Sacks v. SEC

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

RICHARD L. SACKS,  No. 07-74647
Petitioner, SEC No.
v.
 34-56540
SECURITIES AND EXCHANGE ORDER AND
COMMISSION, AMENDED
Respondent.
 OPINION

On Petition for Review of an Order of the
Securities & Exchange Commission

Argued and Submitted
November 30, 2010—San Francisco, California

Filed February 22, 2011
Amended August 8, 2011

Before: Mary M. Schroeder, Sidney R. Thomas, and
Ronald M. Gould, Circuit Judges.

Opinion by Judge Thomas

10375
 SACKS v. SEC 10377

COUNSEL

Timothy A. Canning, Arcata, California, for the petitioner.

Brian G. Cartwright, General Counsel, Andrew N. Vollmer,
Deputy General Counsel, Jacob H. Stillman, Solicitor, Mark
Pennington, Assistant General Counsel, Washington, D.C.,
for the respondent.

ORDER

The opinion is amended as follows:

1. Page 2745, line 30, to Page 2746, line 16. Delete:

Where Congress has enacted a special statutory
review process for administrative action, that process
applies to the exclusion of the Administrative Proce-
10378 SACKS v. SEC
dure Act (“APA”) or other general exhaustion prin-
ciples. See 5 U.S.C. § 703; Bowen v. Massachusetts,
487 U.S. 879, 903 (1988); Steadman v. SEC, 450
U.S. 91, 105 (1981) (“[T]he general provisions of
the APA are applicable only when Congress has not
intended that a different standard be used in the
administration of a specific statute.” (Powell, J., con-
curring)); W. Watersheds Project v. Kraayenbrink,
Nos. 08-35359, 08-35360, __ F.3d __, 2011 WL
149363, at *20 (9th Cir. Jan. 19, 2011) (citing Ben-
nett v. Spear, 520 U.S. 154, 164 (1997)); Turtle
Island Restoration Network v. U.S. Dep’t of Com-
merce, 438 F.3d 937, 947 (9th Cir. 2006). With
respect to exhaustion, specifically, the United States
Supreme Court has held:

“[A]ppropriate deference to Congress’
power to prescribe the basic procedural
scheme under which a claim may be heard
in a federal court requires fashioning of
exhaustion principles in a manner consis-
tent with congressional intent and any
applicable statutory scheme.”

Darby v. Cisneros, 509 U.S. 137, 153 (1993) (quot-
ing McCarthy v. Madigan, 503 U.S. 140, 144
(1992)).

2. Page 2749, line 10 to line 18, including footnote 4.
Replace:

However, the regulation does not apply here because
15 U.S.C. § 78y sets out the exclusive procedure for
judicial review of rules that are proposed by self-
regulating organizations and adopted by the SEC
under § 78s. See Bowen, 487 U.S. at 903; Steadman,
450 U.S. at 105; W. Watersheds Project, 2011 WL
149393, at *20. As a result, neither the APA nor a
 SACKS v. SEC 10379
regulation of general applicability promulgated
under the APA—such as 17 C.F.R. § 201.430(c)—
applies here.4

***
4
Further, to the extent that a regulation of general
applicability conflicts with a specific statute, the stat-
ute controls. See United States v. Doe, 701 F.2d 819,
823 (9th Cir. 1983) (“Where an administrative regu-
lation conflicts with a statute, the statute controls.”).

With:

However, as we have explained, 15 U.S.C.
§ 78y(c)(1) requires only that a petitioner raise his
objection during the rule-making process. Because
the additional requirement in 17 C.F.R. § 201.430(c)
conflicts with the more lenient requirement in
§ 78y(c)(1), the regulation does not apply. See
United States v. Doe, 701 F.2d 819, 823 (9th Cir.
1983) (“Where an administrative regulation conflicts
with a statute, the statute controls.”).

3. Page 2749, line 20, to Page 2750, line 15. Delete:

Of course, nothing in our decision precludes 17
C.F.R. § 201.430(c) from being applied in the
absence of a special statutory review process. As the
Second Circuit explained:

To be sure, [15 U.S.C. § 78y] provides for
judicial review of rules promulgated pursu-
ant to §§ 78f, 78i(h)(2), 78k, 78k-1,
78o(c)(5) or (6), 78o-3, 78q, 78q-1, or 78s
of Title 15. This judicial review provision
makes no mention, however, of rules pro-
mulgated pursuant to [other sections of the
10380 SACKS v. SEC
Exchange Act]. Nevertheless, in the
absence of authorization of “special statu-
tory review” under the Exchange Act, there
is still “general statutory review” under the
APA, which authorizes us to review “final
agency action for which there is no other
adequate remedy in a court.”

Schiller v. Tower Semiconducter, Ltd., 449 F.3d 286,
292-93 (2d Cir. 2006) (citations omitted); see also In
re SEC ex rel. Glotzer, 374 F.3d 184, 189 (2d Cir.
2004) (holding that, when the APA applies, “compli-
ance with [17 C.F.R. § 201.430] is mandatory”).
Thus, 17 C.F.R. § 201.430(c), which was promul-
gated under the APA, would presumably apply to
“action[s] made by authority delegated in §§ 200.30-
1 through 200.30-18” that are not subject to a special
statutory review process, such as 15 U.S.C. § 78y. 17
C.F.R. § 201.430(c).

The petition for rehearing en banc is DENIED. Fed. R.
App. P. 35. No further petitions for rehearing or rehearing en
banc may be filed.

OPINION

THOMAS, Circuit Judge:

Richard Sacks filed a petition for review challenging a rule
proposed by the Financial Industry Regulatory Authority and
adopted by the Securities and Exchange Commission. The
rule prohibits non-attorneys who have been banned from the
securities industry from representing parties in securities-
related arbitration. Sacks argues the rule is impermissibly
retroactive. We agree and hold that the rule cannot be applied
retroactively.
 SACKS v. SEC 10381
I

The Financial Industry Regulatory Authority1 (“FINRA”) is
a “self-regulatory organization” under the Securities
Exchange Act. See 72 Fed. Reg. 42169 (Aug. 1, 2007); 15
U.S.C. §§ 78c(a)(26), 78s(b). It is “responsible for regulatory
oversight of all securities firms that do business with the pub-
lic; professional training, testing and licensing of registered
persons; [and] arbitration and mediation . . . .” Id. at 42170.
To achieve its objectives, FINRA may propose rules aimed at
governing its member firms and associated individuals. See
15 § 78s(b)(1). The proposed rules are subject to approval by
the Securities and Exchange Commission’s Division of Mar-
ket Regulation. See id.; 17 C.F.R. § 200.30-3(a)(12).

On April 13, 2007, FINRA proposed a rule prohibiting
non-attorneys who have been banned from the securities
industry from representing parties in securities-related arbitra-
tion. 72 Fed. Reg. 18703 (Apr. 13, 2007). Richard Sacks sub-
mitted a comment letter to FINRA on May 3, 2007,
challenging the proposed rule. Sacks, who is not an attorney,
was banned from the securities industry by FINRA in 1991.
However, he was not barred from representing parties in
securities-related arbitration. Sacks claims that, since 1991, he
has represented parties in over 1,300 arbitration claims, tried
300 or so cases to a decision, and mediated another 250 or so
claims to a settlement. The rule, though, would prevent him
from continuing to represent parties in securities-related arbi-
tration.

Among other things, Sacks claimed in his comment letter
1
FINRA was created in 2007 through the consolidation of the National
Association of Securities Dealers, Inc. and the member regulation,
enforcement, and arbitration operations of the New York Stock Exchange.
See Press Release, FINRA, NASD and NYSE Member Regulation Com-
bine to Form the Financial Industry Regulation Authority—FINRA (July
30, 2007), http://www.finra.org/Newsroom/ NewsReleases/2007/P036329.
10382 SACKS v. SEC
that the rule was impermissibly retroactive and constituted an
additional sanction for conduct that occurred more than 16
years ago. The SEC’s Division of Market Regulation rejected
Sacks’ protest. It adopted the rule on October 3, 2007, and
commented:

[FINRA’s] rules must be designed to prevent fraudu-
lent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general,
to protect investors and the public interest. The
Commission believes that the proposed rule change
meets this standard by balancing the needs of inves-
tors to have access to representation, particularly in
small cases, with [FINRA’s] responsibility to protect
investors, the integrity of its forum, and the public
interest.

72 Fed. Reg. 56410, 56411 (Oct. 3, 2007). Sacks filed a peti-
tion for review with us on November 13, 2007, without first
petitioning the SEC.

II

We have jurisdiction over Sacks’ petition, even though he
did not first seek relief from the SEC after it adopted the rule.

[1] Our jurisdiction arises under the special statutory
review process set out in 15 U.S.C. § 78y, which governs our
review of rules proposed by self-regulating organizations,
such as FINRA, and adopted by the SEC under § 78s.2 Sec-
tion 78y(b)(1) provides:

A person adversely affected by a rule of the Com-
mission promulgated pursuant to section . . . 78s of
this title may obtain review of this rule in the United
2
In its description of the rule, FINRA remarked that it was proposing
the rule under 15 U.S.C. § 78s(b)(1). 72 Fed. Reg. at 18703 n.1.
 SACKS v. SEC 10383
States Court of Appeals for the circuit in which he
resides or has his principal place of business or for
the District of Columbia Circuit, by filing in such
court, within sixty days after the promulgation of the
rule, a written petition requesting that the rule be set
aside.

15 U.S.C. § 78y(b)(1). There is no dispute here that Sacks
was adversely affected by the rule, that he filed his petition
with the appropriate circuit court, and that he filed his petition
within 60 days after the SEC issued the order adopting the
rule.

[2] Section 78y(c)(1) sets out the exhaustion requirement
for this special statutory review process:

No objection to an order or rule of the Commission,
for which review is sought under this section, may
be considered by the court unless it was urged before
the Commission or there was reasonable ground for
failure to do so.

15 U.S.C. § 78y(c)(1). We agree with the D.C. Circuit that a
party has sufficiently “urged” his objection to the SEC by
raising his objection to the rule during the rule-making pro-
cess. See Blount v. SEC, 61 F.3d 938, 940 (D.C. Cir. 1995).
In other words, a petitioner need not have filed a petition for
review with the SEC after it has adopted a rule in order to
have sufficiently “urged” his objection. As the D.C. Circuit
reasoned, this exhaustion requirement “is presumably aimed
only at assuring that the Commission have had a chance to
address claims before being challenged on them in court.” Id.
at 940.

[3] Here, Sacks met the exhaustion requirement in
§ 78y(c)(1). Sacks raised his objection to the rule in his com-
ment letter to the SEC, and the SEC responded to his objec-
10384 SACKS v. SEC
tion in its approval order. The SEC acknowledged that Sacks
and three others commented:

The proposed rule change would penalize retroac-
tively those persons who are currently suspended or
barred from the securities industry by prohibiting
them from representing a party in an arbitration or
mediation proceeding. In their view, it would impose
a new penalty on those who have had their miscon-
duct adjudicated and sanctions imposed.

72 Fed. Reg. at 56411. This is the same claim that Sacks
raises in his petition before us. And the SEC responded to
Sacks’s claim:

[FINRA] indicated that the rule is “designed to pro-
tect investors” and that at a minimum a non-attorney
representative should not be “a person whom a regu-
latory body has suspended or barred from represent-
ing clients or conducting securities business with the
public.”

Id. Sacks provided the SEC “a chance to address [his] claims
before being challenged on them in court[,]” see Blount, 61
F.3d at 940, and it rejected them. Therefore, he sufficiently
“urged” his objection before the SEC. 15 U.S.C. § 78y(c)(1).

[4] We have jurisdiction over Sacks’ petition because he
has met all of the jurisdictional requirements under the special
statutory review process set out in 15 U.S.C. § 78y, including
its exhaustion requirement.

The SEC argues we lack jurisdiction under 17 C.F.R.
§ 201.430(c). That regulation states:

Prerequisite to judicial review. Pursuant to Section
704 of the Administrative Procedure Act, 5 U.S.C.
704, a petition to the Commission for review of an
 SACKS v. SEC 10385
action made by authority delegated in §§ 200.30-1
through 200.30-18 of this chapter is a prerequisite to
the seeking of judicial review of a final order entered
pursuant to such an action. . . .

17 C.F.R. § 201.430(c). Under § 201.430(b)(1), the party
must either:

fil[e] a written notice of intention to petition for
review within five days after actual notice of the
action to that party or aggrieved person, or 15 days
after publication of the notice of action in the Fed-
eral Register, or five days after service of notice of
the action on that party or aggrieved person pursuant
to § 201.141(b), whichever is the earliest.

17 C.F.R. § 201.430(b)(1).

The SEC argues that it approved the rule through delegated
authority under 17 C.F.R. § 200.30-3(a)(12)3 and that Sacks
did not timely file a petition with the SEC. However, as we
have explained, 15 U.S.C. § 78y(c)(1) requires only that a
petitioner raise his objection during the rule-making process.
Because the additional requirement in 17 C.F.R. § 201.430(c)
conflicts with the more lenient requirement in § 78y(c)(1), the
regulation does not apply. See United States v. Doe, 701 F.2d
819, 823 (9th Cir. 1983) (“Where an administrative regulation
conflicts with a statute, the statute controls.”).

Because our jurisdiction over Sacks’ petition is governed
by 15 U.S.C. § 78y and 17 C.F.R. § 201.430(c) does not
apply, we have jurisdiction to address the merits of the peti-
tion.
3
The SEC, through 17 C.F.R. § 200.30-3(a)(12), has delegated its
authority to approve rules proposed by self-regulatory organizations (such
as FINRA) to the SEC’s Division of Market Regulation. See, e.g., 72 Fed.
Reg. at 18707 n.21.
10386 SACKS v. SEC
III

Sacks argues the rule at issue here is impermissibly retroac-
tive. We agree and hold that it cannot be applied retroactively.

Our standard of review is governed by Section 78y:

[We] shall affirm and enforce the rule unless the
Commission’s action in promulgating the rule is
found to be arbitrary, capricious, an abuse of discre-
tion, or otherwise not in accordance with law; con-
trary to constitutional right, power, privilege, or
immunity; in excess of statutory jurisdiction, author-
ity, or limitations, or short of statutory right; or with-
out observance of procedure required by law.

15 U.S.C. § 78y(b)(4). Sacks argues the rule here fails under
this standard for several reasons, but because we conclude
that it cannot be applied retroactively, we need only address
that issue. See Koch v. SEC, 177 F.3d 784, 789 (9th Cir.
1999).

[5] “[T]he presumption against retroactive legislation . . .
is deeply rooted in our jurisprudence.” Id. at 785 (quoting
Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994)). We
“disfavor retroactive laws based on concerns about fairness:
‘elementary considerations of fairness dictate that individuals
should have an opportunity to know what the law is and to
conform their conduct accordingly; settled expectations
should not be lightly disrupted.’ ” Id. (quoting Landgraf, 511
U.S. at 265). We only apply a statute or regulation retroac-
tively if there is “clear congressional intent” that it should be
applied retroactively. Id. at 786 (quoting Landgraf, 511 U.S.
at 268; see also Bowen v. Georgetown Univ. Hosp., 488 U.S.
204, 208 (1988) (“[A] statutory grant of legislative rulemak-
ing authority will not, as a general matter, be understood to
encompass the power to promulgate retroactive rules unless
that power is conveyed by Congress in express terms.”).
 SACKS v. SEC 10387
Before applying a statute or regulation retroactively, we
first apply a two-step framework to determine if, indeed, it
has a retroactive effect. See Mejia v. Gonzales, 499 F.3d 991,
997 (9th Cir. 2007) (analyzing the retroactive effect of a an
immigration regulation) (citing Landgraf, 511 U.S. 244).
First, we determine whether the statute or regulation clearly
expresses that the law is to be applied retroactively. Id. (citing
Landgraf, 511 U.S. at 280). If not, we consider whether appli-
cation of the regulation would have a retroactive effect by “at-
tach[ing] new legal consequences to events completed before
its enactment.” Id. (quoting INS v. St. Cyr, 533 U.S. 289, 321
(2001)). If, under this second step, the statute or regulation
has retroactive effect, “it does not govern absent clear con-
gressional intent favoring such a result.” Koch, 177 F.3d at
786 (quoting Landgraf, 511 U.S. at 280) (emphasis added);
see Bowen, 488 U.S. at 208.

We addressed the retroactive effect of SEC statutes and
sanctions in Koch. Koch concerned the retroactivity of a
newly-added provision (italicized below) in 15 U.S.C.
§ 78o(b)(6):

With respect to any person who is associated, who
is seeking to become associated, or, at the time of the
alleged misconduct, who was associated or was
seeking to become associated with a broker or
dealer, or any person participating, or, at the time of
the alleged misconduct, who was participating, in an
offering of any penny stock, the Commission, by
order, shall censure, place limitations on the activi-
ties or functions of such person, or suspend for a
period not exceeding 12 months, or bar such person
from being associated with a broker or dealer, or
from participating in an offering of penny stock, if
the Commission finds, on the record after notice and
opportunity for a hearing, that such censure, placing
of limitations, suspension, or bar is in the public
interest and that such person [has been convicted of
10388 SACKS v. SEC
securities fraud or enjoined against conduct in viola-
tion of the securities laws].4

Id. (quoting 78o(b)(6)(A)(I) (1994) (emphasis added)).

The petitioner, Koch, had previously been barred under
§ 78o(b)(6) from associating with any broker, dealer, invest-
ment adviser, investment company, or municipal securities
dealer. Id. at 785 n.2; see supra note 5. After he had been
barred, Congress enacted the Securities Enforcement Reme-
dies and Penny Stock Reform Act of 1990, Pub. L. No. 101-
429, 104 Stat 931. The Act added the penny-stock-bar provi-
sion to § 78o(b)(6). Id. at 786. In light of this new provision,
the SEC attempted to permanently bar Koch from participat-
ing in penny-stock offerings, even though his misconduct
occurred prior to enactment of the provision. Id.

We concluded that the penny-stock provision could not be
applied retroactively. Id. at 787. Koch’s new “life-long ban on
penny stock dealing attach[ed] new and grave consequences
to [Koch’s] pre-Act conduct.” Id. The Act “gave the SEC
authority it did not previously have: the power to bar unfit
individuals from participation in any penny stock offering,
regardless of whether those individuals are currently associ-
ated, or are seeking to become associated, with broker-
4
The previous version of 15 U.S.C. § 78o(b)(6) read:
The Commission, by order, shall censure or place limitations on
the activities or functions of any person associated, seeking to
become associated, or, at the time of the alleged misconduct,
associated or seeking to become associated with a broker or
dealer, or suspend for a period not exceeding twelve months or
bar any such person from being associated with a broker or
dealer, if the Commission finds, on the record after notice and
opportunity for hearing, that such censure, placing of limitations,
suspension, or bar is in the public interest and that such person
[has been convicted of securities fraud or enjoined against con-
duct in violation of the securities laws].
15 U.S.C. § 78o(b)(6) (1990).
 SACKS v. SEC 10389
dealers.” Id. at 788. Consequently, we “conclude[d] that bar-
ring Koch from trading in Penny Stocks for the rest of his life
increases the consequences of such pre-Act conduct. Our
‘presumption against statutory retroactivity’ comes into full
force under these circumstances.” Id. at 789 (quoting Land-
graf, 511 U.S. at 273).

[6] For all intents and purposes, Koch is indistinguishable
from the facts here. Like Koch, Sacks was barred by the SEC
from engaging in certain securities-related activities. And,
like Koch, Sacks was confronted with the consequences of a
new statute or regulation as a result of prior misconduct—the
new rule here bars Sacks, like Koch, from participating in a
securities-related activity in which he had previously been
allowed to participate. Based on the reasoning in Koch, as
well as the “deeply rooted” ”presumption against retroactivi-
ty,” Koch, 177 F.3d at 785, we hold that the rule here cannot
be applied retroactively.

IV

For the reasons above, we grant Sacks’ petition for review
and hold that the SEC may not retroactively apply the rules
it adopted at 72 Fed. Reg. 56410-12. We need not and do not
reach any other issues urged by the parties.

PETITION FOR REVIEW GRANTED.