Securities and Exchange Commission v. Chenery Corp.

Supreme Court of the United States · 1943 · Administrative Law

Administrative Lawadministrative lawagency reasoningjudicial reviewSECChenery doctrinestated grounds ruleremand

Facts

Respondents were officers, directors, and controlling stockholders of Federal Water Service Corporation, a registered holding company undergoing reorganization under the Public Utility Holding Company Act. While successive reorganization plans were pending before the SEC, respondents purchased 12,407 shares of Federal preferred stock on the open market, openly, at fair prices, and without any finding of fraud, inside advantage, prejudice to the corporation, or prejudice to stockholders. The SEC concluded that as fiduciaries managing the reorganization, respondents had a duty not to trade in the company's securities during that period and required that their purchased preferred stock receive only cost plus interest rather than equal participation in the reorganized company. The SEC expressly based its decision on what it viewed as established equitable principles applicable to fiduciaries, not on a new policy judgment or a general administrative rule.

Issue

May a court uphold an SEC order on grounds different from those the SEC itself gave, where the SEC justified its order as compelled by settled judicial principles of equity but those principles do not support the result? More broadly, can an administrative order stand when the agency's stated rationale is legally erroneous, even if another rationale might have supported the outcome?

Rule

An administrative order cannot be upheld unless the grounds on which the agency acted are those on which its action can be sustained. When an agency states that it is proceeding on a particular legal basis, judicial review is confined to that stated basis; a reviewing court may not affirm by supplying a different administrative policy judgment that the agency itself did not make.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

The Coastal Transit Board in Oregon denied a route-transfer application filed by Harbor Line Coaches, stating in its written decision that settled common-law conflict-of-interest principles automatically barred the transfer because one manager bought a small stake in a creditor company during the review period. The Board expressly found the purchase was open, at market price, fully disclosed, and did not affect bargaining power or harm riders.

On judicial review, the court concludes the common-law principles cited by the Board do not actually forbid the transaction. The record might nevertheless support denial under the Board's broad statutory authority to protect the public convenience. What is the best result?

Explanation. An administrative order must stand or fall on the grounds the agency itself invoked. Where the agency expressly rested its action on a particular legal basis, judicial review is confined to that basis. Even if the agency might have reached the same result under its broader statutory policy authority, the court may not substitute that rationale for the agency's own stated reasoning.