conclusion is based on the court's finding that (1) the SEC's 1976 Explanation of the ordinary business operations exception was developed using the SEC's legislative rule-making tools and authority and (2) the 1976 Explanation has had a legally binding effect.
a. Agency's Method and Authority for Rule Making.
As was noted above, one of the dominant approaches to distinguishing between interpretive rules and legislative rules is to consider whether, in adopting the rule, the agency used its "power to exercise its judgment as to how best to implement a general statutory mandate," in which case the rule is legislative. United Technologies Corp., 821 F.2d at 720. The agency's own characterization of its rule making is evidence of whether it is legislative or interpretive. General Motors Corp., 742 F.2d at 1565. The SEC treated the 1976 Explanation as legislative by providing notice and comment on the question it addresses.
In announcing its proposed rule making, the agency noted that issuers had used the ordinary business operations exception to exclude proposals involving important matters, and expressed its concern that as a result, its regulations did not accord with Section 14 of the Exchange Act. Proposed 1976 Amendments, 41 Fed. Reg. at 29,984-85. The SEC proposed two alternative formulations of the rule in order to address this concern. After providing for notice and comment on the issue, the SEC's response to this concern was to retain the "ordinary business operations" exception, subject to the 1976 Explanation of the exception. This new understanding was the product of notice and comment proceedings and therefore had the hallmark of a legislative rule.
The SEC claims that it did not follow notice and comment procedures for developing the 1976 Explanation of the rule. The agency maintains that because it ultimately decided not to adopt either of the proposed alternatives that were noticed and commented upon, it is incorrect to conclude that the standard it actually adopted was subject to notice and comment procedures. SEC Reply Br. at 23-24.
The court disagrees. The SEC retained language similar to the 1954 language subject to its new understanding, because that approach was more workable than the proposed alternatives, not because the SEC determined that no change in the rule was needed. The 1976 Explanation of the ordinary business operations language, announced in lieu of the proposed alternatives, was no less a legislative rule than either of the alternative rules would have been had they been adopted. Thus, in 1976, the SEC treated both the amended Rule 14a-8(c)(7) and the explanatory material that accompanied it as legislative rules, by employing notice and comment proceedings to develop them. Although not dispositive, the agency's treatment of a rule as legislative suggests that the rule was in fact adopted pursuant to the agency's legislative rule-making authority. Lewis-Mota, 469 F.2d at 481-82.
The conclusion that the SEC's 1976 Explanation of Rule 14a-8(c)(7) was itself legislative is further supported by the fact that the SEC's explanation was not drawn from the text of either Section 14(a) or its own rule. See Batterton v. Francis, 432 U.S. 416, 97 S. Ct. 2399, 2405 n.9, 53 L. Ed. 2d 448 (1977). Rule 14a-8(c)(7)'s "ordinary business operations" language is too imprecise to permit one to derive from that language alone the SEC's 1976 position on proposals involving substantial policy considerations. See Grimes v. Centerior Energy Corp., 285 U.S. App. D.C. 290, 909 F.2d 529, 531 (D.C. Cir. 1990), cert. denied, 498 U.S. 1073, 112 L. Ed. 2d 860, 111 S. Ct. 799 (1991) ("unfortunately, the phrase ['ordinary business operations'] has no precise definition"); see also Roosevelt v. E.I. Du Pont de Nemours & Co., 294 U.S. App. D.C. 198, 958 F.2d 416, 426 (D.C. Cir. 1992); New York City Employees' Retirement System v. Dole Food Co., 795 F. Supp. 95, 100 (S.D.N.Y.), vacated, appeal dismissed, 969 F.2d 1430 (2d Cir. 1992). The explanatory materials accompanying the SEC's 1976 amendments cannot be characterized as an effort by the SEC to clarify the underlying regulation and statute or to "remind effected parties of existing duties." General Motors, 742 F.2d at 1565. Rather, the agency drew on its twenty-two years of experience in administering the rule "to fill gaps" in the statutory and regulatory scheme. United Technologies Corp., 821 F.2d at 719. The 1976 Explanation reflected the agency's new-found concern that certain proposals that could be said to deal with ordinary business operations might nonetheless involve issues of considerable importance to shareholders. Southern California Aerial Advertisers' Ass'n, 881 F.2d at 677 (finding new rule legislative where it was prompted by agency's safety concerns rather than the language or history of the regulations the agency purported to interpret). The court finds that the authority and analytic tools employed by the agency to give content to its 1976 amendments were those of legislative rule making.
b. 1976 Rule's Legal Effect.
The conclusion that the SEC's 1976 Explanation was a legislative rule is supported not only by the nature of the authority exercised by the agency, but also by the fact that its position has had the legal effect of binding both the agency and reviewing courts. In announcing the rule, the SEC stated unequivocally that "proposals . . . that have major implications, will in the future be considered beyond the realm of an issuer's ordinary business operation, and future interpretative letters of the Commission's staff will reflect that view." Adoption of 1976 Amendments, 41 Fed. Reg. at 52,998. Accordingly, until the SEC issued the Cracker Barrel letter, the agency had repeatedly informed companies that they could not exclude shareholder proposals regarding equal employment opportunity and affirmative action policies, because such policies involve substantial policy considerations. See, e.g., AT&T, 1990 SEC No-Act. LEXIS 20 (Jan. 5, 1990). In a 1984 no-action letter to Texaco, Inc., the SEC stated:
The Commission has given content to the term "ordinary business" by declaring that Rule 14a-8(c)(7) is not available to exclude proposals which raise important policy matters, but only may be used if the issue raised by the proponent is "mundane in nature." Thus, in promulgating the present version of Rule 14a-8(c)(7) the Commission stated in Release 34-12999 (November 22, 1976) that proposals "which have significant policy, economic or other social implications inherent in them" would not be excluded by Rule 14a-8(c)(7). . . .
Texaco, Inc., 1984 SEC No-Act. LEXIS 1846, *3-*5 (Feb. 28, 1984) (emphasis added). Less than a year before the SEC issued Cracker Barrel, the SEC advised the D.C. Circuit Court of Appeals that "in 1976 the Commission established the principles by which it intended the "ordinary business" provision of Rule 14a-8 to be interpreted." Brief of Securities Exchange Commission, Amicus Curiae at 29, filed in Roosevelt v. E.I. Du Pont de Nemours & Co., 294 U.S. App. D.C. 198, 958 F.2d 416 (D.C. Cir. 1992) (emphasis added). The SEC explained for the benefit of that court that "the underlying theme behind the discussion of Rule 14a-8(c)(7) in the 1976 Release is that a shareholder proposal must be analysed on the basis of whether its subject matter has 'major implications' for the company, or whether 'significant policy, economic or other implications' are inherent in the proposal." Id. at 30 (emphasis added).
The SEC's 1976 Explanation cabined the agency's discretion in a manner similar to that considered by the D.C. Circuit in Pickus. See Pickus, 507 F.2d at 1110. In Pickus, the court held that the Board of Parole's guidelines, which specified many of the factors that the Board would consider in exercising its discretion to parole federal prisoners, were legislative rules. See id. at 1113. The court explained:
The Board's statements are not interpretations of a statute's meaning. Rather, they are self imposed controls over the manner and circumstances in which the agency will exercise its plenary power.