors" (emphasis added).
The differences in the inquiry to be undertaken and the allocation of the burden of proof make it clear that judicial review of a section 12(f)(4) order is not the proper mechanism for determining whether the standards of section 12(f)(2) were properly applied when unlisted trading was initially authorized.
Congress, had it wished, could have permitted the issuer to intervene in the Commission's 12(f)(2) hearing and at the same time withheld the opportunity for judicial review of that decision. There is, however, nothing on the face of the statute that suggests this. The legislative history of section 12(f)(2) does indicate that Congress did not want an issuer to have exclusive power to control which markets may trade the issuer's stock. See S.Rep.No.75, 94th Cong., 1st Sess. 19 (1975). This does not mean, however, that an issuer is to have no role in the 12(f)(2) decision,9 or that it is not free to appeal from an adverse Commission decision.
We hold for all the reasons stated above that the 12(f)(2) decision is a final order subject to review here under section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976).10
The Commission argues nevertheless that, as a matter of discretion, we should decline to review at this time its decision to grant unlisted trading privileges. Declining review is appropriate, we are told, because Ludlow is free to file a 12(f)(4) petition to suspend or terminate unlisted trading. The 12(f)(4) inquiry is preferable, according to the Commission, because at that time the record will reflect what actually has happened to the markets for Ludlow stock since unlisted trading began.
In light of the foregoing discussion, this argument must fail. We have held above that a 12(f)(2) order is a final order from which a party may seek judicial review. Section 25(a)(1) of the Act, 15 U.S.C. § 78y(a)(1) (1976). See note 3 Supra. To deny judicial review of the 12(f)(2) order, whether because of an alleged congressional prohibition or by reason of a discretion attributed to this court, equally deprives Ludlow of the opportunity to ensure that the Commission adhered to the standard and burden of proof peculiar to section 12(f)(2). The court does not have discretion to decline judicial review of an order under these circumstances. We therefore turn to the merits of Ludlow's petition.
The standard contained in section 12(f)(2) directs the Commission are to grant the application unless it finds the extension of unlisted trading privileges to be "consistent with the maintenance of fair and orderly markets and the protection of investors." Congress adopted this standard in the Securities Acts Amendments of 1975 (1975 Amendments), Pub.L. 94-29, § 8, 89 Stat. 97, 117-18. This language replaced the standard that had been in effect since 1964, under which the Commission was required to find that extending unlisted trading privileges would be "necessary or appropriate in the public interest or for the protection of investors." Securities Acts Amendments of 1964, Pub.L.No.88-467, § 3, 78 Stat. 565, 565-66. Thus, Congress retained the "protection of investors" requirement but substituted "fair and orderly markets" for the "public interest" standard. Although the meaning of this change is not obvious on its face, we take it to be that henceforth unlisted trading applications are to be evaluated, at least insofar as their effect on the securities markets is concerned, with primary reference to the congressional purposes of the 1975 Amendments.
This court must accept the Commission's factual determinations if they are supported by substantial evidence. Section 25(a)(4) of the Act, 15 U.S.C. § 78y(a)(4) (1976). The Commission insists, however, that its decision to permit unlisted trading in Ludlow stock was based in part on a quasi-legislative prediction that such trading would help fulfill Congress' policy in enacting the 1975 Amendments. To the extent that the decision was of this sort, the Commission argues that we may reverse only if petitioner meets what the Commission believes to be the higher standard of showing that its decision was arbitrary or capricious. In support of this theory, the Commission cites our own decision in Bradford National Clearing Corp. v. SEC, 191 U.S.App.D.C. 383, 390-91, 590 F.2d 1085, 1092-93 (1978). The Commission's reliance on Bradford is misplaced. Bradford involved judicial review of a process "distinctly legislative in nature," akin to rulemaking. Id. at 391, 590 F.2d at 1093. Bradford therefore applied the "arbitrary or capricious" standard of judicial review to these quasi-legislative decisions. This case, on the other hand, involves a trial-type adjudication of BSE's application for unlisted trading privileges. Review is sought here from an order that occurred after a formal hearing, an initial decision by an ALJ, and an appeal to the full Commission. Adjudications of this sort must be reviewed under the substantial evidence test. Section 25(a)(4) of the Act, 15 U.S.C. § 78y(a)(4) (1976).
The Commission approved BSE's application for unlisted trading in Ludlow stock after finding that the extension of such privileges was " consistent with the maintenance of fair and orderly markets and the protection of investors." Section 12(f)(2) of the Act, 15 U.S.C. § 78L (f)(2) (1976). We examine each part of this test in turn.
The second part of the section 12(f)(2) test requires BSE to show that unlisted trading privileges are consistent with investor protection. The Commission found that BSE had made this showing.
BSE's application was pursuant to § 12(f)(1) of the Act, 15 U.S.C. § 78L (f)(1) (1976), which provides, in pertinent part, that
The standards to be applied by the Commission in acting on unlisted trading privilege applications are contained in section 12(f)(2) of the Act, 15 U.S.C. § 78L (f)(2) (1976), which provides, in pertinent part:
Section 25(a)(1) provides, in pertinent part, that a "person aggrieved by a final order of the Commission entered pursuant to this title may obtain review of the order in the United States Court of Appeals . . . ."
Compare Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26, 42-43, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976); Warth v. Seldin, 422 U.S. 490, 508-09, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) and Linda R. S. v. Richard D., 410 U.S. 614, 617-18, 93 S.Ct. 1146, 35 L.Ed.2d 536 (1973) With United States v. SCRAP, 412 U.S. 669, 687-89, 93 S.Ct. 2405, 37 L.Ed.2d 254 (1973) and NRDC v. SEC, 196 U.S.App.D.C. --- at --- - ---, 606 F.2d 1031 at 1042 - 103, (1979)
See Association of Data Processing Serv. Organizations, Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970). Unlike the "injury in fact" requirement, which is constitutional in dimension, the "zone of interests" test is a nonconstitutional prudential limitation on our jurisdiction. Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99 S.Ct. 1601, 1608 & n.6, 60 L.Ed.2d 66 (1979)
Cf. Gladstone, Realtors v. Village of Bellwood, 99 S.Ct. at 1608-13 (comparing §§ 810 and 812 of the Fair Housing Act)
Section 12(f)(5) provides:
Section 12(f)(4) provides:
See § 12(f)(5) of the Act, 15 U.S.C. § 78L (f)(5) (1976), Supra note 7
1975 Amendments, Pub.L.No.94-29, § 7, 89 Stat. 97, 111-12 (adding § 11A to the Act, 15 U.S.C. § 78k-1 (1976)). A second major objective of the 1975 Amendments, not directly relevant to the present case, was to encourage the establishment of a national system for the clearance and settlement of securities transactions. See generally Bradford Nat'l Clearing Corp. v. SEC, 191 U.S.App.D.C. 383, 590 F.2d 1085 (1978)