Thursday, January 07, 2016

SEC's Lack of Response to a Petition Not the Same as Denial

By Rodney F. Tonkovic, J.D.

A district court has rejected a suit over the SEC's failure to respond to a rulemaking request. Investor Stephen Silberstein sued the Commission under the Administrative Procedure Act to challenge the agency's inaction and to compel it to act on the issue of disclosure of political contributions. The court concluded that it lacked jurisdiction over the complaint's claim that the Commission's failure to respond to the petition violated the APA. The court also found that the argument that the Commission's inaction was an effective denial of the petition failed to state a claim (Silberstein v. SEC, January 4, 2016, Collyer, R.).

Silberstein had unsuccessfully sued Aetna, Inc. under Exchange Act Section 14(a) over alleged false or misleading statements in the company's proxy materials regarding certain contributions to tax-exempt organizations. The Southern District of New York denied Silberstein’s request to enjoin Aetna from holding its 2014 shareholder meeting until it amended its reports to reflect all of its political contributions, finding that Silberstein was unable to demonstrate irreparable harm. On May 8, 2014, Silberstein and Citizens for Responsibility and Ethics in Washington submitted a petition for rulemaking requesting that the SEC create a rule establishing a disclosure requirement.

The Commission never acted on the petition, and, Silberstein filed a complaint under the APA alleging that the failure to respond was arbitrary, capricious, and contrary to law. The complaint sought a declaration that the failure to respond or grant the petition violated provisions of the APA concerning the right to petition and requiring a reasonable timely response to petitions. Silberstein also asked for an injunction to compel the Commission to initiate a rulemaking proceeding.

Failure to respond. The court first found that it lacked jurisdiction to address the claim concerning the Commission's failure to respond. Here, Exchange Act Section 25(a)(1) clearly states that review of all final orders lies on the circuit courts. While there was no final order, it is well-established that claims that might affect the circuit court's future jurisdiction, such as the claim for unreasonable delay under the APA in this case, are also subject to the exclusive review of the circuit court. The court accordingly dismissed this claim without prejudice.

Failure to grant. The second count of the complaint asserted that the Commission's inaction constituted an effective denial of the complaint that was arbitrary, capricious, and contrary to law. A claim under Section 706(1) of the APA can proceed only if an agency fails to take a discrete action that it is required to take. While acknowledging that he sought the promulgation of a rule under the Commission's "broad discretionary powers," Silberstein maintained that the Commission was required to provide an explanation to support its denial of the petition.

The problem, the court said, was that the Commission did not deny CREW's petition, but simply failed to respond to it. A failure to act is distinguishable from a denial, and since the Commission did not deny the petition, and there was no clear legal duty for it to act, it followed that Silberstein failed to state a valid claim under the APA, the court said. The second count was dismissed with prejudice.

The case is No. 15-722.